Monday, March 3, 2014

LICT, any meat left on the bone?

Over two years ago I wrote a post about a company trading at 50% of book value and 5 times earnings.  I mostly liked what I saw.  I liked the valuation, and liked who was at the helm, but hated the industry.  I saw a value trap in LICT, not a great investment.  I was wrong.

If anyone invested in LICT based on my initial post they wouldn't have been cheering their good luck before last week.  In the two years since I posted about LICT the stock rose 20%, and trailing the market.  Long suffering investors were rewarded with a strangely worded press release on February 19th.  The company stated that they received an unsolicited proposal to purchase the company from a third party at a significant premium to their most recent share price.  Management responded that the offer didn't accurately reflect the company's private market value and rejected the offer.

The company's press release would have been great if that's all it contained.  Fortunately it had one more line of good news.  The company stated right before their legal disclaimers that they were currently in negotiation for a management led buy-out of one of their operating units.  The company provided no further detail and emphasized that they won't provide updates except as required by law.

I can understand investor disinterest at this point.  A company in a dying industry with a flat share price released PR saying an unnamed company offered an unnamed buyout price that was rejected.  It's not uncommon for less respected pink sheet companies to release statements like this to pump up their stock price.
"I've seen this movie, and I know how it ends."

For the uninitiated LICT is a Mario Gabelli controlled collection of telecom assets in markets that the majors would rather forget about.  If this is starting to sound familiar it is, it's following the playbook of CIBL (CIBY), another bundle of telecom assets Gabelli controls.

When CIBL traded near $300 p/s the company issued a press release stating that they had an offer for their wireless assets at a price that exceeded the current price.  It took a while for the deal to be consummated, about two years, but it happened at $900, three times the price at the time.  CIBL's management team then went on to sell the company's remaining assets for another impressive number.  The company's shares are now trading at $1450, potentially what management saw as private market value initially.

 LICT's announcement boosted their shares by $1,000 per share, they now trade at $3,300 a share.  It's impossible to know whether $3,300 is too high or too low unless we have a reasonable estimate of LICT's private market value.  In the case of CIBL their private market value exceeded their book value and was based on a multiple of earnings and replacement cost.

LICT has a book value of $88m, and a market cap of $74m.  They spent $300m building their telecom network, although I'd caution that it's doubtful they'll get anything close to replacement value.

The company is trading for about 10x trailing twelve month earnings.  Their EV/EBIT is 9, which seems reasonable given the industry and where they operate.  If we consider their earnings in isolation the company appears fairly valued at the current price if nothing changes in the future.

Given that LICT paid $300m for their telecom infrastructure I don't think it's a stretch to say that it could be worth book value of $88m.  What is disappointing is that $300m worth of cables and routers is only generating a roughly 2% return on their initial cost.

As I've worked my way through this post I've probably reinforced the thinking that LICT has the potential to be a value trap.  While they might have valuable assets it's also possible that the assets aren't as valuable as we'd want them to be.  The company is in a tough competitive position as well because they are landlocked into rural markets where running new cable is costly, and incomes aren't has high.  I've found myself thinking "who would want to buy this, and why?" as I've been writing.  I think a strong case could be made that LICT is worth at least book value, but to get any value higher requires some creative thinking.

The truth is most companies that acquire don't do it for a one time financial gain, they expect to pay a fair price and add value through their expertise.  Viewed through this lens it's easy to see what an acquirer might gain.  An acquirer might have more efficient operations, or operate in a similar geographic area.  If that were the case they might save significantly by consolidating operations.  Or maybe the acquirer plans on moving all the customers to a cheaper VOIP installation.  It's even possible the acquirer plans on attempting to upsell LICT's customers with more services or raising prices.

What if the potential acquirer doesn't come back with a counter offer?  Shareholders will probably get a glimpse at how the Board values the company when the management buy-out takes place at one of the subsidiaries.  Beyond that owning LICT doesn't seem like a terrible investment.  The company has considerable asset value, and their earnings have stabilized.  They service an important niche that isn't going away anytime soon, and they have responsible management at the helm.  You could do worse than owning LICT, and for the patient investor you will probably do quite well over time.

Disclosure: Long CIBL


5 comments:

  1. Your writeup is on LICT. In this disclosure is 'long CIBL' a typo or is that on purpose? Great blog you have here by the way.

    ReplyDelete
  2. No it's not a typo. I mentioned CIBL as another Gabelli owned company, and wanted to disclose that I own it. I do not own shares of LICT.

    ReplyDelete
  3. I own and like LICT. The one thing I noticed about LICT is that it actually had increasing EBITDA (2012 vs. 2011) versus declining for all the RLEC comps except the likes of GNCMA, SHEN and CNSL. LICT even now only sells for 3.3x TTM EBITDA a nice sized discount from the other declining RLECs who sell at 5.0 to 6.0x EBITDA. Iowa Telecom was purchase a few years ago for more than 8.0x EBITDA. If you apply a 6.0x EBITDA multiple to today's price you get an upside of over 135%. I think LICT is one of the better players in a tough industry with a much cheaper valuation. BTW they also just announced they are going to be a part of the FCC license auction of TV spectrum.

    Packer

    ReplyDelete
  4. You are long CIBL, but think that ICTG is an over-valued investment at $22?

    ReplyDelete
  5. congrats to LICT owners!

    ReplyDelete