Description

We are recommending a long position in shares of Advent Wireless, Inc. (AWI).  We note that given size and liquidity this opportunity is only appropriate for PAs or small funds.  Advent Wireless (or the “Company”) operates 2 business segments:  1) retail wireless through its Am-Call Wireless, Inc. subsidiary and 2)  Micro-Financing through Adwell Financial Services Inc., a 70% owned subsidiary.  All of the Company’s profitability currently comes from the Company’s wireless subsidiary as the micro-finance portion of the business is relatively new and currently generates operating losses.  We note that management has substantial control of the business as 4 of the 7 board members are also part of the management team and the 3 independent directors were former employees of the Company.  While this raises some concerns regarding corporate governance, we believe management’s 33% ownership in the business provides alignment.  

We believe the crux of the investment thesis rest on the substantial amount of excess cash and excess assets on the Company’s balance sheet which we believe the market is giving no credit for.  While the shares trade at 11.4x PE, they are extremely cheap when one takes into account the capital structure of the Company trading at .9x book value 1.0x EV/EBITDA.  When one factors in non-core real estate assets and certain note receivables the Company effectively trade at a negative EV.  We believe the market’s failure to account for the Company’s large excess balance provides both substantial upside opportunity and a sizeable margin of safety as the stock trades at a discount to a book value consisting largely of cash.  We value the company at 5.0x EV/EBITDA + excess real estate assets and note receivables implying a share price of $1.91 or 55% upside vs. the 7/24/17 closing price of $1.23.  We provide a summary of the Company’s primary lines of businesses below.  Please refer for to previous Glentel write-up (by fiverocks) and write-up on Advent (by devo) for more detail on the Canadian wireless retail industry and the Company.  

Wireless Business Summary

Am-Call is an authorized dealer of Rogers Communications Partnership (“Rogers”) and is an independent specialty retailer of personal wireless and wireline communication products and services under the Rogers and Fido brands. Fido is the discount brand and is a wholly owned subsidiary of Rogers. The Company carries the full line of Rogers and Fido products and services, including wireless voice and data, high-speed Internet, digital cable television, home phone, Smart Home Monitoring and Rogers Platinum MasterCard.

As of March 31, 2017, the Company had 15 stores in Ontario (10 Rogers and 5 Fido), unchanged when compared with March 31, 2016. As an authorized Rogers dealer, the Company works with Rogers continuously to evaluate its retail network in order to make it more efficient and a better fit in Rogers’ retail landscape strategy.

Micro-Financing business  

In an effort to better monetize its cash balance, the Company recently launched a micro-finance subsidiary,  Adwell Financial Services Inc. (“Adwell”).  The Company subscribed to 70% of the shares issued, with the remaining 30% owned by two minority shareholders, Q&Y Holdings Inc. (15%) and Adwealth Capital Holdings Inc. (15%).  Based on the shareholders’ agreement among the three parties, executed on January 27, 2016, the Company will invest, from its available cash on hand, up to $1,375,000 in Adwell’s first year of operation, of which $375,000 is for ongoing operations with the remaining $1,000,000 for advances to customers. The two minority shareholders, both with financial and lending experience, will assist in the start-up and continuing operations of the venture. Adwell commenced operations in Q1 2016.  If the Company is successful in profitably growing its Adwell subsidiary, it could serve as a catalyst for the share price as portions of the excess cash balance will be converted into income generating assets which the market will be more prone to value.  Today Adwell is a relatively small portion of the business and our valuation is capitalizing ~$211k worth of losses tied to this subsidiary.  We are modestly negative on the Adwell venture and believe it will result in modest value erosion.

Catalyst

• Profit generation from its new micro-finance unit
• Increased dividend or share buy-back