Seeking Alpha
CFA, long/short equity, macro
Profile| Send Message|
( followers)  

A reader emailed me his write-up on Global Telecom & Technology, Inc (GTLT.OB). I find his write-up particularly compelling and will be digging deeper over the coming days. In the meantime, with his permission I’ll share his thesis here.

*****

Global Telecom & Technology (“GTLT” or the “Company”) is a global telecommunications carrier and leading network integrator serving the data communications needs of large enterprise, government and carrier clients in over 80 countries. While this is an illiquid name, it is currently an interesting situation because:

  1. it's undiscovered and highly undervalued at ~3.7x (growing) free cash flow,
  2. there appears to be stock available for sale (much of which has been bought by insiders), and
  3. there are some near term catalysts that could drive the stock price higher.

Why GTLT Is Misunderstood

  1. LTM results are very deceiving due to a major acquisition. On June 6, 2011, GTLT bought Packetexchange for $18 million. The acquired company generated about $20mm of revenue but no EBITDA. However, GTLT has already achieved $4-5 million of annualized synergies from the acquisition (thus, they paid 3.6x-4.5x EBITDA). So, any LTM valuation is deceiving because the balance sheet reflects the $18 million spent for the acquisition but not the full 12 month pro forma EBITDA contribution from the acquisition. Furthermore, the two quarters of EBITDA contribution from the acquisition that are in the LTM figure do not show the full impact of the achieved synergies as illustrated by the increase in Adjusted EBITDA from $1.9 million in Q2 to $2.6 million in Q3. In summary, Yahoo and Bloomberg show LTM EBITDA of $7.3 – $7.9 million; however, we believe a more accurate figure to determine PF LTM Adj. EBITDA is to annualize last quarter’s results, which implies $10.2 of Adj. EBITDA million (and we expect that figure to grow over the NTM).

  2. The company has a $20 million NOL (about equal to its market cap), so any EBITDA valuation likely underestimates the company’s worth.

  3. D&A is significantly higher than maintenance capex, so EPS valuation understates true free cash flow. D&A for the NTM should equal ~$4.6 million while maintenance capex should only be ~$1.0 million. This $3.6 million difference is very significant for a stock with a market cap of only $25 million.

  4. GTLT historically has not done a great job of telling its story. While management is very interested in speaking with investors, their press releases and PPT do not emphasize some important investment highlights such as the NOL, accretive impact of a recent acquisition, high free cash flow and strength of management.

  5. In the first 6 months of this year, the company incurred $1.0 million of non-recurring restructuring expenses (mostly related to the acquisition). While this is excluded from our Adjusted Ebitda, it clearly distorts reported results.

Catalysts

  1. Increased investor interest due to increased insider buying. Over the past few days, GTLT’s Chairman (and largest shareholder with over 25%) has bought 45k shares (near the 52 week high). This is an illiquid stock and these purchases represented a significant amount of the recent trading volume.

  2. Increased trading liquidity. Lately we have seen some blocks available for sale via electronic trading systems, which could give new investors an opportunity to establish a position. Cannell Capital owns 18% and its latest SEC filing appears to indicate it had sold some stock.

  3. In January GTLT will be presenting at Needham’s conference in NYC.

  4. I believe management will make some improvements to its PR to better highlight why GTLT is such an undervalued stock.

  5. Strong expected q4 results. Q3 revenue and Adjusted EBITDA were up 13.2% and 36.8% sequentially. While management does not give guidance, this conservative management team in the Q3 earnings press release said it expects “solid sequential growth in the fourth quarter.”

Other Considerations

  1. Insiders own 30+% so they are highly incentivized to create shareholder value.

  2. Management is very strong, especially for a company this small. The CEO has extensive telecom experience, an Engineering degree from Yale and an MBA from Harvard. The CFO is excellent as well. They are eager to attract more investors to their stock.

  3. Management has done two accretive acquisitions that have generated significant synergies. We expect them to do additional acquisitions as management grows its company in an effort to gain additional operational leverage and gain a higher multiple for its stock.

Capitalization

Stock Price $1.35
Shares (w/options & warrants) 19.5
Equity Cap 26.4
Cash (w/options & warrants) 7.8
Debt 31.6
Enterprise Value 50.1

Due to the recent acquisition, LTM Adj EBITDA of $7.9 million is deceiving so we think a better way to assess GTLT is to annualize the last quarterly results:

Q3 Annualized ($MM)
Rev $96.0
Adj. EBITDA 10.2
Cash Interest (2.4) Cash taxes will be less than book
Maint. Capex (1.0) Likely on high end
Cash Taxes 0.0

NOL shelter most of cash tax taxes

Free cash flow 6.8

NTM Adjusted EBITDA could be closer to $12 million and free cash flow $8.8 million.

Below are some multiples. Again, we think EBITDA valuation is deceiving since it gives no credit to the NOL and big difference between D&A and maintenance capex.

Q3 annualized NTM
EV/EBITDA 5.0x 4.2x
Equity Cap/ Free cash flow 3.7x 2.9x

*****

Disclosure: I (Frank) did not write the above, and have no position in GTLT.

Source: Global Telecom & Technology: Misunderstood Microcap With Near-Term Catalysts