Description
It'll be hard to lose money buying NORSB at these prices, because it's cheap, has spent tons of cap-ex over the last few years improving the product and shouldn't be an independent company to begin with.
NORSB was ably written up by max686 back in the summer of '06. Thanks, Max! Nice find! I'll definitely be building on your work, because I've been too lazy to request reports from the company, but this isn't the usual, "For more details please see..." situation, because we have a bit of a different slant on things.
NORSB is the non-voting class of the non-reporting company North State Communications, henceforth NSC. NSC is the local telephone company for the city of High Point, North Carolina and some of the surrounding areas. This is an ILEC (Incumbent Local Exchange Carrier), not an RLEC (Rural Local Exchange Carrier). At the limit, an RLEC has a scattering of customers over hundreds of square miles where cable will never go and wireless doesn't work. RLECs exist because FDR decreed that Aunt Minnie in Idaho should be able to talk to Uncle Fred in Wyoming. They are real monopolies that depend on government support and will never be replaced. Smaller ILECs like NSC, on the other hand, still exist because they've been too stubborn or stupid to sell out, and face competition from cable and wireless.
NSC might be worth high $100s/low $200s to a strategic buyer, but unfortunately I don't think it's for sale. Management of the company recently passed from Royster Tucker, Jr. to Royster Tucker, III. The latter Royster probably wants to play with his toy for a while, and has vowed that, "We'll continue to steer the course that we're on." Thus, I won't be spending a lot of time on comparables and M&A and sum-of-the-parts, etc. You need to own this for what you're getting, not for what someone else might pay.
So what do you get?
- At least a low teens unleveraged FCFE.
- A fiber-to-the-home play! NSC has spent $30MM over the last three years on a state-of-the-art fiber optics network. Which somebody might get excited about at some point, and will definitely alleviate the biggest problem for ILECs -- line loss -- and might even increase profitability.
FCF: I estimate FCF at between $8 and $10/share. The higher number comes from eye-balling the debt and dividends that peers can support. The lower number comes from assuming cap-ex (excluding the fiber build out) is an industry average 12% of revenue and backing out FCF from the financials that can be found here:
http://ncuc.commerce.state.nc.us/cgi-bin/webview/senddoc.pgm?dispfmt=&itype=Q&authorization=&parm2=EBAAAA92380B&parm3=000110813
For 2007, we see revenue of $106MM and OIBDA of $32MM. At 12% of revenues, cap-ex is $13MM, leaving FCF at $19MM. Divided by my estimate of 2.25MM shares outstanding gets $8.4/share for a 13.5% FCF yield. This lower bound is supported by tying out dividends and Max's reports of share buy-backs with NSC's cash and investment balance, and attributing the decline to spending $10MM/year on the network upgrade.
FTTH: This has been the subject of years of debate between smart and passionate people with an interest in the outcome -- so I'm not going to get into details. The main points are,
1: Whether building an FTTH network is optimal or even profitable is now irrelevant, since NSC has built it,
2: Fiber is technologically superior to the coaxial cable that cable companies use, so it's harder for cable to poach lines, and
3: Maintenance costs are reputed to be lower -- Verizon, the largest FTTH outfit in the US, claims $100/line cheaper than legacy copper.
FTTH more or less gives you unlimited bandwidth. The arguments are about whether or not you need unlimited bandwidth, whether an FTTH network is worth the considerable expense to build, whether the DOCSIS 3.0 standard will allow cable to come close enough to closing the gap, and so on. All good questions. But all I care about is that the D&A tax shield plus $100/line over the 20k customers they claimed to have a variance request meeting this spring will add $1/share to FCF.
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I think of NSC as a mini-Verizon, but with no debt and ~2x EBITDA turns cheaper even ignoring the ~$14/share in cash and investments. The downside is limited because there are large economies of scale in running networks. Windstream bought similarly sized Concord Communications, which is right next to NSC, and easily reached their target of $20MM in savings. Say NSC's EBITDA gets cut in half, from $40MM to $20MM. Assuming only $10MM in synergies still gets you around the current price at a 4x post-integration multiple. In order to lose money here, things have to get really bad and management has to decide to go down with the ship. I don't believe that they want to sell, but it's a closely held business and and some point you've got the grandchildren to think about.
Other stuff:
Since I've been involved, cash has been used for dividends, buybacks and to "future-proof" the company, so I don't worry too much about agency risks.
You're exposed to the local economy. High Point used to be the furniture capital of the world, but they've done a decent enough job diversifying that they now call themselves, "North Carolina's International City".
Small size is in some ways an advantage. Time Warner has to compete with AT&T, but nobody has to compete with NSC.
Catalyst
Increased cashflow now that $30MM network upgrade is complete.