INTERNAP CORP (INAP) INAP
July 23, 2019 - 3:31pm EST by
crawfordsville
2019 2020
Price: 3.10 EPS -1.50 .2
Shares Out. (in M): 27 P/E -20 15
Market Cap (in $M): 83 P/FCF 11 5
Net Debt (in $M): 678 EBIT 80 90
TEV ($): 761 TEV/EBIT 9.5 8.45

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Description

Internap is a provider of data center colocation space, network services, cloud services and other managed services to customers to facilitate their networking needs. Internap equity is an attractive risk-reward investment. The company has been in the midst of a two-year turnaround that entailed a real estate portfolio rationalization. The equity is very depressed both from a historical trading price as well as intrinsic value as there have been a number of overhangs that include 1) exclusion from Russell 2000 index, 2) rumors of Chapter 11 spurred by inability to refinance or get covenant waivers, and 3) weaker than expected top-line performance. The company has resolved these major issues by securing a covenant amendment relief that gives the company ample runway to operate and execute on improving the financial profile through material new contract wins and margin improvement through costs savings from a rationalized footprint. Internap is in a high demand industry that is consolidating with the primary motive of achieving more and more economies of scale to better service customers regionally and globally. 

INAP is undervalued on a number of different measurements including: EV/EBITDA of 6x vs. peers of 10-15x EBITDA, Value per Data center of 14mm vs transcations ranging from 10-50mm, EV of $6mm per MW of capacity whereas replacement cost is between 8-10mm per MW, and EV/Normalized Utilization EBITDA of less than 5x. Comparable colocation REITs trade between 12-20x EBITDA, networking services companies trade between 7-12x EBITDA, and the cloud/managed service business ranges from 5-7x ebitda and recent transactions for comparable type businesses like ZAYO were completed above 11x EBITDA.  

Management is an important component for the investment to work out here. CEO Peter Aquino was tasked to turnaround the company after a failed sale process in 2016 as the company was not able to pass due diligence. Peter Aquino has a long history in telecom and has led companies like RCN and PGTi through improvements and eventual sales of the companies. This is Pete’s third rodeo so to speak and given his track record chances favor another successful exit of the company. 

The biggest risk with the equity investment is the level of debt and its manageability. This risk has been taken off the table with a recent amendment. On May 8, 2019, INAP secured a debt amendment that enable operating room to 2021 and beyond thereby allowing the company to avoid an expensive short-term refinancing in pursuit of longer-term cheaper financing matching better financial performance. With this overhang lifted, the management and salespeople have operational flexibility and market credibility to win new business. There’s been a string of new business wins that is confirming Internap’s improving financial profile. In total there have been 6 deals some of each which were won through intense RFP processes that have been announced publicly since April of this year. Clearly the company is gaining revenue momentum. There is significant capacity available at their new flagship in Phoenix with 5MW of ready available capacity now which we believe will be leased out this year which could provide 10-20mm of revenue lift with high contribution margins. 

We provide a sensitivity table highlighting the attractiveness of the equity investment below. There is also a significant 35% short interest of the float that is convinced the company will be forced to restructure. We think the company has many options on the table and many interested parties from strategics as well as financial buyers because of the valuation and the attractiveness of the assets relative to the optimized earnings power of the business. There are a total of 130 MW of capacity and at 100-150k MRR per MW that's 230mm of revenue potential on colocation alone that could nearly double the size of the colocation business today. 

Stock Price  $       3.10       INTERNAP SUMMARY  SENSITIVITY TABLE        
EV 720 780 840 900 960 1020 1080 1140 1200 1260 1320
Debt 662 662 662 662 662 662 662 662 662 662 662
Equity 58 118 178 238 298 358 418 478 538 598 658
Shares 26.7 26.7 26.7 26.7 26.7 26.7 26.7 26.7 26.7 27.7 28.7
Price         2.17        4.42        6.67        8.91     11.16     13.41  $   15.66  $   17.90  $  20.15  $   21.59  $    22.93
EV multiple 6.0x            6.5 7.0x 7.5x 8.0x 8.5x 9.0x 9.5x 10.0x 10.5x 11.0x
ebitda 120 120 120 120 120 120 120 120 120 120 120
Upside downside -30% 43% 115% 188% 260% 333% 405% 478% 550% 596% 640%
Data Centers 53 53 53 53 53 53 53 53 53 53 53
Ev/data center  $   13.58  $   14.72  $   15.85  $   16.98  $   18.11  $  19.25  $   20.38  $    21.51  $  22.64  $   23.77  $   24.91
MW 130 130 130 130 130 130 130 130 130 130 130
ev/mw  $    5.54  $      6.00  $    6.46  $      6.92  $     7.38       7.85  $     8.31  $     8.77  $    9.23  $     9.69  $    10.15
cap leases 25 25 25 25 25 25 25 25 25 25 25
interest 39 39 39 39 39 39 39 39 39 39 39
CAPEX 45 45 45 45 45 45 45 45 45 45 45
EBIT 75 75 75 75 75 75 75 75 75 75 75
fcf 11 11 11 11 11 11 11 11 11 11 11
EBIT MULTIPLE           9.60         10.40

      11.20

       12.00        12.80        13.60        14.40        15.20        16.00         16.80        17.60
fcf per share  $       0.41  $       0.41  $       0.41  $       0.41  $      0.4      0.41       0.41  $  0.41       0.41  $     0.40        0.38
ev/revenue           2.40           2.60           2.80   3.00           3.20           3.40           3.60           3.80           4.00            4.20           4.40

There are a number of strategic companies willing and able to buy Internap and could realize significant cost savings through G&A, salesforce, and transport cost optimization. In addition, having more scale in-market and globally would leverage and attract multi-location customers thereby increasing odds of winning and reducing churn. 

We think the company will miss revenue guidance but hit EBITDA guidance and will have something on the strategic announced/completed this year. This presents a very compelling risk/reward. With large sponsors like Gabelli already owning 26% of the company, there will be an appetite for equity sponsorship if the case presents itself.  

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Catalysts include: Improving operating performance, leasing out the Phoenix facility, improvement of cash flow from expiration of capi

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