Primus Telecommunications: Trailing Performance Masks Value Opportunity

Mar.22.12 | About: PTGi Holding, (PTGI)

Below is a reader submitted investment idea for Primus Telecommunications Group (NYSE: PTGI). Note also this earlier write-up on bullish options activity at PTGI here.

Primus Telecommunications ("PTGI") has an attractive mix of assets, and upon closer inspection is likely trading at closer to 3.9x (or less) EBITDA instead of the 4.5x LTM EBITDA (Bloomberg has it at 5.3x). The company is in the process of exploring strategic alternatives and investors are obviously beginning to take notice of this improving story.

Description

PTGI is an integrated facilities-based communications services provider offering a portfolio of international and domestic voice, wireless, Internet, VoIP, data, colocation and data center services. Its primary markets are Australia and Canada, where it has deployed significant network infrastructure. Importantly, and not readily apparent, is that 25% of the company's EBITDA comes from high growth and high margin data centers, which command a much higher valuation multiple than other telecom businesses. This is a somewhat complicated story, so we encourage people to see the company's latest investor presentation and/or the 10-k.

Capitalization (including options/warrants)

Stock Price: $15.00
Shares 14.8
Equity Cap 221.6
Cash 68.5
Debt 249.3
Enterprise Value 402.4
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Valuation

We believe that LTM Adj. EBITDA is deceiving as it does fully reflect a full year of the Arbinet acquisition (and associated cost savings) and the overall improvement in PTGI's core business (as illustrated below). We believe a conservative way of projecting 2012 is to annualize Q4 2011, although this does not give credit for any (likely) growth and improvements in the business, and $4 million of additional Arbinet cost saving management projects for 2012 . We have also shown Adj. EBITDA with and with corporate overhead because if the company is sold, the buyer(s) may be able to eliminate much of this expense.

Adjusted EBITDA EV/
LTM: $88.6 4.5x
Annualized Q4: $102.8 3.9x
LTM - Excluding Corp.: $101.2 4.0x
Annualized Q4 - Excluding Corp.: $114.8 3.5x
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Improving financials

PTGI's Adjusted EBITDA improved throughout the year as a result of its improving operations, more data center business, the Arbinet acquisition and the related cost savings. As a result of this sequential improvement, it is deceiving to value the company on an LTM basis.

Quarter Adj. EBITDA
Q1 $19.8
Q2 $20.7
Q3 $22.4
Q4 $25.7
CY 2011 $88.6
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Strategic alternatives process

On October 4, 2011, PTGI announced that the Special Committee of its Board had retained Jefferies to explore strategic alternatives to enhance shareholder value. (One might wonder why a "special committee" was formed in the first place). To date, there have been no major announcements regarding this process, but on the recent earning call, management indicated that the process is still on going.

Why the stock is misunderstood

  1. To understand true EBITDA requires some work and the stock does not screen well.

  2. PTGI has no sell side analysts to promote the stock.

  3. PTGI pulled off a large acquisition on February 28, 2011, when it acquired Arbinet for ~$50 million (3.2mm shares). While the balance sheet reflects the full purchase price, reported LTM figures include only approximately three-fourth of a year's contribution from Arbinet. Furthermore, the LTM figures do not include a full year's contribution of the significant cost savings the company expects to generate from the acquisition. Management projects $3 million in cost savings in 2011 and $7 million in 2012.

  4. In July 2011, PTGI refinanced most of its debt, replacing a lot of debt at 13% and 14.25% with new debt at 10%. The annual interest savings from this refinancing is approximately $9 and since it occurred mid-year, is not fully reflected in LTM results.

  5. In 2011, PTGI incurred numerous non-recurring items that distorted reported operating profit.

  6. In 2011, PTGI incurred numerous non-recurring items below operating profit that distorted reported net income.

  7. While not readily apparent, in the recent conference call management said that 25% of its EBITDA now comes from its data centers business. This high margin, high growth business typically commands a much higher valuation multiple that other telecom businesses.

  8. Management does not do a great job of telling the story to the street… but management is likely focused on/distracted with exploring strategic alternatives and dealing with potential bidders.

  9. PTGI has approximately $13mm of annual corporate overhead, much of which might go away if the company were sold.

  10. Like many telecom companies, PTGI is not an EPS story because it has significant non-cash depreciation and amortization expense which depresses EPS. In 2011, D&A was $65 million and capex was only $31 million, so we believe PTGI should be valued on EBITDA not EPS.

  11. The company has a collection of assets that are geographically and operationally diverse, so it's not a simple company to describe.

  12. Under a different management team and several years ago, PTGI filed for bankruptcy. This may have created a taint in some investors mind and some ugly GAAP accounting issues.

  13. Many investors who received equity securities as part of the emergence from bankruptcy have had a nice gain. PTGI is an illiquid stock so any selling can dampen stock price appreciation.

Disclosure: No position (Frank).