Wednesday, 29 May 2013

Platinum Communications (CVE:PCS, $0.085)

Platinum Communications is a small internet service provider based out of Alberta. They sell fixed base wireless internet to rural Albertans. There are a number of important qualitative advantages to this business.
  1. High speed internet has become a staple good, people need it
  2. Limited competition in rural areas gives Platinum pricing power.
  3. The government built Alberta Supernet provides fiber backhaul services1
  4. Fixed costs - once a tower is built, adding more users is inexpensive
  5. Cost of capital advantage - most of their competitors are mom and pop operations. This is analogous to the early days of the cable TV industry, and PCS is following a similar roll-up strategy as the Shaw family did decades ago, without the multi-voting stock and egregious insider pay packages.
So, this is a "good" business. It has a bright future, and a good "moat." Customers are unlikely to switch as the installation process is involved, and the cost of building a competing tower makes competitors unlikely to offer service. All that being said, a good business is only a good investment if it trades at a price where you can buy it with a margin of safety.

The current share price of $0.085 gives a market capitalization of $5.5 milion, and their most recent 6 months EBITDA was $826k. Annualizing that EBITDA gives an annual value of $1.65 million. Long term debt net of current assets surplus over current liabilities is $2.0 million, for a total enterprise value of $7.5 million, and an EV/EBITDA of only 4.5x, low for a growing business.

The best way to value this business is by customer accounts. PCS has made numerous acquisitions, and have usually paid $1000 per customer for the customers and the assets to service them. This suggests their 11,000 customer business is worth at least $11M, which corresponds to $0.14 after debt. Platinum is probably worth more than the sum of its acquisitions as it gains scale and can leverage fixed investments and corporate overhead.
Disclosure: Long PCS.

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  1. While this seems very attractive, trades have only crossed the ticker on 4 days in the last month and a half!

    Also, how tied is this to the oil price? Are most of these WISPs providing Internet to oil-boom small towns/rural areas (or more risky, to tar sands?)? Just trying to think about what could go wrong (besides the think just never trading).

  2. Hello,
    Yes, you certainly need to use limit orders and lots of patience to invest in this company, as liquidity is low. It has gotten less liquid in the last few months.

    I would say this isn't significantly tied to oil prices. The south/central part of Alberta where they have most of their business isn't booming right now, because natural gas prices are low. They don't service the part of the province with oilsands deposits, although they could eventually buy the WISP that does.