Thursday, 23 May 2013

Axia NetMedia TSX:AXX $1.31

Axia is a company in the business of providing next generation networks around the world. Essentially, the own fibre optic cable and allow others to sell network services using that cable. They currently have interests in Alberta, Massachusetts, France, Catalonia, and Singapore. The France and Singapore businesses are owned jointly with others. The best way to value Axia is by the sum of its parts, as each network is a separate business. It would be very easy for Axia to sell one of their networks, as they are separately operated.  

North America

The other reason separate treatment is important is the businesses are very different from a capital intensity and risk perspective. The Alberta business was Axia’s first. The Government of Alberta paid for the construction of a fibre-optic network called the SuperNet, which Axia operates on the government’s behalf. Their business in Massachusetts operates in a similar fashion. These businesses are reported together as the North American segment.  North America had segment income of $4.375 million in the last quarter, after depreciation of $725 thousand was accounted for. Most of the value of this segment comes from Alberta, and Axia’s contract to run this network expires in 2 years unless renewed. The present value of my estimate for Axia’s income from the SuperNet before contract expiry is $38 million. Massachusetts and any upside from an Alberta renewal are not valued separately, but could be significant. The Massachusetts network spend is minimal, so any value to that business is upside, and a renewal in Alberta would be a huge catalyst, as it could add up to $120 million in value if the terms are similar. Management is guiding towards completion of the MA network in Q3 2013 (Q1 conference call)


Axia put in $80 million for half of a $280 million base. Cube paid 42+50mm in earnouts for their half. Covage has $30 million in debt and $28.8 million in cash (inferred from Jan 2013 corporate presentation on changes due to IFRS consolidation). Covage as a whole had 3.355 million of EBITDA in the last quarter. That was a big improvement over the past, as the operating leverage in the business begins to show. If we annualize that we get $13.5 million. Cube paid a minimum of $42 million for their half of the business, and that valuation for Axia’s half of a business doing $13.5 million of EBITDA is very conservative.


Axia also owns 30% of Singapore’s OpenNet, a fibre to the premises network that was mostly paid for by the Government of Singapore. That business had operating income of $10.5 million in the most recent quarter, with penetration of only 30%. Because the fibre product is dramatically superior to other networks, and 8 companies are selling it on their behalf (including the incumbents), penetration is expected to be very high, and has been growing dramatically. Starting in April 2013, OpenNet will need to pay the greater of 75% of its revenue or $55 million per year to a SingTel subsidiary for use of its infrastructure (network rooms, manholes, ducts, etc). Last quarter’s revenue would annualize to a yearly rate of ~$60 million dollars. At present, functionally all the value of OpenNet is going to SingTel’s Assetco. However, OpenNet should easily be able to double their penetration within the next two years, which doubles their revenue because their rates are regulated. At that level of revenue two years out, they’d have $120 million in revenue, $90 million to AssetCo, and $10 million of other expenses. The $6 million per year of those earnings attributable to AXX are worth at least $18 million. Another way of looking at that is as an option on OpenNet improvement, and a very cheap one at that, since OpenNet revenue could approach $180 million if penetration increases sufficiently.

Sum of the part and net Debt

The company is has around $10 million of net debt, and taking that off the sum of the Alberta, French and Singapore businesses leaves a valuation for Axia of $88 million, which is identical to its current market cap. Those three businesses when very conservatively valued account for the entire market value of the company. Thus, all the upside is free. The potential catalysts of a SuperNet renewal, more than 50% of Singaporeans signing up for the best and cheapest internet available to them, or Covage margins increasing are all present, possible, and not accounted for in the current price. This also doesn’t include any value for the Massachusetts or Spanish networks.  It’s also possible that Bell Canada decides to buyout Axia. They own a network that works with Axia’s in Alberta, and already own 5 million shares. A dividend initiation is also on tap for the next two years, which would likely provide a material rerate to Axia’s multiple. Axia also bought back approximately 1.4% of the company last year, which improves EPS going forward. Essentially, Axia is a good business trading at a price that discounts the worst case scenario for all of it's assets. That valuation provides significant downside protection, and a huge upside bias to future moves.
Disclosure: Long AXX

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