Description

PTGI LONG

- PTGI is a post-bankruptcy microcap that has recently transformed from a telecom Company with a diverse mix of global telecom assets to a Company with two segments:

 i) Blackiron Data, a Canadian ‘pure-play’ provider of data center services
 ii) North American Telecom

- PTGI has no analyst coverage and has high insider ownership.
- The market views PTGI as it was previously – a highly levered Company with a collection of mediocre telecom assets. The market is overlooking the Company’s transformation and, in particular, the attractive data center business that I value at more than the Company’s EV. 

Valuation (following $2.50 dividend)

Applying a SOTP, I value PTGI at approx. $17 to $25 per share, approx. 45% to 115% above the current price.

PTGI snapshot

PTGI emerged from Chapter 11 in July 2009 and was listed on the NYSE in June 2011. Until recently, the Company was comprised of a diverse mix of telecom assets across the globe. Key recent events include:

• Issued a dividend of $2.50 per share to stockholders as of November 23, 2012
• Sold its Australian segment to M2 Telecommunications Group Ltd. for AUS$192M in Q2 2012. The Brazil segment was sold in 2011
• Issued a $1 per share dividend in July 2012
• Completed a tender offer for $119M of its 10% notes
• Created a separate entity for Blackiron Data, its data center business

I recommend reviewing the Company filings/presentations and the previous VIC write-up for more detail on the Company history, including the period prior to and during the bankruptcy.

Blackiron Data – Canadian data center segment

Blackiron Data consists of 8 data centers across Canada, including the Company’s recently opened Toronto DC3 facility, which is the first Canadian Certified Tier III data center.  Full data services are offered and most of the revenue is comprised of co-location, cloud services and network connectivity.

The data centers require minimal maintenance capex once up and running. Management continues to invest in growth capex due to the high returns on the incremental capital invested in this segment. Our research indicates that the services continue to see increased demand and that the new Toronto facility is gaining traction and will ramp quickly over the next 12 months.

I project that Blackiron Data will earn ~$22-25M EBITDA in 2013 and see solid growth in the years following. The right multiple to apply is more art than science but given the growth profile, I apply a range of 11-13x to 2013 EBITDA, valuing the segment at ~$242 to $325M.  This valuation could prove conservative given the growth potential and the high multiples in this sector. I expect that the CEO will sell this segment once it is ramped up.

Until the most recent quarter, this segment was part of the broader North American Telecom segment. As a result, investors will witness the growth of this specific segment in 2013 which might serve as a catalyst. 

North American Telecom

The North American Telecom segment provides a range of telecom and communication services to consumer and business customers in Canada and the US.  Services include traditional voice, VOIP, broadband, etc. Much of this business offers little or no growth, and management is focused on harvesting the cash flows to invest in the dat . The one potential growth area is the metro fiber sub-segment where the Company recently completed installation of a fiber ring in Ottawa.  Consumer, SME and large biz/govt services will be targeted.  Management believes there is an opportunity to capitalize on recent changes to Canadian Telecom legislation and to build fiber rings in key metro markets.  I give minimal value to this opportunity at this stage.

I project EBITDA less capex for the North American Telecom segment will be ~$34M in 2013.  Given the low-growth profile, I apply a 4-5x multiple, valuing this segment at ~$136 to $170M.

Other key points:

• Management/insiders own a large amount of stock. Given the large stake and the CEO’s experience turning around and selling telecom assets (such as at RCN), I see a sale as the eventual exit.  The CEO, Peter Acquino, is criticized by some investors for his aggressive style and high compensation but he certainly understands return on capital.  If he does not have conviction to achieve high IRR on capital invested, he will likely use the cash for additional dividends or buybacks ($3.50 has been returned as dividends in 2H 2012) given his alignment/incentives.
• Balance sheet: until a few months ago, PTGI was a highly levered company. During Q3, the Company paid down $119M of its 10% notes, leaving its balance sheet in a solid position with net debt at Sep. 30, 2012 of $52.7M.
• ICS Business Unit: The Company is committed to divest the ICS business unit – it is held on the balance sheet under assets held for sale.
• Corporate overhead was ~$14M in 2011 and is on track to be 50% lower in 2013, mostly driven by reductions associated with the sale of the Australian division

Risks

• Data center services demand unexpectedly declines in Canada
• A bad acquisition (I do not expect an acquisition, but it is possible)

Catalyst