Wednesday, 30 October 2013

Advent Wireless (CVE:AWI) $1.93

Advent Wireless is a small company that operates as a wireless retailer. It operates stores selling phones and plans for Rogers and its Fido subsidiary. With $13 million of net excess cash and a $23 million market capitalization, the company is selling at an enterprise value of $10 million. And with TTM (trailing twelve months) net earnings of  $1.6 million, you're buying the operating business for a 6x effective price to earnings.

The biggest risk to the company is that all 24 of their retail locations are dealers for Rogers and its subsidiary, so a loss of that dealer contract would functionally require the shutdown of the company, or at least a severe dislocation while they revamp to sell phones for a different carrier, or as a multi-line dealer. The Rogers contract expires in May 2014, and I would expect it to be renewed due to the fierce competition among Canadian telecoms for new subscribers and the distribution used to acquire them. The bigger risk is that Roger's squeezes Advent's margins by reducing commissions paid for plan sign ups. This risk is difficult to quantify. I would comment that the company's locations in a number of Asian specialty malls and ability to market to Asian centric populations gives it a competitive edge in certain areas of Toronto and Vancouver, and Rogers may want to keep this edge.

The company also has some downside protection from owned real estate. It has 24 stores, and only 20 leases, implying the remaining 4 stores are in owned commercial space. The have land and buildings on their balance sheet, and at the end of 2011 the depreciated cost was $1.8 million. Although I don't know the acquisition date of these stores, I'd be comfortable valuing them at their depreciated 2011 values in a liquidation scenario. The copmany is also purchasing commercial bays in both Vancouver and Toronto to move 2 of its stores into owned space in the near future. This transition to owned real estate will lower their expenses and provides some downside protection.

The company's stock is very illiquid. Although it currently trades at $1.93, volume is very low. I purchased my position (partial fill only) for $1.75, and still have a limit order outstanding. At that price the business is being purchased at more like 5x earnings, for additional safety. While the company has some downside risk if Roger's screws them, I think its more likely that they continue earning strong profits for some time, in which case the valuation at current prices in undeniable.

Disclosure: Long AWI

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