|Shares Out. (in M):||41||P/E||NA||5.7x|
|Market Cap (in $M):||42||P/FCF||5.9x||3.2x|
|Net Debt (in $M):||70||EBIT||2||13|
Introduced by chuck307 almost a year ago, NTS is a Texas-based integrated telecom. NTS has a mediocre business (legacy copper) as well as a growing, profitable business (triple play FTTP) that is being deployed in several markets in west Texas and Louisiana. As the network is deployed by mid-2013 and starts becoming "mature" by the end of 2014, I expect the share price to appreciate to $3 per share (a triple from here).
I would consider this idea a "hidden earnings" story as the declines in the legacy copper business has masked much of the growth in the small but increasingly profitable fiber business. Since mid-2010, EBITDA has been growing slowly sequentially each quarter; over the next two years, sequential EBITDA growth should accelerate as the new fiber markets (offering triple play of voice, video and date to businesses and residences) are penetrated and as the legacy copper business stabilizes.
NTS was founded in 1981 by Garey Wallace as a West Texas long distance reseller. In 1998, NTS became a licensed CLEC. In February 2008, NTS was acquired by Xfone (stock was around $3 at the time) for $42 m in cash and stock, funded partly by Israeli junk bonds. At the time, NTS had about $8 m in EBITDA and had spent about $24 m on its network. In 2008-2010, Xfone extended the FTTP (fiber) network from Lubbock and Wilson, TX to Levelland and Smyer, TX. These markets achieved business customer penetration rates of 40+% and became the "model" for its future fiber networks (Pride 1, 2, and 3). In 2010, Xfone sold Xfone 018 (its Israeli subsidiary) for $7.9 m and discontinued its U.K. operations. In October 2010, Xfone broke ground on "Pride" network (which eventually will serve 19+ communities in west Texas; the company now refers to it as "Pride 1 and 2"). In 2010 and 2011, Xfone acquired two small (not significant) cable operations. In March 2011, the company did a $6 m promissory note-common shares-warrant deal with shareholder Burlingame. In October 2011, the company did a $6 m rights offering at $0.30 per share. In November 2011, the company closed a $7.5 m loan with ICON (later revised to $13.6 m in June 2012). In January 2012, Xfone changed its name to NTS. In 2012, NTS (after the name change) started construction of Pride 3, its fiber network in Louisiana.
Along the way, NTS has successfully applied for Federal grants/loans to build select fiber networks in several 75+% rural markets under RUS (US Department of Agriculture's Rural Utility Service). The first major award was $11.8 m in long-term loans in October 2007 for areas in west Texas (build out completed in 2010). NTS also was awarded $63.7 m ($35.5 m grants and $28.2 m in loans) in March 2010 for more areas in west Texas, called Pride 1 and 2 (to date, build-out almost finished) and $36.2 m ($17.7 m in grants and $18.4 m in loans) in September 2010 for Louisiana, called Pride 3 (build-out to be likely finished by mid-2013). The loans are covenant-light, low cost (interest rates around 3.5%) and long term (about 17-20 years).
Importantly, with the rights offering, ICON loans and RUS funding, NTS has fully funded its roll-out of fiber to 50,000 (actually 54,000) businesses and residences in Texas and Louisiana.
NTS discloses revenues from leased loop (legacy copper) and FTTP (triple play fiber) networks. Leased loop revenue has been slowly declining (currently about $10.2 m a quarter). Recently, management expects leased loop to stabilize, partly because now about 93% of subscribers are businesses. Meanwhile, NTS is building several FTTP (fiber) networks. Over the last several years, NTS has rolled out FTTP to over ten rural communities in west Texas, so it has a good understanding of potential hook-up rates for neighboring rural towns. Each new FTTP market generally has 20+% early adopters, taking roughly 18 months to reach "mature" hook-up rates of 40-60% for business and residences passed. Eventually, CEO is targeting 60% business and 40% residential hook-up rates in all markets, in-line with the first TX communities. With about 9,000 business and 45,000 residences to be passed (by mid-2013) and ARPU of about $350 for business (currently $418) and $99 for residential (current level), "mature" FTTP sales could approach $44 m, or $11 m a quarter (up from $4.8 m in 3Q12) by the end of 2014. With some modest decline in leased loop to perhaps $38 m, that would imply run-rate sales of $82 m by the end of 2014.
NTS does not break-out the cost of service by segment. However, I believe that cost of service will decline to about 37-38% of sales (from 45% in 3Q12) by 4Q14 because I estimate the incremental cost of service for FTTP at around 25-30%. Meanwhile, SG&A is expected to be roughly flat going forward ($5.2 m 3Q12). For example, NTS expects few, if any, net new hires to its total employee count of around 245 (perhaps 3-5 new sales people to its 40-person sales team to serve the new markets in Louisiana). Also, the company plans to vacate its main office and move into an owned building in August 2013, saving about $518k a year in rent. With SG&A roughly flat, that would imply potential run-rate EBITDA by end of 2014 of $30+ m (significantly up from 3Q12 run-rate EBITDA of $12.4 m).
When the network is complete later this year, D&A should grow to about $10 m a year with maintenance capex about $3.5 m a year. With potential financing expenses around $4 m (with about $56.7 m in federal loans and $13.6 m in ICON loans; outstanding Israeli bonds of $10 m are being paid off and are offset by cash) and 35% taxes, that's $10.7 m in potential run-rate NI ($0.23 EPS with 47 m FDS with warrants) and $17.2 m in potential run-rate FCF ($0.37 FCF per share). At 6.5-7x EV/EBITDA (in-line with comps) or 12x EPS or 8x FCF would put the stock around $3 per share (roughly a triple from here). Importantly, CEO Guy Nissenson is heavily incentivized to maximize shareholder value with 7.7 m shares (including about 3 m options at $1.1). The recent board realignment in December includes several shareholders who will fight to prevent shareholder dilution and maximize shareholder value.
FURTHER POTENTIAL UPSIDE
In 2012, NTS began construction of Pride 3 in Louisiana, which will eventually pass over 11,500 businesses and residences in towns such as Hammond, Ponchatoula, Amite, Independence, Monpelier, Natalbany, Pinegrove, Tick Faw Village and Franklinton. In addition to the targeted 50,000 (actually 54,000) passings, the company could build fiber in adjacent TX areas (such as Abilene, Midland/Odessa, Amarillo) as well as in larger markets such as New Orleans, LA, Baton Rouge, LA, Jackson, MS. NTS would have to fund these deployments out of cash flow. Historically, unlevered ROI has been around 25-30% for their FTTP roll-outs in rural Texas.
Furthermore, as FCF increases, the company could significantly de-lever over the next few years.
Note: In tables above, net debt is mid-2013E (after Pride 1, 2 and 3 completed) and EPS/FCF metrics are for C2013, C2014 (not 2012, 2013).
1. Execution slower than plan. However, to date, company's FTTP deployments have largely been under budget and on time. IMHO the stock price will be largely a function of business and residential hook-up rates in each community, which may not hold to historical levels.
2. Costs above plan. NTS may require more sales people or have higher programming and other costs than expected.
2. Increased competition. In each town, NTS competes primarily with the single incumbent cable company (e.g. Suddenlink, Comcast). Cable competitors could overbuild more and try to lock-in customers with longer contracts. However, NTS has had historical success with its residential "NTS fusion" plan, which is bundled broadband (20 Mbps downstream; 5 Mbps upstream), TV (220+ channels, 1 set-top box), home phone (including voicemail) for $99 per month. All-in, it's a better plan at a lower cost than competitors.
1. "Mature" economics become clearly apparent to investors by the end of 2014. Company could be acquired at that time for 6.5-7x EBITDA.
2. Significant growth in EBITDA, FCF, EPS over the next two years.3. FCF is used to deploy more networks and/ or de-lever