Hawaiian Telcom Holdco, Inc. HWLT.PK
February 24, 2011 - 11:27am EST by
cuyler1903
2011 2012
Price: 25.78 EPS $0.00 $0.00
Shares Out. (in M): 11 P/E 0.0x 0.0x
Market Cap (in $M): 291 P/FCF 7.8x 7.1x
Net Debt (in $M): 225 EBIT 0 0
TEV ($): 516 TEV/EBIT 0.0x 0.0x

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Description

Thesis:

  • Opportunity to own a well-capitalized, well-positioned post-reorg equity in a defensive, consolidating industry at estimated 4.3x 2011 EBITDA and 7.1x FCF (14% levered FCF yield), conservatively assuming $60mm of maintenance capex (~15% of revenue) and modest EBITDA growth from $116mm in 2010E to $120mm in 2011E.
  • Unlikely that HWLT will remain and independent company for long-term; substantial synergies available to a strategic buyer in this consolidating industry.
  • Equity price cheap on an absolute and relative basis due to (i) lack of readily available information resulting from recent bankruptcy emergence; (ii) present trading status on Pink Sheets; (iii) limited liquidity due to the aforementioned factors; and (iv) initial forced equity selling by pre-reorg debt investors.
  • Price target of $40 represents 5.5x estimated 2011 EBITDA, a conservative valuation relative to public comps and precedent transactions (pls see below).

Company:

  • Hawaii's leading communications provider (ILEC), offering a wide spectrum of services including local and long distance, high-speed Internet, advanced communication and network services, and wireless services.
  • Recently launched Business All-in-One service based on VoIP, unifying all communications services on a single broadband IP connection.
  • New consumer portal offers high-speed Internet subscribers combined email, voicemail and streaming content.
  • Ongoing strategic investments in its advanced fiber optic network has enabled HWLT to introduce leading business data services such as Routed Network Services and Enhanced IP Data services while forming the backbone of its future "next generation" IP-based TV service. Company seeking to replace declining traditional access line and long distance business with growing high-speed IP-based business.
  • Primary current competitor is Time Warner Cable (Oceanic), the incumbent cable operator, with Wavecome, Clearwire and wireless providers providing additional competition. Satellite TV penetration in Oahu is only 5%, vs. 30% nationwide.
  • HWLT was a Carlyle buyout in 2005 for $1.6 billion, $1.1 billion more than HWLT's current EV of $0.5 billion following the Ch. 11 debt reduction of over $850mm.
  • Management team has new incentive program providing for up to 10% of fully diluted shares.
  • Cerberus largest post-reorg shareholder with 1.1mm shares and 187k warrants at 12/31/2010, since reduced to 0.85mm shares and 187k warrants at 2/14/2011.
  • Ch. 11 emergence press release: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Njc5NTB8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1
  • Expected NASDAQ listing press release:  http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NzYwNTh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1  

Post-Reorg Capital Structure (Emergence Date = 10/28/2010):

  • $75mm cash
  • $300mm senior secured loan due 10/28/2015 (supplemented by $30mm undrawn revolving credit line)
    • L + 6.0%
    • Interest only until maturity
    • 3/2/1 prepayment premium schedule prior to October 28, 2011, 2012, 2013, respectively
  • 10.14mm shares outstanding
  • 1.48mm warrants outstanding (strike = $14.00, exp. 10/28/2015)
  • 0.49mm RSUs presently outstanding on management option program, subject to vesting schedule

Financials:

  • Disclosure Statement projections indicate Revenue rising from $450mm in 2011 to $528mm in 2013, EBITDA rising from $123mm in 2011 to $149mm in 2013, and capex averaging around $80mm per annum. As these projections were prepared in July 2009 and have not since been updated, they are of limited value.  Capital structure assumption in these statements are also dated, as cash balance at emergence is higher and debt pricing became significantly cheaper prior to emergence.
  • Based on "selected data" (http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODA2OTF8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1) issued by management through 9/30/2010, HWLT had its first positive comp quarter in Q3 (+1.5% revenue and +10.3% Adj. EBITDA) and LTM Adj. EBITDA as of 9/30 stood at $113mm. Based on the relatively easy comp quarter in Q4 2009, Revenue and EBITDA appear set to comp up again in Q4 2010, likely taking 2010 LTM EBITDA up another $3.5mm to $116mm+ (assuming Q4 equal to Q3). This level implies a valuation of 4.4x 2010 EBITDA and 4.3x 2011 EBITDA assuming modest growth from $116mm to $120mm this year.
  • Investor Relations has conveyed that it believes 75% of its capex ($13mm in Q1 '10, $15mm in Q2 '10, $21mm in Q3 '10) is growth. Due to the nature of the telecom business, and the need to invest to retain customers, one could take a more conservative view and assume 75% of capex is actually maintenance. While it is very likely that management was conservative (high) in its capex projection (~$80mm) in order to negotiate with lenders in the reorg process, it is likely fair to estimate total capex of ~$60mm (15% of revenue) as a presently normalized level.
  • Assuming modest EBITDA growth in 2011 to $120mm, $60mm of normalized capex, $19mm of cash interest expense and no cash taxes (per IR) or NWC change, HWLT will generate roughly $41mm of FCF in 2011, implying a 14% FCF yield today.
  • HWLT had an unfunded pension liability of ~$50mm as of 12/31/2009. Due to strong equity market performance, this liability will likely shrink substantially as of 12/31/10, which should be reported in upcoming 10-K.

Comps:

  • Windstream (WIN) trades at 6.6x 2011 EBITDA
  • Frontier (FTR) trades at 6.4x 2011 EBITDA
  • CenturyLink (CTL) trades at 5.8x 2011 EBITDA
  • FairPoint (FRP) trades at 5.7x 2011 EBITDA
  • In 2010, Windstream acquired ILEC Iowa Telecom (IWA) in transaction valued at $1.1bn at announcement and $1.2bn at closing in July 2010. With $275mm of sales and $130mm of EBITDA, IWA received 8.5x EBITDA and 4.0x revenue. Adjusting out IWA's tax assets with an estimated NPV of $130mm results in an implied valuation for the business of 7.7x EBITDA and 3.6x revenue.
  • In 2005, Carlyle bought HWLT for $1.6bn, $1.1bn more than current EV: http://www.washingtonpost.com/wp-dyn/content/article/2008/12/01/AR2008120102575.html

Variant View:

  • The variant view is that HWLT will not be able to convert its traditional access line and long distance business to high speed IP-based customers going forward, or that capital spending will outstrip expectations. Given the Company's proven ability to grow its high-speed Internet lines (both residential and business) over the past year, and grow revenue and EBITDA in the most recent quarter despite being in bankruptcy, signals that the company is on the right track and positioned to maintain its customer base as it rolls out new IP-based services.

Catalyst

Catalysts:

  • Expected Q1 2011 relisting on NASDAQ. The Company has announced its intention to use NASDAQ ticker HCOM, and expects to re-list as soon as it reaches 300 shareholders.
  • Q4 earnings release showing second consecutive quarter of Y/Y growth in revenues and EBITDA and updating financial guidance for first time since July 2009.
  • Potential management roadshow and analyst coverage following Q4 earnings release; increased investor awareness of the name and comfort with strategy.
  • Exhaustion of forced sellers of the stock.
  • Realization of growth from fiber investments.
  • Initiation of a dividend, which would need to be approved by the Hawaii Public Utility Commission and lenders.
  • Ultimate acquisition by larger player at premium price, likely garnering $20mm+ of cost synergies.
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