Description

Intertan is a US-listed, Canadian-domiciled consumer-electronics retailing company. It is a licensee of the Radio Shack name until 2009. It operates Radio Shack stores, Rogers AT&T stores, & BatteryPlus stores.

In Canada, the Radio Shack stores are multi-brand retailers along the lines of Circuit City and Best Buy in the US. They are very different from the typical US Radio Shack store. I guess they have about a 15% market share in Canada. They compete with Best Buy, and multi-line retailers like Wal-Mart. Last year, Best Buy bought a local Canadian competitor, Future Shop, for $377mn, or 18x P/E, 7x EV/EBITDA, 11x EBIT.

Over the past four years, the company has undergone a significant transformation from a global retailer to one focused solely on its Canadian home market. As a result, historical financial records, which show declining sales and profits due to the restructuring, can mislead. In fact, the company has generated good LFL growth and cash flows from its core Canadian business. With the free cash flow, the company has
repurchased shares & made small acquisitions.

The company has around 100mn in cash (including options exercise), no debt, and has a market cap of 220mn. Operating profit should be around 35mn for the year just ended (FYE June). Almost 22% of EBIT is recurring in that they receive roughly 5% of a cell-phone or satellite-subscriber’s bill for 5 years as a fee for originating the customer for the cell/sat company. (See catalyst for further discussion).

So ITN trades for EV/EBIT of around 3.5x, and less than 3x EBITDA. This is low on an absolute basis, and versus the transaction noted above. It is also low given that the company comps regularly at +3%, has a return-on-capital of around 40%, operating margins of 8%+, and ample free cash flow. In sum, this business doesn’t appear sub-optimal, yet trades as such.

Catalyst

The Canadian government has made it illegal to receive satellite signals from US-based transmitters without signing up for a contract. In other words, until recently, people would just get a dish & a forged receiver card, and receive DBS programming for free. Now, people must sign for service. This should provide a boost to recurring income for ITN, and therefore EBIT, providing future growth rate in excess of that priced in by the market. (I estimate that recurring revenues should grow by 50% in five years.)

Other than that…the price just strikes me as unreasonably low.