Alaska Power & Telephone - APTL
Alaska Power & Telephone ("APT") is a classic OTC Adventures stock. It operates in a geography that is remote to most, in a relatively boring industry, with little chance of entering the limelight any time soon. Despite operational success, a strong balance sheet, and a rising share price, the company remains obscure and ignored. I first profiled APT way back in 2012 when shares changed hands at a mere $17 compared to today's $60. Practically nobody read OTC Adventures at the time, so let me reintroduce the company.
APT has been in operation since before Alaska even achieved statehood. The company provides electrical power and telephone service to many Alaskan communities, including some extremely remote outposts. APT's regulated power activities are 75% hydroelectric and 25% fossil fuel. Its telecom activities span traditional regulated exchange activities and non-regulated broadband services. In 2017, revenues from broadband-associated offerings surpassed traditional telecom revenue for the first time.
Because APT operates two completely different businesses, it is necessary to evaluate each in order to derive a value for the whole. The power business is the smaller and simpler of APT's segments, so let's start there.
In 2012, APT's power business produced revenues of $20 million, with EBITDA of $8.0 million and EBIT of $4.9 million. In 2017, the segment brought in revenue of $19.9 million, EBITDA of $8.5 million and EBIT of $5.1 million. If there's a textbook stable business out there, this is it. The power business has nearly no growth potential, but also enjoys practically guaranteed profits. The earnings stream from the power segment is essentially an annuity and should be priced like one. Electric utilities in the lower 48 are valued highly. Anywhere from 12-20x EBIT is common depending on asset types, underlying electricity demand dynamics and the regulatory environment. APT's power segment probably deserves... less. Alaska's population is stable at best, particularly in the interior areas APT serves. In other words, the demand for electricity will grow slowly. Combining a lackluster demand picture with the reality of APT's tiny size makes me think a 10x EBIT multiple is fair. That would put the value of APT's power operations at $51 million based on 2017 figures. On an EBITDA basis, that's a 6.0 multiple. Are both measures too conservative for a regulated electric utility? Possibly. But if there's anything I've learned, one must be very careful not to pay too much for a slow-growth/no-growth business. When there's little or no top-line growth to bail you out, every point of the purchase multiple matters.
The "telephone" part of of APT's business is both larger and more dynamic. Until recently, APT's telecom segment was like nearly every other rural telecom: facing a slow erosion of revenue from traditional wireline services and scrambling to make up the losses with unregulated broadband offerings. APT was relatively successful in doing so, but the telecom segment was only moderately profitable and certainly not a growth engine for the company. All of that changed with the FCC's A-CAM program. This rural infrastructure program has already had a tremendously positive impact on the financials of many rural telcos, and will continue to do so for a decade to come. If you're unfamiliar, A-CAM is essentially an enormous subsidy that telcos can receive if they commit to extending broadband internet access to nearly the entirety of their service areas, including areas far too sparsely populated or remote to justify service under previous funding mechanisms. Naturally, rolling out this service requires a significant amount of incremental capital expenditure. But the net effect is a dramatic increase in both profits and cash flows for many rural telcos, and APT is one of them.
In 2016, APT's telephone segment (regulated and unregulated services included) earned revenue of $24.7 million, EBITDA of $9 million, and EBIT of $5.4 million. In 2017 with the addition of the A-CAM subsidy, telecom segment revenue soared to $36.4 million, with EBITDA rising to $15 million and EBIT nearly doubling to $10.3 million. Investors should expect to see elevated capital expenditures in telecom for some time to come, so not all of the increased GAAP profits will fall to free cash flow. However, the great thing about investment in fiber is its longevity. Once in the ground, the expensive part is over. Good quality fiber optics can easily last decades and decades, much longer than copper cable or coaxial fiber. The investment APT makes now in expanding its fiber network will be producing revenue in 2049, long after the investment has been fully depreciated. As the rural telco managers I talk to like to say, fiber is "future-proof." Even in the coming 5G world, fiber networks will serve as the backbone enabling 5G wireless services.
Well and good, but what's it worth? Other rural telcos trade at EBITDA multiples of 5-6 depending on the attractiveness of their geographies, their opportunity for profitable investment in fiber, the competitive landscape, and balance sheet strength. I value APT's telecom segment at the high end of this range. APT is well-situated with little threat of new competitors entering their markets and plenty of rural Alaskan households and communities needing broadband services. Compared to highly leveraged rural telcos like Consolidated Communications or Shenandoah Telecommunications, APT carries little debt. For the twelve trailing months ended September 30, 2018, APT telecom produced EBITDA of $15.4 million. We know that APT will receive an additional ~$800,000 in annual A-CAM funding from the FCC's recent enhanced offers. So we can call EBITDA $16.2 million. A 6x multiple would value the telecom segment at $97.2 million.
Now to the liabilities. Based on its debt amortization schedule, APT had total debt of $48.2 million at year-end. A large portion of this debt is owed to CoBank, a quasi-governmental bank that lends to rural infrastructure owners and operators. CoBank functions much like a mutual and pays out annual "patronage dividends" to borrowers, effectively reducing their borrowing costs. Because it is able to borrow on such friendly terms, I believe the economic value of APT's debt is below its stated value. I won't reproduce it here (gotta leave some work for my very industrious readers), but I created a schedule of APT's debt obligations and discounted the cash flows assuming a spread of 400 basis points over treasuries for each time period. I arrived at a value of $45.5 million, which seems fair to me. This includes the effects of an interest rate swap struck at 7.62% on the largest portion of APT's debt. This debt is being amortized rapidly and will be gone in five years. I expect APT will receive a much better rate the next time they approach CoBank.
So $51 million for power, $97.2 million for telecom, less debt of $45.5 million values APT equity at $102.7 million, or $80 per share, 33% higher than today's prices. Once again, this is conservative. I did not give APT credit for any balance sheet cash, nor the CoBank patronage stock it holds. It's not difficult to imagine some EBITDA growth in coming years from their fiber roll-out either.
While APT appears cheap on the numbers, investors must be prepared to truly think like owners. Shares are very illiquid, and most are held by company insiders and employees. It's highly unlikely that a bid for the company will emerge, so you've got to trust insiders to run the company well. On the whole, they have stewarded the company well. Management took a detour into empire-building a decade ago with disastrous results, but they appear to have regained their discipline. I am happy to hold APT for the long term.
Alluvial Capital Management, LLC holds shares of Alaska Power and Telephone Company for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at firstname.lastname@example.org.