Description

We think ABVT is currently trading at 4x 2008 EBITDA, half the multiple of peers, 1/5^th of replication cost, and a 20% untaxed FCF yield on maintenance cap ex (large NOL). Given the environment, lack of current financials, and history of the company it’s easy to see why it trades at current levels. Given the downside protection, clear catalysts and market’s general distaste to invest in a business of this nature right now we think it’s a great opportunity over the next 12 – 24 months, and highly contrarian.  

We wrote about ABVT in Sep 07 (near market peak) so refer to our prior write-up for more background information; a lot has changed in the world since this time. 

The original thesis was a) relatively cheap stand-alone valuation b) cheap vs. peers but c) highly interesting take out valuation on asset value and industry consolidation, which we felt was nearly certain till the credit bubble burst. Now, ABVT is a) incredibly cheap on a standalone basis and to peers b) still a great asset with high likelihood of being bought in future, but unlikely to be near term. The main consolidator in 06/07, Level 3 (LVLT), is now priced like it could go BK, given the large amount of debt coming due over the next few years; we think they are unlikely to attempt acquisitions given this dynamic, but there is some potential with other industry peers who are better capitalized. For example, Global crossing as recently as Nov 08’ announced at a conference “we see a new wave of consolidation in the next 18^th months – and – we’ve been in talks with everyone.” Buyouts of these businesses at the peak were going for 15x ebitda. Even if that were to fall to 6x EBITDA in this environment, it’s still 50% upside for ABVT. We think the long term desire for consolidation in the industry is still a viable thesis. 

When management was shopping the company in late 07’ after the bubble burst we believe they were asking 1B and projected 09’ EBITDA could be 90-100m. The world is a different place now but the current enterprise value is about 1/3^rd of the original asking price. 

ABVT only has 07 financials filed so we have to make assumptions for what 08 will look like. It has taken ABVT much longer than we originally planned to get current with financials. We believe the internal goal is to have 2008 10k out on-time and that they are on track to meet this deadline.. Management has every intention to become a fully compliant public company again with conference calls and street coverage – so catalysts do not see very far off. 

With corporate America facing substantial headwinds – we no longer believe ABVT can see significant revenue growth, despite the fact that data volumes going across corporate pipes should still grow. However, we think revenues can remain relatively stable to low single digit growth until the economy improves, given the nature of the business which is contractual in nature and fact that they are spending significant growth cap ex. In addition, with their peers being in worse financial shape, it’s likely they’ll have to be more rational on pricing, which would benefit the industry. 

We spoke to management regarding the high financial institution concentration and while it’s possibly too early to say with certainty, they had not yet seen much impact on the business and have had the odd stroke of luck where their customers happened to be the banks that are buying the distressed banks. It’s not unlikely there will be some impact though as there is simply too much distress in their customer base to think otherwise. But we think the odds of revenue growth turning negative are rather low and if it were to happen we think it would be rather short-lived.  Data demand is still growing strong.   

Given the high operating leverage, which we think will prove to be greater than 65% incremental ebitda margins – even just 5% revenue growth over the next two years will generate ~ 9m in incremental ebitda, or 11% growth. 

Cogent (CCOI) and Level 3 (LVLT) are two peers we use to help value ABVT. They are off significantly from their highs but CCOI still has a 10.5x EV/EBITDA multiple while LVLT sports 8x. Both more than double where ABVT is trading. It’s interesting to note where they trade, but we take more comfort in the cheap valuation of ABVT on an absolute basis. 

Refer to prior write-up for this analysis. We believe assets are generally worth the cash flow you can create with them – so replication cost is not as good a measure of value as it typically sounds – but in the case of fiber assets there are substantial and hard to value synergies to be had when networks are merged – as you can cut out much of the overlapping network cost and keep the revenues. So replication cost is a good way to think of what a buyer is paying to acquire vs. building themselves. 

ABVT has not yet released 08 financials and the 07 financials are complicated / misleading. You have to back out the data center sale from both revenue and EBITDA. But upon doing so it’s clear that ABVT grew revenue 19% 07’ over 06’ and generated about 70m of EBITDA. If you assume revenue grew 10% at a 65% incremental ebitda margin in 08, both of which seem like conservative assumptions, then 2008 will > 85m EBITDA. 

08’ EBITDA          85

Less interest         0* (may have drawn revolver in 08 - Libor + 275-300)

Less taxes              0* (large NOL)

Less WC                0* (we don’t value)

CFO                        85

Maint cap ex         -20

Stock price            $30

Shares                    12.2m

Cap                         366m

Cash                       45.8* (07A)

Debt                       0* (Have a small revolver they may have drawn in 08 – unclear)

EV / EBITDA        3.8x

FCF / Cap              20% Yield* (Maint cap ex and untaxed but company will be spending growth cap ex)

DISCLOSURE: We and our affiliates are long AboveNet (ABVT.PK), and may long additional shares or sell some or all of our shares, at any time.  We have no obligation to inform anybody of any changes in our views of ABVT. This is not a recommendation to buy or sell shares. 

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