Digital Multimedia Technology DMT IM
September 18, 2009 - 11:25am EST by
cgnlm995
2009 2010
Price: 10.57 EPS $0.20 $0.50
Shares Out. (in M): 11 P/E 53.0x 21.2x
Market Cap (in $M): 120 P/FCF nm 8.1x
Net Debt (in $M): 108 EBIT -5 29
TEV ($): 224 TEV/EBIT nm 8.9x

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Description

 

 

DMT presents an opportunity to buy a great business with >100% incremental ROIC for just 8.1x 2010 price to free cash flow, growing top-line organically at 4-6% plus inflation escalators. DMT operates tower assets in Italy where significant regulatory restrictions have created monopolistic characteristics. The shares trade at a significant discount to replacement value and half the valuation multiples of peers due to an explainable temporary market dislocation. The Company operates a non-core Systems business (33% of sales with significant losses) that focuses primarily on products and services for digital television. This business not only shrouded Tower profitability, but also led to unfounded bankruptcy concerns. As this business returns to profitability in 2H 2009, we believe the market dislocation will unwind and the shares will more than double in value. If the shares doubled, DMT would still trade at just 16x 2010 free cash flow (peers at 20x). Given strong secular trends in the industry and inherent operating leverage in the business, we believe the shares could quadruple over the next four years.

 

DMT owns and operates nearly 1,500 broadcasting and telecom towers in Italy (77% / 23%). The Company was carved out of Mediaset in January 2000 through effectively an MBO by CEO and founder, Alessandro Falciai, who owns 36% of the shares. This is very similar to well-known domestic tower businesses such as American Tower, SBA Communications and Crown Castle. DMT also has a non-core equipment technology business that will benefit from the government mandated shift from analog to digital television. This historically troubled business will be profitable in 2H 2009 and likely sold in mid 2010. We ignore Systems in our analysis, but mention it qualitatively in 'Long Merits' and 'Long Risks.'

 

 

 

  • Valuation: DMT will earn its market cap back in cash over the next 5 years. On management's base case, the shares trade at just 4.4x and 4.8x 2014 levered and unlevered free cash flow. Peers trade at twice the 2010 EBITDA multiple and nearly 4x the sales multiple (7x 2010 vs. peers at 14x and 2.4x vs. peers at >9.0x). Peers also posses more leverage with ~1.5x turns more of debt (4.3x vs. 6x). Peers include American Tower, Crown Castle and SBA Communications.
  •  

  • Business Quality: The average contract length outstanding is currently 12 years for the Tower business providing extreme sales visibility. Incremental pre-tax ROIC is 100% (capex of E3-4mm vs. incremental EBITDA of E3-4mm and growing by ~10% per year). Towers will be around as long as wireless (WIMAX, mobile phones, digital television, etc.). Additionally, there is ample room for DMT to exploit tower capacity more efficiently. Rental space is underutilized, helped by continuing reduction in size of the equipment installed, leads to increasing existing tower capacity. Permits to build new towers are nearly impossible to obtain, so barriers to entry are quite high.
  •  

     

  • Management Quality: CEO Alessandro Falciai is an aggressive entrepreneur who rose quickly through the ranks at Mediaset and then through an MBO, purchased the assets of DMT. Falciai has built solid relationships with local authorities as well as the PM of Italy. He owns 36% of the Company, and is thus completely aligned with shareholders.
  •  

     

  • Long inflation: >75% of sales have automatic inflation escalators while just 17% of costs are potentially exposed to inflation.
  •  

     

  • DMT potentially qualifies for REIT status, which would add 30% to fair value.
  •  

     

  • Clear Market Dislocation: The shares are just 12% of their highs set in mid 2007 (>E76) and are just 37% of their 52 wk highs (Sept 2008). There does not appear to be any permanent value impairment (no share dilution). As the Systems division begins to generate profits, analyst estimates and the share price should improve dramatically as this non-core business is currently perceived as having significant negative equity value.

       

    • Systems has clouded the profitability of the Group (-20mm of EBIT and 24mm of debt at YE 2008). Due to cash burn, investors feared a major rights issuance, which given liquidity - probably would have been impossible. Sellside analysts estimated E30mm to shut down the division (management says E9mm). Despite losses in 1H 2009, this business will be profitable in 2H. Management has repeatedly stated that there will be no need for an equity issuance. Given the CEO's ownership, it is clear that he is incentivized to avoid a dilutive offering. We can have confidence that this business will only IMPROVE sentiment and fundamentals as the Prime Minister of Italy is completely aligned and incentivized to drive the transition from analog to digital. Mediaset, owned 38% by Prime Minister Silvio Berlusconi, will benefit heavily from the move from analog to digital as they are the incumbent cable provider trying to compete with satellite players like Sky. DMT is a child of Mediaset, sold/spun to the current CEO and Mediaset alumnus in 2000, and the Systems business is driven almost entirely by the shift to digital in broadcast television. Similar to the US, Berlusconi has overseen legislation mandating the switchover to digital transmission. The program is setup by region with the entire country going digital by the end of 2012. This supplies the Systems business with more than three years of visibility, which should be enough to achieve profitability and then sell the business. Previous losses were driven by former PM Romano Prodi's decision to suspend the government mandated move to digital. Berlusconi's was elected in 2008, and theoretically has a 5 year mandate.
    •  

       

    • Estimates are too low: Analysts underestimate the growth of Tower Biz and the resulting margins. For example, one analyst with a 'Hold' has 2% growth in 2010, 1.9% in 2011 and 1.5% in 2012. In reality, DMT will grow 4-6% from content and contract renewals + inflation. Estimates are nominal, so we possess a significant margin of safety given revenue visibility with any modicum of inflation leading to outperformance. Tower revenues grew organically by 4% in 1H 2009. From speaking with our Telecom management contacts as well as a senior manager at a comparable business in France, we are highly confident in management's 4-6% revenue growth targets before inflation escalators. Secondly, analysts estimate sub-50% margins for the Tower business despite management's assertion that the business should earn 50%+ EBITDA margins in 2010 and up to 55% in 3-5 years. This can be achieved quite easily given operating leverage (almost entire cost structure is fixed). Tower will likely do close to 50% EBITDA margins this year (did 55% in Q3 of 2008).
    •  

       

    • Morgan Stanley and UBS dropped coverage in November 2008 and March 2009 respectively, which led to lower liquidity and investor interest amidst a collapsing equity market.
    •  

       

    • Dissolution or delay of several expected catalysts:

         

      • Transformational deal did not happen: DMT looked to acquire Wind-3 Italy tower network (named Eiffel, which was a E1.5bn-E2bn deal despite DMT's equity value of just E260mm at the time...stock was mid 20s). The deal fell apart in early fall of last year along with the credit markets. Many global hedge funds and European institutional funds liquidated their positions very rapidly when it became clear that the acquisition would not go through. By itself, DMT was likely too for the respective mandates and capital bases of these funds.
      •  

         

      • Investors thought the Systems business would be sold in early 2008, and certainly would not complete erase the profitability of the Tower business.
      •  

         

      • Talks of a deal with Atlantia, the Italian motorway company failed in late 2008.
      •  

 Long Risks

 

  

  • Liquidity: E102mm mkt cap; E222mm EV; CapIQ says the shares trade about $1mm per day.
  •  

  • Interest rates: ½ their debt is floating and exposed to movements in rates. As they have to refinance in 2012, they may be exposed to interest rate risk.
  •  

  • The Tower business could be exposed to a lull in growth as analog channels go dark at once and digital channels take time to emerge (will provide higher growth in the medium term given higher content requirements).
  •   

    Model

    DMT Cash Flow / Debt Paydown Model

     

     

     

     

     

     

     

     

     

     

     

    2010

    2011

    2012

    2013

    2014

    2015

    2016

     

     

     

     

    Revenue

    59.4

    64.1

    69.9

    76.9

    83.8

    90.5

    97.7

     

     

     

     

    % Increase

    6.0%

    8.0%

    9.0%

    10.0%

    9.0%

    8.0%

    8.0%

     

     

     

     

    of which inflation

    1.0%

    3.0%

    4.0%

    5.0%

    4.0%

    3.0%

    3.0%

     

     

     

     

    of which content

    5.0%

    5.0%

    5.0%

    5.0%

    5.0%

    5.0%

    5.0%

     

     

     

     

    EBITDA

    29.7

    32.7

    36.3

    40.7

    45.2

    49.8

    53.7

     

     

     

     

    %margin

    50.0%

    51.0%

    52.0%

    53.0%

    54.0%

    55.0%

    55.0%

     

     

     

     

    Maintenance Capex

    -4.0

    -4.1

    -4.3

    -4.5

    -4.7

    -4.8

    -5.0

     

     

     

     

    Cash EBIT

    25.7

    28.6

    32.1

    36.2

    40.6

    44.9

    48.8

     

     

     

     

    Interest Expense

    -4.6

    -3.6

    -2.8

    -3.3

    -1.3

    0.9

    3.5

     

     

     

     

    % rate

    4.0%

    4.0%

    4.0%

    7.0%

    7.0%

    7.0%

    7.0%

     

     

     

     

    Cash EBT

    21.1

    25.0

    29.3

    33.0

    39.2

    45.8

    52.2

     

     

     

     

    Taxes @ 30%

    -6.3

    -7.5

    -8.8

    -9.9

    -11.8

    -13.8

    -15.7

     

     

     

     

    Levered Free Cash Flow

    14.8

    17.5

    20.5

    23.1

    27.5

    32.1

    36.6

     

     

     

     

    per share

    1.31

    1.55

    1.81

    2.04

    2.43

    2.84

    3.24

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    EOY Debt/ Cash

    107.7

    90.3

    69.8

    46.7

    19.3

    -12.8

    -49.4

     

     

     

     

    122.5

     

     

     

     

     

     

     

     

     

     

     

     

    2010

    2011

    2012

    2013

    2014

    2015

    2016

     

     

     

     

    Levered Multiple (CF)

    8.1x

    6.9x

    5.8x

    5.2x

    4.4x

    3.7x

    3.3x

     

     

     

     

    Unlevered Multiple (CF)

    11.8x

    10.0x

    8.1x

    6.3x

    4.8x

    3.4x

    2.1x

     

     

     

     

    EV/EBITDA

    7.7x

    7.0x

    6.3x

    5.6x

    5.0x

    4.6x

    4.2x

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Shares Out

    11.3

     

     

     

     

     

     

     

     

     

     

    Share Price

    € 10.6

     

     

     

     

     

     

     

     

     

     

    Market Cap

    119.8

    119.8

    119.8

    119.8

    119.8

    119.8

    119.8

     

     

     

     

    Net Debt

    107.7

    90.3

    69.8

    46.7

    19.3

    -12.8

    -49.4

     

     

     

     

    Enterprise Value

    227.5

    210.1

    189.6

    166.5

    139.0

    106.9

    70.4

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Fair Value

    19.6

    23.2

    27.2

    30.6

    36.4

     

     

     

     

     

     

    % upside

    85%

    119%

    156%

    189%

    244%

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Market Statistics

    P/E

    EV/EBITDA

    EV/Sales

    Net Debt

    Peers

    Ticker

    Price

    Mkt Cap

    EV

    2009

    2010

    2009

    2010

    2009

    2010

    09 EBITDA

    Tower Companies

     

     

     

     

     

     

     

     

     

     

     

    American Tower

    NYSE:AMT

    36.70

    15,003

    19,118

    61.2x

    40.8x

    16.5x

    14.9x

    11.2x

    10.4x

    3.5x

    Crown Castle

    NYSE:CCI

    30.40

    8,707

    14,959

    -76.0x

    304.0x

    15.1x

    13.8x

    9.0x

    8.4x

    6.3x

    SBA Communication

    NasdaqGS:SBAC

    27.30

    3,197

    5,410

    -34.1x

    -54.6x

    16.2x

    14.5x

    9.8x

    9.0x

    6.6x

    Average

     

     

     

     

    -16.3x

    96.7x

    15.9x

    14.4x

    10.0x

    9.2x

    5.5x

    Median

     

     

     

     

    -34.1x

    40.8x

    16.2x

    14.5x

    9.8x

    9.0x

    6.3x

    DMT

    CM:DMT

    10.60

    120

    240

    53.0x

    21.2x

    8.6x

    7.4x

    3.4x

    2.4x

    4.3x

     

    Catalyst

        sort by    

      Description

       

       

      DMT presents an opportunity to buy a great business with >100% incremental ROIC for just 8.1x 2010 price to free cash flow, growing top-line organically at 4-6% plus inflation escalators. DMT operates tower assets in Italy where significant regulatory restrictions have created monopolistic characteristics. The shares trade at a significant discount to replacement value and half the valuation multiples of peers due to an explainable temporary market dislocation. The Company operates a non-core Systems business (33% of sales with significant losses) that focuses primarily on products and services for digital television. This business not only shrouded Tower profitability, but also led to unfounded bankruptcy concerns. As this business returns to profitability in 2H 2009, we believe the market dislocation will unwind and the shares will more than double in value. If the shares doubled, DMT would still trade at just 16x 2010 free cash flow (peers at 20x). Given strong secular trends in the industry and inherent operating leverage in the business, we believe the shares could quadruple over the next four years.

       

      DMT owns and operates nearly 1,500 broadcasting and telecom towers in Italy (77% / 23%). The Company was carved out of Mediaset in January 2000 through effectively an MBO by CEO and founder, Alessandro Falciai, who owns 36% of the shares. This is very similar to well-known domestic tower businesses such as American Tower, SBA Communications and Crown Castle. DMT also has a non-core equipment technology business that will benefit from the government mandated shift from analog to digital television. This historically troubled business will be profitable in 2H 2009 and likely sold in mid 2010. We ignore Systems in our analysis, but mention it qualitatively in 'Long Merits' and 'Long Risks.'

       

       

       

      • Valuation: DMT will earn its market cap back in cash over the next 5 years. On management's base case, the shares trade at just 4.4x and 4.8x 2014 levered and unlevered free cash flow. Peers trade at twice the 2010 EBITDA multiple and nearly 4x the sales multiple (7x 2010 vs. peers at 14x and 2.4x vs. peers at >9.0x). Peers also posses more leverage with ~1.5x turns more of debt (4.3x vs. 6x). Peers include American Tower, Crown Castle and SBA Communications.
      •  

      • Business Quality: The average contract length outstanding is currently 12 years for the Tower business providing extreme sales visibility. Incremental pre-tax ROIC is 100% (capex of E3-4mm vs. incremental EBITDA of E3-4mm and growing by ~10% per year). Towers will be around as long as wireless (WIMAX, mobile phones, digital television, etc.). Additionally, there is ample room for DMT to exploit tower capacity more efficiently. Rental space is underutilized, helped by continuing reduction in size of the equipment installed, leads to increasing existing tower capacity. Permits to build new towers are nearly impossible to obtain, so barriers to entry are quite high.
      •  

         

      • Management Quality: CEO Alessandro Falciai is an aggressive entrepreneur who rose quickly through the ranks at Mediaset and then through an MBO, purchased the assets of DMT. Falciai has built solid relationships with local authorities as well as the PM of Italy. He owns 36% of the Company, and is thus completely aligned with shareholders.
      •  

         

      • Long inflation: >75% of sales have automatic inflation escalators while just 17% of costs are potentially exposed to inflation.
      •  

         

      • DMT potentially qualifies for REIT status, which would add 30% to fair value.
      •  

         

      • Clear Market Dislocation: The shares are just 12% of their highs set in mid 2007 (>E76) and are just 37% of their 52 wk highs (Sept 2008). There does not appear to be any permanent value impairment (no share dilution). As the Systems division begins to generate profits, analyst estimates and the share price should improve dramatically as this non-core business is currently perceived as having significant negative equity value.

           

        • Systems has clouded the profitability of the Group (-20mm of EBIT and 24mm of debt at YE 2008). Due to cash burn, investors feared a major rights issuance, which given liquidity - probably would have been impossible. Sellside analysts estimated E30mm to shut down the division (management says E9mm). Despite losses in 1H 2009, this business will be profitable in 2H. Management has repeatedly stated that there will be no need for an equity issuance. Given the CEO's ownership, it is clear that he is incentivized to avoid a dilutive offering. We can have confidence that this business will only IMPROVE sentiment and fundamentals as the Prime Minister of Italy is completely aligned and incentivized to drive the transition from analog to digital. Mediaset, owned 38% by Prime Minister Silvio Berlusconi, will benefit heavily from the move from analog to digital as they are the incumbent cable provider trying to compete with satellite players like Sky. DMT is a child of Mediaset, sold/spun to the current CEO and Mediaset alumnus in 2000, and the Systems business is driven almost entirely by the shift to digital in broadcast television. Similar to the US, Berlusconi has overseen legislation mandating the switchover to digital transmission. The program is setup by region with the entire country going digital by the end of 2012. This supplies the Systems business with more than three years of visibility, which should be enough to achieve profitability and then sell the business. Previous losses were driven by former PM Romano Prodi's decision to suspend the government mandated move to digital. Berlusconi's was elected in 2008, and theoretically has a 5 year mandate.
        •  

           

        • Estimates are too low: Analysts underestimate the growth of Tower Biz and the resulting margins. For example, one analyst with a 'Hold' has 2% growth in 2010, 1.9% in 2011 and 1.5% in 2012. In reality, DMT will grow 4-6% from content and contract renewals + inflation. Estimates are nominal, so we possess a significant margin of safety given revenue visibility with any modicum of inflation leading to outperformance. Tower revenues grew organically by 4% in 1H 2009. From speaking with our Telecom management contacts as well as a senior manager at a comparable business in France, we are highly confident in management's 4-6% revenue growth targets before inflation escalators. Secondly, analysts estimate sub-50% margins for the Tower business despite management's assertion that the business should earn 50%+ EBITDA margins in 2010 and up to 55% in 3-5 years. This can be achieved quite easily given operating leverage (almost entire cost structure is fixed). Tower will likely do close to 50% EBITDA margins this year (did 55% in Q3 of 2008).
        •  

           

        • Morgan Stanley and UBS dropped coverage in November 2008 and March 2009 respectively, which led to lower liquidity and investor interest amidst a collapsing equity market.
        •  

           

        • Dissolution or delay of several expected catalysts:

             

          • Transformational deal did not happen: DMT looked to acquire Wind-3 Italy tower network (named Eiffel, which was a E1.5bn-E2bn deal despite DMT's equity value of just E260mm at the time...stock was mid 20s). The deal fell apart in early fall of last year along with the credit markets. Many global hedge funds and European institutional funds liquidated their positions very rapidly when it became clear that the acquisition would not go through. By itself, DMT was likely too for the respective mandates and capital bases of these funds.
          •  

             

          • Investors thought the Systems business would be sold in early 2008, and certainly would not complete erase the profitability of the Tower business.
          •  

             

          • Talks of a deal with Atlantia, the Italian motorway company failed in late 2008.
          •  

       Long Risks

       

        

    • Liquidity: E102mm mkt cap; E222mm EV; CapIQ says the shares trade about $1mm per day.
    •  

    • Interest rates: ½ their debt is floating and exposed to movements in rates. As they have to refinance in 2012, they may be exposed to interest rate risk.
    •  

    • The Tower business could be exposed to a lull in growth as analog channels go dark at once and digital channels take time to emerge (will provide higher growth in the medium term given higher content requirements).
    •   

      Model

      DMT Cash Flow / Debt Paydown Model

       

       

       

       

       

       

       

       

       

       

       

      2010

      2011

      2012

      2013

      2014

      2015

      2016

       

       

       

       

      Revenue

      59.4

      64.1

      69.9

      76.9

      83.8

      90.5

      97.7

       

       

       

       

      % Increase

      6.0%

      8.0%

      9.0%

      10.0%

      9.0%

      8.0%

      8.0%

       

       

       

       

      of which inflation

      1.0%

      3.0%

      4.0%

      5.0%

      4.0%

      3.0%

      3.0%

       

       

       

       

      of which content

      5.0%

      5.0%

      5.0%

      5.0%

      5.0%

      5.0%

      5.0%

       

       

       

       

      EBITDA

      29.7

      32.7

      36.3

      40.7

      45.2

      49.8

      53.7

       

       

       

       

      %margin

      50.0%

      51.0%

      52.0%

      53.0%

      54.0%

      55.0%

      55.0%

       

       

       

       

      Maintenance Capex

      -4.0

      -4.1

      -4.3

      -4.5

      -4.7

      -4.8

      -5.0

       

       

       

       

      Cash EBIT

      25.7

      28.6

      32.1

      36.2

      40.6

      44.9

      48.8

       

       

       

       

      Interest Expense

      -4.6

      -3.6

      -2.8

      -3.3

      -1.3

      0.9

      3.5

       

       

       

       

      % rate

      4.0%

      4.0%

      4.0%

      7.0%

      7.0%

      7.0%

      7.0%

       

       

       

       

      Cash EBT

      21.1

      25.0

      29.3

      33.0

      39.2

      45.8

      52.2

       

       

       

       

      Taxes @ 30%

      -6.3

      -7.5

      -8.8

      -9.9

      -11.8

      -13.8

      -15.7

       

       

       

       

      Levered Free Cash Flow

      14.8

      17.5

      20.5

      23.1

      27.5

      32.1

      36.6

       

       

       

       

      per share

      1.31

      1.55

      1.81

      2.04

      2.43

      2.84

      3.24

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

      EOY Debt/ Cash

      107.7

      90.3

      69.8

      46.7

      19.3

      -12.8

      -49.4

       

       

       

       

      122.5

       

       

       

       

       

       

       

       

       

       

       

       

      2010

      2011

      2012

      2013

      2014

      2015

      2016

       

       

       

       

      Levered Multiple (CF)

      8.1x

      6.9x

      5.8x

      5.2x

      4.4x

      3.7x

      3.3x

       

       

       

       

      Unlevered Multiple (CF)

      11.8x

      10.0x

      8.1x

      6.3x

      4.8x

      3.4x

      2.1x

       

       

       

       

      EV/EBITDA

      7.7x

      7.0x

      6.3x

      5.6x

      5.0x

      4.6x

      4.2x

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

      Shares Out

      11.3

       

       

       

       

       

       

       

       

       

       

      Share Price

      € 10.6

       

       

       

       

       

       

       

       

       

       

      Market Cap

      119.8

      119.8

      119.8

      119.8

      119.8

      119.8

      119.8

       

       

       

       

      Net Debt

      107.7

      90.3

      69.8

      46.7

      19.3

      -12.8

      -49.4

       

       

       

       

      Enterprise Value

      227.5

      210.1

      189.6

      166.5

      139.0

      106.9

      70.4

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

      Fair Value

      19.6

      23.2

      27.2

      30.6

      36.4

       

       

       

       

       

       

      % upside

      85%

      119%

      156%

      189%

      244%

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

      Market Statistics

      P/E

      EV/EBITDA

      EV/Sales

      Net Debt

      Peers

      Ticker

      Price

      Mkt Cap

      EV

      2009

      2010

      2009

      2010

      2009

      2010

      09 EBITDA

      Tower Companies

       

       

       

       

       

       

       

       

       

       

       

      American Tower

      NYSE:AMT

      36.70

      15,003

      19,118

      61.2x

      40.8x

      16.5x

      14.9x

      11.2x

      10.4x

      3.5x

      Crown Castle

      NYSE:CCI

      30.40

      8,707

      14,959

      -76.0x

      304.0x

      15.1x

      13.8x

      9.0x

      8.4x

      6.3x

      SBA Communication

      NasdaqGS:SBAC

      27.30

      3,197

      5,410

      -34.1x

      -54.6x

      16.2x

      14.5x

      9.8x

      9.0x

      6.6x

      Average

       

       

       

       

      -16.3x

      96.7x

      15.9x

      14.4x

      10.0x

      9.2x

      5.5x

      Median

       

       

       

       

      -34.1x

      40.8x

      16.2x

      14.5x

      9.8x

      9.0x

      6.3x

      DMT

      CM:DMT

      10.60

      120

      240

      53.0x

      21.2x

      8.6x

      7.4x

      3.4x

      2.4x

      4.3x

       

      Catalyst

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