Description

Thesis 

While our investment orientation is bottom up in nature, occasionally an entire industry becomes cheap on the numbers and provides us an opportunity to take a basket approach in instances where we have a non-consensus view. Such is the case with rural telecom providers. The popular narrative a couple of years ago was that landline usage was in permanent decline, poor management teams had taken on unsustainable amounts of leverage, and the cashflow streams would never accrete to equity due to declining multiples and its junior position in the capital stack. This ennui allowed us to build positions in several providers in anticipation of an under-appreciated catalyst: Alternative Connect America Cost Model or A-CAM. We have already submitted LICT corporation which shares many of the same dynamics but we believe New Ulm should also benefit from the program.

The cocktail napkin summary is that large swathes of rural America were and are without high speed broadband. A recent article describing the situation:

https://www.politico.com/agenda/story/2018/02/07/rural-indian-reservations-broadband-access-000628

This technology schism between the urban haves and the rural have-nots was untenable and the federal government---with a painful nudge from local representatives- devised a way to entice rural telecom providers to increase broadband speeds to the households that they passed. Aware that most providers were capital contrained, the government established a fund to make annual payments to companies that elected this source of capital. While the terms weren't quite no-questions asked, they were awfully close. Providers would receive annual payments for each of the next ten years with the understanding that after year four they would have to show that they had increased speeds to stated percentages of their coverage area. New Ulm applied to the program and received $ 6.1mm/year. In the financials below, the economic benefits are obvious. The program disproportionately benefits companies that already laid a fair amount of fiber as ongoing growth capex would be smaller as a percentage of ACAM dollars received. In essence, the government is subsidizing what for other industries would be considered r&d; the result is that the business mix should improve, customers should be happier with their service and, hence, less likely to balk at price increases, and less likely to consider other provider options. 

New Ulm continues to trade at undemanding multiples of cashflow; and, furthermore, has great visibility into a decent percentage of that cashflow for the next nine years. Couple this with a competent management team and a space which is beginning to see private equity interest and we think the odds favor solid stock performance going forward.

Company Description (from latest 10-K)

NU Telecom is a diversified communications company headquartered in New Ulm, Minnesota with more than 111 years of experience in the local telephone exchange and telecommunications business. We operate in one principal business segment: the Telecom Segment.

Our principal line of business is the operation of five local telephone companies or incumbent local exchange carriers (ILEC) and the operation of two competitive local exchange carriers (CLEC) telephone companies. Our original business was founded in 1905 and consisted of the operation of a single ILEC (New Ulm Rural Telephone Company). In 1984, we changed our name to New Ulm Telecom, Inc. In 1986, we acquired our second ILEC, Western Telephone Company (WTC). In 1993, we acquired our third ILEC, Peoples Telephone Company (PTC). In 2008, we acquired our fourth ILEC, Hutchinson Telephone Company (HTC). In 2012, we acquired our fifth ILEC, Sleepy Eye Telephone Company (SETC). Our businesses consist of connecting customers to our state-of-the-art, fiber-rich communications network, providing managed services, switched service and dedicated private lines, connecting customers to long distance service providers and providing many other services associated with our businesses. Our businesses also provide Internet protocol television (IPTV), cable television services (CATV), Internet access services, including high-speed broadband access, and long distance service. We also install and maintain communications systems to the areas in and around our service territories in southern Minnesota and northern Iowa. In 2002, we formed a CLEC in the city of Redwood Falls, Minnesota and acquired our second CLEC in 2008, with the acquisition of HTC. This CLEC operates in and around the city of Litchfield, Minnesota. In 2010, we acquired the cable TV system in the city of Glencoe and operate Glencoe under the Litchfield CLEC. Our CLECs offer the same services as our ILECs. In 2000, we changed our marketing name to NU-Telecom and currently operate under that name in our markets.

Financials

Other Investments

▪   FiberComm, LC – 20.00% subsidiary equity ownership interest. FiberComm, LC is located in Sioux City, Iowa;

      ▪   Broadband Visions, LLC (BBV) – 24.30% subsidiary equity ownership interest. BBV provides video headend and Internet services;

      ▪   Independent Emergency Services, LLC (IES) – 14.29% subsidiary equity ownership interest. IES is a provider of E-911 services to the State of Minnesota as well as a number of counties located in Minnesota; and

      ▪   SM Broadband, LLC (SMB) – 12.50% subsidiary equity ownership interest. SMB provides network connectivity for regional businesses.

It is hard to gather much meaningful data on their minority interests so we're valuing the investments at the stated book amount of 7.3mm which is about 18x runrate investment income. 

Valuation

EV/EBITDA est (20mm): 5.8x

Free cash flow: 9-10mm 

FCF%: 10.5%

Price Target

(20mm  of EBITDA *7)+10mm of '18 FCF+7mm of other investments-net debt=$25/share

Our conversations with bankers in the space suggest that multiples are hovering around 7-8x for these kinds of assets;  with fiber heavy companies fetching the higher end of the range.

Catalyst

• Free cash flow continues to accrete to equity value
• The company makes an accretive acquisition
• Time