Just completed the Advent Wireless sale at a total loss of 0.5% post the dividend.
Advent Wireless’ revenue as a whole fell 7%, and within the mobile segment:
Phone sales and upgrade commissions have been weak, as expected since the Smartphone upgrade cycle continues to lengthen. This is a universal trend as the Smartphone market has matured.
The bonus commission is based on sales metrics from Rogers and Fido. The company did not meet that for this quarter, and that’s why it fell 50%. The commission will fluctuate over time for that reason, so the 50% drop this quarter does not indicate a trend.
Revenues of both the Wireless and Financing (JV) Segments.
Adwell is the new Joint Venture that Advent Wireless owns 70% of. The perks of Adwell is that, so far, it has been funded primarily by Advent’s mobile business and not the balance sheet cash. Mgmt also expects it to break even in the ‘middle’ of 2017. That seems a bit aggressive, IMO, but judging by the Q1/Q2 progression (Table: Adwell’s Financials), they might just pull it off.
Mgmt is also considering an expansion of Adwell’s operations into collateral lending in Ontario and will likely do so if its current operation proves to be successful.
The balance sheet remains solid with $13.2 million in cash and book equity of $16.71. The company also recently announced a $0.05 dividend with an ex-dividend date of September 30th. That’s a 4.46% yield at today’s price.
The goal here is to track the development of Adwell. If mgmt able to pull off profitability next year, this could be worth a multiple of today’s price. If I’m wrong, the cash balance should serve as a price floor.
|Purchase Price: $1.135||Market Capitalization: $13.90 Million|
|Price Target: –||Enterprise Value: $1.21 Million|
|TTM EV/EBITDA: 0.84||Time Frame: –|
Advent Wireless is an independent specialty retailer of personal wireless and wire line communication products and services for Rogers Communication. Rogers Communication is the largest telecom provider in Canada by subscriber count, and Fido, which is the discount brand of Rogers. Advent sells wireless voice and data, high-speed Internet, digital cable television, home phone, smart phones and other electronics and services.
The company makes money by collecting commissions for Phone Sales, Line activation, customer upgrades, residual commission from prior activated customers, and bonuses from preset achievement metrics. Revenues are down from 14 to 15 primarily because the company sold a portion of its locations. Beyond that, organic sales are also falling because of declining smartphone sales and Rogers subscriber count. The company recorded revenues (organic) of 3,755,731 and 3,433,267 for Q1 2015 and Q1 2016. The decline was propelled by a -12% decline in Phone sales which accounts for just over 60% of the company’s revenues.
Declining Smartphone Market
The smartphone market has peaked with even the king of profits – Apple – recording a 15% decline in sales and a 27% decline in profits last quarter. This trend is also evident in Advent’s financials. The positive side of this, for Advent at least, is that phone sales for dealers are razor-thin. So while the vast majority of revenue is derived from phone sales, the effect on the bottom line is trivial. For example: Advent’s smartphone sales declined by 12% in Q1, which propelled the 9%, but after netting for the loss the new lending business (see more below) contributed, net income fell just 3%.
Economic Dependence on Rogers
- Rogers user-base has been declining for the past few years. This is because of the company’s strategic push towards higher margin or higher Average Revenue Per User (ARPU) customers. So while Rogers continues to target ARPU metrics, the decline has been offset by FIDO, the discount brand which targets volume growth at lower margins.
- Approximately 85% of the Company’s revenue was from Rogers. 98% of receivables are also due from Rogers.
The accounts receivable risk is not pertinent because Rogers is not only well established, but is also the largest telecom company by subscriber count in Canada. The company netted just over $1 billion last year and has been profitable for the past decade. With regards to the user-base risk, there’s only one direction one can go from the top and that’s down. The ARPU is also increasing. So while the base in falling, the effect has been negligent to Advent.
The company entered into a JV with Q&Y Holdings and Adwealth Capital Holdings, which were formed for this JV. The JV will provide unsecured short-term installment loans in amounts ranging from $1500 to $5000 with 9-36 month and interest rates ranging from 31% to 48% repayment terms and no early repayment penalties. Credit cards interest rates in Canada range from 19% to 29% – this is in contrast to payday loans charge interest rates beyond 400%. Advent owns 70% of the JV while the other two partners who have experience in the lending business own a combined 30% and will run the operations. This new business may very well be the reason most value investors are steering clear of the stock, but at this valuation, there is a lot of room for error. Also, management holds a third of the shares outstanding and also has a history of preserving shareholder wealth. Management’s target for break even for the business is towards the end of 2017 to early 2018.
Why do Telecom Companies need dealers?
Over 80% of McDonald’s restaurants are franchised and the company has set a goal to get that number to 95%. Why do companies do this? It’s actually quite simple. Lets say it costs $1 million to get a McDonald’s restaurant up and going. If McDonald’s were to lease a building and pay all the other startup costs, then they would own the restaurant and get the full share of profits. However, should the new restaurant not work out for whatever reason, McDonald’s takes the loss. With a Franchisee, McDonald’s can pass the startup cost to someone else and just take a percent of the revenues. If the store outperforms, the franchisee wins, if the store under-performs, the franchisee loses. McDonald’s, however, collects its fees regardless of what the franchisee’s outcome is. This becomes a cost-free source of income and is most beneficial to a company that wants to rapidly expanding without leverage. The franchiser protects its franchisees by only strategically accepting and placing other franchisees in locations where they won’t cannibalize each other’s sales.
Advent is basically a franchisee of Rogers and the difference between Advent and a startup franchisee is that Advent is well established.
The company has paid dividends over the past two years in recognition of its ‘strong financial position’. While these dividends have been unstable, I still think the company is quite a rare breed in today’s market.
Balance Sheet & Valuation
The company carries a cash balance of $12.27 million, and has current assets of $14.67 million with over half of the current assets net of cash being accounts receivable – excluding assets in the lending business (also receivables). The company also has real estate that it leases out in Vancouver, British Columbia and Ontario. It initially acquired them for business purposes, but then sold off the businesses and kept the real estate. The Real Estate’s book value is $1.8 million, but given that the company earned a 7.2% return on the book value of those properties. Average cap rates across Vancouver and Toronto for multi-family properties are between 3.25 to 4. The properties are worth at least a 50% premium to today’s prices. Although these aren’t necessarily multi-family properties, the rates are likely within the vicinity of each other.
So to recap, Liquid assets of $14.67 million + $1.8 million book = $16.47. I intentionally used real estate in the liquid calculation – any asset is liquid at the right price and book value significantly undervalues its properties. The market cap today is $13.90 and the company still makes money. Although the decline in smartphone sales will likely continue to pressure sales, the company shouldn’t trade below book. The base case is that the venture doesn’t work out and I sell out at a minute loss or gain. If the venture does indeed work out, then the business is certainly worth more than 2x today’s price since we would end up with cash flows from both the venture and the smartphone business. The goal here is to see how the venture business evolves. I purchased this about 2 weeks ago, my cost basis is $1.135 CAD at 6.8% of the portfolio.