Description
Voxcom Income Fund operates an alarm monitoring business in Canada. Voxcom has excellent operating performance with high margins, modest growth, and low customer attrition. The valuation is cheap at 2006 EV/EBITDA = 6.2 and a current distribution yield of 12%
Valuation Summary (all amounts in Canadian dollars)
|
|
2004A |
2005A |
2006E |
2007E |
|
Revenues ($000) |
28,710 |
35,179 |
39,000 |
43,000 |
|
EBITDA ($000) |
14,787 |
18,449 |
21,000 |
23,000 |
|
Net Income ($000) |
(1,244) |
1,155 |
4,600 |
8,000 |
|
|
|
|
|
|
|
EBITDA/Revs |
51.5% |
52.4% |
53.8% |
53.5% |
|
EV/EBITDA |
|
|
6.2 |
6.0 |
|
P/E |
|
|
16.5 |
10.9 |
|
|
|
|
|
|
|
YE RMR ($000) |
2,492 |
2,887 |
3,200 |
3,400 |
|
EV/RMR |
|
|
40.7 |
40.3 |
|
|
|
|
|
|
|
Customers (YE) |
101,500 |
108,200 |
120,000 |
127,000 |
|
Value Added Service Customers |
48,600 |
61,900 |
75,000 |
82,550 |
|
Attrition |
9.2% |
8.9% |
8.5% |
8.5% |
Voxcom was taken private in May 2004 at a valuation of 6.3X EBITDA. Given the strong performance since that time I believe it currently deserves a higher multiple. Buyout potential should support the current unit price.
Voxcom provides a free cash flow yield of 12.8% and should be able to grow 5-10% per year for the foreseeable future. With modest assumptions of 5% growth for 10 years, tax=20% of cash flow by 2013, and a 10% discount rate, Voxcom has a present value of $12.50. If you assume 8% growth and 8% discount then the present value is $17.
Business Description
Voxcom has grown steadily through partnerships with authorized dealers, including Home Depot. About 76% of customers are residential accounts, 13% commercial, 5% Lifecall (emergency medical), and only 6% lower margin wholesale.
Voxcom has an active acquisition strategy. The majority of alarm monitoring services are provided by companies with fewer than 5,000 customers. Voxcom improves service to acquired accounts through new technology, lowers cost through economies of scale, and increases revenue per account with new services.
Typical rates are:
Monthly Cost |
Service |
|
$25-$40 |
Intrusion Monitoring |
|
$2-$5 |
Environmental Monitoring (Fire, Flood, Freeze, and CO) |
|
$3-$10 |
Lifetime Equipment Warranty |
|
$5-$10 |
Private Guard Response |
|
$12-$15 |
Response Monitoring – emergency contact to customer |
|
$4 |
2–way voice hotline |
|
$30 |
Video Monitoring |
|
$9-$22 |
Activity Monitoring |
The increasing number of customers for the value-added services and the company’s low customer attrition rate demonstrate Voxcom’s success. Only 8-9% of RMR terminates each year and relocations account for about half the total.
Growth to date has been without issuance of new units. In November the company’s credit facility ($75mm size, $53mm drawn at 9/30) was amended to facilitate potential acquisitions. A bridge feature allows a six-month stretch of the debt/EBITDA ratio during which Voxcom would raise capital. The $20mm of available funds suggests a modest acquisition rather than a dramatic change and you have to assume that management would only execute a deal where the numbers made sense.
Industry Characteristics
The alarm monitoring industry is benefiting from several long-term trends:
-
New homes often come with alarms installed
-
Larger number of homes, including second/vacation homes
-
Aging population needs security and emergency assistance
-
Equipment has become more affordable due to new technology
The residential monitoring business (Voxcom’s focus) is growing about 8% per year. Commercial monitoring is growing about 4% per year. The business is highly decentralized. Voxcom estimates there are about 3000 security alarm providers in Canada, most with fewer than 5000 customers.
Successful alarm monitoring companies earn high margins with very steady cash flow; however, most are operated as divisions of larger companies. The limited number and liquidity of stand-alone public companies has probably inhibited their valuation. This may change over time as larger companies such as ADT become public.
Competitors
|
|
PONN (US) |
IASG (US) |
FNA.UN (CAN) |
AF (CAN) |
VOX.UN (CAN) |
|
Shares (000) |
18,240 |
24,368 |
6,324 |
12,089 |
8,191 |
|
Price ($) |
12.25 |
3.25 |
4.00 |
5.00 |
9.29 |
|
Market Cap ($mm) |
223 |
79 |
25 |
60 |
76 |
|
Debt ($mm) |
391 |
125 |
49 |
1 |
54 |
|
EV ($mm) |
614 |
204 |
74 |
62 |
130 |
|
|
|
|
|
|
|
|
Debt/EV |
64% |
61% |
66% |
2% |
42% |
|
2006 EV/Sales |
2.3 |
2.2 |
2.3 |
3.0 |
3.4 |
|
2006 EV/EBITDA |
9.2 |
9.5 |
4.7 |
13.6 |
6.2
|
|
2006 P/E |
NA |
NA |
7.6 |
43.1 |
16.5 |
|
|
|
|
|
|
|
|
Customers |
694,843 |
746,477 |
103,128 |
64,100 |
118,300 |
|
Retail Attrition |
12.7% |
14.5% |
10.8% |
NR |
8.5% |
|
RMR ($mm) |
19.9 |
7.0 |
2.5 |
NR |
3.1 |
|
EV/RMR |
30.9 |
29.2 |
29.7 |
NR |
42.0 |
|
GM Growth (YOY) |
-2.2% |
0.8% |
-8.6% |
19.2% |
10.0% |
On balance I believe that Voxcom compares favorably. I believe the higher EV/RMR valuation is reasonable for Voxcom’s growth, low attrition, and very limited reliance on wholesale business. Some of these competitors may also be attractive investments. Note that all of the comparison data is from reported results without adjustment for subsequent transactions.
Voxcom’s major private competitors in Canada are ADT (Tyco), Chubb (United Technologies), Brinks (Brinks), and Protectron (UE Waterheater).
Tax Position
The Income Trust structure was suitable for Voxcom’s high free cash generation. Unfortunately the flow-through treatment that allows trusts to avoid corporate income tax will end in 2011. Voxcom’s shares are about 13% below their $10.50 price prior the change in policy. Like every trust, Voxcom will study the new rules when they are released and adjust in order to minimize tax liability. Several factors should limit the impact on Voxcom.
-
Voxcom is already cheap relative to cash flow and peers
-
Voxcom has a deferred tax asset of $13.3mm that does not appear on the balance sheet. The trust recorded a 100% valuation allowance because the trust did not expect to have any tax liability. Instead, it likely that this credit will be available to reduce future obligations.
-
Voxcom generates tax pools, favorable deductions against taxable income, through acquisitions and capital expenditures
-
Voxcom could use more debt in its capital structure.
Risks
Declining home construction
Poor execution of “roll-up” strategy.
Catalyst
1) Exhaustion of year-end selling
2) Clarification of tax position
3) Arrival of more comps (e.g. ADT)
4) Value (cash flow + yield + growth)