CRAIG WIRELESS SYSTEMS LTD CWG.
April 20, 2011 - 11:28am EST by
tony411
2011 2012
Price: 0.38 EPS -$0.25 -$0.24
Shares Out. (in M): 51 P/E na na
Market Cap (in M): 19 P/FCF na na
Net Debt (in M): -27 EBIT -13 -14
TEV: -8 TEV/EBIT na na

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Description

Craig Wireless (CWG) is an extremely cheap Canadian-listed microcap.  With 26.8 million CAD* in cash, no debt, and 51.34 million shares outstanding, the company trades at a -7.5 million EV.   The Ben Graham-style net-net (Cash + 75% of A/R + 50% inventory – all liabilities) valuation is 25.8m CAD—1/3rd above the 19.3m market cap!  The fact that the market cap is so small may explain why the stock is overlooked, as well as the fact that the company’s focus area, WiMax, is currently less popular with the tech momentum crowd.

CWG was incorporated in 2002 and listed on the TSX in 2007.  It is essentially a holding company created to buy wireless spectrum assets.  The initial focus was on spectrum to be used for WiMax data/voice and CWG currently owns (or has long-term leases on) spectrum in the US, Greece, Norway and New Zealand.  The company had spectrum in Canada which they sold in 2010—generating the large amount of cash they currently have.  In addition to the spectrum assets the company has some limited wireless services operations that allow them to continue holding and/or monetize their spectrum assets. 

At the current price, you are essentially getting all the spectrum assets entirely for free, so the company can be thought of as a call option on the value of its spectrum.  In fact, given the company’s -7.5 million EV, you are getting paid to hold the call option.   What is the catch?  CWG is spending cash on its limited WiMax deployments.  Looking at the past quarter and estimating forward, CWG has a roughly $2.6 million/quarter burn.

What is the value of the spectrum assets?  If we are to believe CWG’s own estimate, they state that the Canadian assets sold represent 22.3% of their total spectrum assets (measured in megahertz weighted on a per-population basis).  That means that if all the spectrum is valued equally to the 80 million for the Canadian spectrum, then remaining spectrum assets would be worth $280 million!   Of course, as it is likely CWG sold off its best asset first, we can dismiss that figure as wildly optimistic, but it does give an upper bound of the valuation.

Looking in more detail at the assets to get a sum of the parts valuation:

  • Norway and New Zealand: In 2007 Craig Wireless paid 13.7m CAD for these rights, 93% of which went to pay for the rights in Norway which are tradable till 2022 and have no build-out requirements.  In 2009 they sold a 50% share of these rights to Everest Wireless Partners, a Washington-based VC, for 7.4 million.  The willingness of a 3rd party to invest in these assets at a 14.8 million valuation suggests that they should be valued at least at that price.  CWG is not investing is any buildout in Norway or New Zealand.
  • Palm Springs (Coachella Valley), CA: CWG launched services in Palm Springs in March of this year.   There appear to be a limited selection of broadband service providers in the area; for instance, Charter doesn’t provide internet service there and AT&T provides only wireless or dial-up services. You can see the detail on Craig’s pricing and products here: http://www.craig4g.com/products.html  They are providing an expensive solution ($99-299/mo) targeted to business users who need broadband at speeds from 2-6Mbps (typically WiMax supports up to 10 Mbps).  Assuming competition is low and they can convince customers to sign up, their breakeven is quite low.  Excluding amortization of the wireless license, expenses in Coachella Valley for CWG are 677,000/quarter.  At an ASP of $150/mo, that implies they only need 1,500 business customers to break even in the region.
  • Greece: CWG’s web site claims they will launch their 4G network in Greece in “early 2010” in Athens and Thessaloniki, but the service is still not launched.  There is no Greek web site for the service and the company provides fairly limited information on their operations, dubbed “Craig Wireless Hellas”.  My research indicates that the Greek operations were launched by Dimitris Stavrianos, a Greek lawyer, through the purchase of spectrum from Europrom for 7 million Euro in 2005 (9.6 million CAD at current exchange rates).   After putting in place the vendor relationships and a 10-persion team, he left the business in 2009 and was eventually replaced by Vassilis Sotiriou, the current Managing Director.  The current operations cost the company 817,000 CAD in the previous quarter, but it is not clear that much has been achieved for that cost.  It appears the company needs to maintain the operations in order to meet build-out requirements for the license.  It is likely the costs to maintain these operations equal out any residual value in the Greek license.
  • NOLs: As of Aug 2010 (the end of the last fiscal year) CWG had 5.2 million of tax-loss carryforwards.

If we assume no (essentially breakeven) value for the US and Greek parts of the business, no value for the NOLs, 14.8 million for the Norwegian and New Zealand licenses, and add in the 26.8 million in cash, that gives a valuation of 41.6 million, or CAD 0.81/share – over 2x the current price.  Any good news in Greece or the Palm Springs operation could unlock significant additional value beyond that.

There are three notable risks:

(1) As a result of a dispute related to the Greek operations, Lannet Communications, while in bankruptcy, filed a 254 milling Euro suit against CWG in Athens courts.   According to CWG’s 10Q, “The Company is confident in its position that no payment will be required.” 

(2) The prior CFO, Wesley Thiessen, left “to pursue other career opportunities” effective Feb 28, 2011 and was replaced with Murray Bamforth.  In the most recent 10Q, CWG calls out “certain material weaknesses in internal control over financial reporting,” specifically that: “key finance accountabilities are not effectively segregated due to resource constraints.” 

(3) To control decision making, the company has issued multiple voting shares worth 200x more votes than the subordinate voting shares.  There is a risk that management uses that control to make dumb decisions with the cash or pay out excessive compensation to themselves.

-----------

*Note & Disclosure: All figures in this writeup are Canadian Dollars.  At the time of writing the exchange rate was C$ 1 = US$ 1.0447.  This idea is for discussion purposes only and is not a recommendation to buy or sell any security.  The author may from time to time buy or sell this and other securities.

Catalyst

The company trades below its net-net valuation, and value can be its own catalyst.  Also, if the company is able to make good progress in winning customers in Palm Springs (where they launched operations in March) or else sell any of their current spectrum to gain capital, that will have a major impact on the valuation.

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    Description

    Craig Wireless (CWG) is an extremely cheap Canadian-listed microcap.  With 26.8 million CAD* in cash, no debt, and 51.34 million shares outstanding, the company trades at a -7.5 million EV.   The Ben Graham-style net-net (Cash + 75% of A/R + 50% inventory – all liabilities) valuation is 25.8m CAD—1/3rd above the 19.3m market cap!  The fact that the market cap is so small may explain why the stock is overlooked, as well as the fact that the company’s focus area, WiMax, is currently less popular with the tech momentum crowd.

    CWG was incorporated in 2002 and listed on the TSX in 2007.  It is essentially a holding company created to buy wireless spectrum assets.  The initial focus was on spectrum to be used for WiMax data/voice and CWG currently owns (or has long-term leases on) spectrum in the US, Greece, Norway and New Zealand.  The company had spectrum in Canada which they sold in 2010—generating the large amount of cash they currently have.  In addition to the spectrum assets the company has some limited wireless services operations that allow them to continue holding and/or monetize their spectrum assets. 

    At the current price, you are essentially getting all the spectrum assets entirely for free, so the company can be thought of as a call option on the value of its spectrum.  In fact, given the company’s -7.5 million EV, you are getting paid to hold the call option.   What is the catch?  CWG is spending cash on its limited WiMax deployments.  Looking at the past quarter and estimating forward, CWG has a roughly $2.6 million/quarter burn.

    What is the value of the spectrum assets?  If we are to believe CWG’s own estimate, they state that the Canadian assets sold represent 22.3% of their total spectrum assets (measured in megahertz weighted on a per-population basis).  That means that if all the spectrum is valued equally to the 80 million for the Canadian spectrum, then remaining spectrum assets would be worth $280 million!   Of course, as it is likely CWG sold off its best asset first, we can dismiss that figure as wildly optimistic, but it does give an upper bound of the valuation.

    Looking in more detail at the assets to get a sum of the parts valuation:

    • Norway and New Zealand: In 2007 Craig Wireless paid 13.7m CAD for these rights, 93% of which went to pay for the rights in Norway which are tradable till 2022 and have no build-out requirements.  In 2009 they sold a 50% share of these rights to Everest Wireless Partners, a Washington-based VC, for 7.4 million.  The willingness of a 3rd party to invest in these assets at a 14.8 million valuation suggests that they should be valued at least at that price.  CWG is not investing is any buildout in Norway or New Zealand.
    • Palm Springs (Coachella Valley), CA: CWG launched services in Palm Springs in March of this year.   There appear to be a limited selection of broadband service providers in the area; for instance, Charter doesn’t provide internet service there and AT&T provides only wireless or dial-up services. You can see the detail on Craig’s pricing and products here: http://www.craig4g.com/products.html  They are providing an expensive solution ($99-299/mo) targeted to business users who need broadband at speeds from 2-6Mbps (typically WiMax supports up to 10 Mbps).  Assuming competition is low and they can convince customers to sign up, their breakeven is quite low.  Excluding amortization of the wireless license, expenses in Coachella Valley for CWG are 677,000/quarter.  At an ASP of $150/mo, that implies they only need 1,500 business customers to break even in the region.
    • Greece: CWG’s web site claims they will launch their 4G network in Greece in “early 2010” in Athens and Thessaloniki, but the service is still not launched.  There is no Greek web site for the service and the company provides fairly limited information on their operations, dubbed “Craig Wireless Hellas”.  My research indicates that the Greek operations were launched by Dimitris Stavrianos, a Greek lawyer, through the purchase of spectrum from Europrom for 7 million Euro in 2005 (9.6 million CAD at current exchange rates).   After putting in place the vendor relationships and a 10-persion team, he left the business in 2009 and was eventually replaced by Vassilis Sotiriou, the current Managing Director.  The current operations cost the company 817,000 CAD in the previous quarter, but it is not clear that much has been achieved for that cost.  It appears the company needs to maintain the operations in order to meet build-out requirements for the license.  It is likely the costs to maintain these operations equal out any residual value in the Greek license.
    • NOLs: As of Aug 2010 (the end of the last fiscal year) CWG had 5.2 million of tax-loss carryforwards.

    If we assume no (essentially breakeven) value for the US and Greek parts of the business, no value for the NOLs, 14.8 million for the Norwegian and New Zealand licenses, and add in the 26.8 million in cash, that gives a valuation of 41.6 million, or CAD 0.81/share – over 2x the current price.  Any good news in Greece or the Palm Springs operation could unlock significant additional value beyond that.

    There are three notable risks:

    (1) As a result of a dispute related to the Greek operations, Lannet Communications, while in bankruptcy, filed a 254 milling Euro suit against CWG in Athens courts.   According to CWG’s 10Q, “The Company is confident in its position that no payment will be required.” 

    (2) The prior CFO, Wesley Thiessen, left “to pursue other career opportunities” effective Feb 28, 2011 and was replaced with Murray Bamforth.  In the most recent 10Q, CWG calls out “certain material weaknesses in internal control over financial reporting,” specifically that: “key finance accountabilities are not effectively segregated due to resource constraints.” 

    (3) To control decision making, the company has issued multiple voting shares worth 200x more votes than the subordinate voting shares.  There is a risk that management uses that control to make dumb decisions with the cash or pay out excessive compensation to themselves.

    -----------

    *Note & Disclosure: All figures in this writeup are Canadian Dollars.  At the time of writing the exchange rate was C$ 1 = US$ 1.0447.  This idea is for discussion purposes only and is not a recommendation to buy or sell any security.  The author may from time to time buy or sell this and other securities.

    Catalyst

    The company trades below its net-net valuation, and value can be its own catalyst.  Also, if the company is able to make good progress in winning customers in Palm Springs (where they launched operations in March) or else sell any of their current spectrum to gain capital, that will have a major impact on the valuation.

    Messages


    SubjectRE: Norway and NZ licenses
    Entry06/04/2011 08:47 PM
    Membertony411
    Devo, Good catch--you are correct.  I should have written, "If we assume no (essentially breakeven) value for the US and Greek parts of the business, no value for the NOLs, 7.4 million for the Norwegian and New Zealand licenses, and add in the 26.8 million in cash, that gives a valuation of 34.2 million, or CAD 0.67/share – 1.7x the current price."  This doesn't change the thesis but does reduce the margin of safety.  My apologies for the error. 

    SubjectLack of wireless spectrum
    Entry06/24/2011 04:30 PM
    Membertony411
    Intesting link of Gary Shapiro, President of the Consumer Electronics Association, discussing yesterday the need for additional wireless spectrum: http://bit.ly/iTEdkO   As this issue gains more visibility it will be a positive for CWG.
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