Otel otel
March 24, 2020 - 9:07am EST by
2020 2021
Price: 3.00 EPS 2.31 2.1
Shares Out. (in M): 3 P/E 1.3 1.4
Market Cap (in $M): 10 P/FCF 2.5 2.7
Net Debt (in $M): 67 EBIT 15 15
TEV ($): 77 TEV/EBIT 5 5

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Today’s quick Covid special:  Otelco is currently trading at a P/E ratio of 1.3.    I would argue that while it does not deserve a market multiple, 1.3 is bit too low. 

Otelco Inc. provides a range of telecommunications services on a retail and wholesale basis including old line telephone, internet service and cable television to rural areas in Alabama, Maine, Massachusetts, Missouri, Vermont, and West Virginia; and business customers in Maine and New Hampshire.

Otelco was written up in November 2016 by Houdini so I refer you to that as well for background on the company. 

Highlights since then:

Ebitda has declined from $27 million to $23.5 million in 2019.

Net debt has been reduced from $87 million to $66 million or $6.20 per share (current share price is $3.00)

Otel has ramped up capital spending currently to upgrade to fiber to allow it to offer internet speeds of 1 Gig to its customers.  Capx has increased to $12.4 million in 2019 compared with $8 million in 2018.   This investment, should at a minimum arrest and reverse the slow decline in overall company Ebitda from the legacy landline business.  Churn has been reduced from 2.1% in 2018 to 0.5% in the fourth quater of 2019.  That is a very good churn rate that any telcom or cable company would be proud of. By the end of 2020 Otel expects to have improved data speeds to 43% of premises passed, having capability of at least 25 Mbps, with 19% having access to gigibit speeds. 


We have seen other rural telcom companies stabilize and reverse slightly revenue and ebitda declines recently (North State Telcom).  At the same time, even with the larger investment spending, Otel is free cash flow positive.  In 2019 it paid down $4.4 million in debt or about $1 per share on a $3 stock price. 

Otel is being priced like a business that will be significantly affected by Covid.  In reality that does not seem likely.  In fact, it may create some tailwinds as people spend more time at home and businesses look to upgrade Internet capabilities. 

Otel is trading at an EV of $78 million with $23.4 of Ebitda.  A ratio of 3.3.   See Houdini write up re M&A.  No doubt this would be attractive purchase candidate for a larger player as costs could be taken out and would be accretive at a higher price and multiple.  If we haircut multiples by a turn or so, to 4.5 times Ebita, Otel is worth around $10 a share or triple the current value. 



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


We get past Covid and market reprices

Sale of the company


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