Arrowhead Water - Update on a 10-20 Bagger, with a mistake

This is an update on Arrowhead Water, which I profiled positively in May: http://safetyinvalue.blogspot.ca/2013/05/arrowhead-water-products-ltd.html. At that time, it's most recent trade was $0.015. It closed today at $0.35, for a gain of 20 times the price from the time I wrote it up. Depressingly, I put in a limit order when I did the write-up to buy at $0.015, and never got a hit. The next trade was at $0.02, and it never traded below that again. It started to really move up in August, and the company announced the former management team of Western Wind would be taking over in September. They seem like a successful bunch, and the stock may have more room to run. But the margin of safety is out of the stock now, so any readers who took advantage might want to lock in some profits now.

There's a lesson here somewhere, but right now I feel like I'd rather have the $20,000 I would have made had I made my limit order $0.02 than the lesson.

I recently published an update on my previous Axia article available on Seeking Alpha for free for the next 30 days. A number of good things have happened since I first wrote about Axia:
1) Alberta SuperNet renewal
2) Sale of Spanish Assets
3) Sale of OpenNet for nearly 2x my previous valuation
4) Continued EBITDA growth in France


http://seekingalpha.com/article/1698372-axia-netmedia-newly-simplified-and-cashed-up

Africo Resources - Trading under Cash

Africo Resource TSX:ARL $0.46

The thesis for an investment in Africo Resources is simple. The company's current market capitalization of $32.8 million is less than its current cash and short term investments. Since the short term investments are all short time deposits with Canadian chartered banks, I'll treat them like cash. In fact, the current assets minus all the liabilities of the company yields a positive value of $63.1 million. That implies a value just based on cash of $0.88 per share.

The company also has a mining project in the Democratic Republic of Congo. I claim no insight to whether the project is any good, and I don't think the quality of the project is material to the case for buying the company. If you happen to be interested, an updated NI 43-101 was filed in May, and can be found here: http://www.africoresources.com/ir/news/2013/kalukundi_copper_cobalt_project_23may2013.pdf.

The company has taken the position it won't be able to develop the project independently with its current share price, and has reduced its expenditures. In Q1 it had a cash draw down of $610 thousand, so you could wait a long time for the valuation gap to close before the cash burn impacted the value of the company's current assets.

The company is majority owned by a subsidiary of Eurasian Natural Resources (LSE: ENRC) which is a partially privatized Kazakh miner. This ownership and control position is the likely cause for the significant undervaluation. The logical endgame is to merge Africo Resources into ENRC (which has adjacent mining claims) at the value of the cash. I would expect any take private attempt lower than the value of the cash to face minority shareholder resistance and regulatory scrutiny, so there is some protection against the majority owner confiscating the value.

Disclosure: No current position, may buy shares without prior warning or update.

Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author.

Glentel TSX:GLN $17.36

Glentel is a cellphone retailer operating in Canada, the US, and Australia, and is growing rapidly through partnerships, new store openings, and reasonably priced acquisitions. The company trades at a 13.8 price to earnings ratio and has excellent earning growth. It is integrating new acquisitions which should propel profits higher. I have done a complete write-up on Glentel which is available on Seeking Alpha.

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.

Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author


1) http://www.thealbertasupernet.com

Murphy Oil NYSE:MUR $61.58

Murphy Oil is an oil exploration company that is about to spin-off its retail business to shareholders. I'm a huge fan of spinoffs, as I think they often surface value that was hidden in a larger entity. I suspect that will be the case here as the gas stations being spun off are high volume and co-located with Wal-Mart. The E&P business also includes many assets that could be sold off quickly, like a stake in Syncrude. I'm trying to keep this blog focused on Canadian value situations, so I wrote this up on Seeking Alpha at http://seekingalpha.com/article/1461311-the-long-case-for-murphy-oil-corporation.

Disclosure: No position in MUR.

Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author

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)

Europe

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.

Singapore

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

Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author