VTL - Vital Telecommunications (formerly Team Talk)

[The Grinch]

Okay, just finished playing with my spread sheet of lies and distortions (believe that was STC's reference).


Before I begin I would like to say I am happy to provide my sheet to anyone who wishes to review further and provide considerate feedback. Please just PM me and I will flick it through to you. If you have any of your own work would appreciate the insights.


First off the cab is basics thoughts on BlackPeter's (cheers) questions:

* does the TTK board have sufficient experience and skills with mergers / turning companies around?
Yes, David and his team are well qualified in this area. We are talking about a guy that successfully started a company in an industry dominated by a few big players/high costs of entry/prone to regulation measures etc. to be honest I would love to see the initial business case he presented to the VC company that backed their first endeavour. It must have been impressive because I would have rated there chances at slim to nothing. They then went on to buy Telecoms mobile radio network that they were making nothing off and probably considered would be obsolete in 10 years. Not only were they successful in making money out of that dog but they have acquired citylink and araneo which have performed well. They really do seem to take the opportunity to try and synergise were possible - definitely room for this between Farmside, Araneo and TeamTalk.

* if National wins: how well is TTK positioned to benefit from the additional broadband money promised by National?
To be honest I don't see this as a big one, they will likely win some more dicky contracts supplying to no were, the ones the big guys put a decent margin on to make it worth there while.

* what's TTK's unique selling proposition in the Internet market - and how difficult would it be for the big boys to step in?
David isn't a very smooth salesman or the most PC but has been about as clear as you can be on there unique selling proposition. They are niche. The big players won't lower themselves to TTK's playground because it would require strict controls, strong management and harder/less rewarding than developing a new product that is $2 more that they can sell to their already huge customer base. It's not worth there time.

* how are the latest "connect remote" projects (Haast and Chatham Islands) going?
Imagine they are going just fine, its same old same old business for Farmside (well maybe a little but bigger than normal) and Araneo's expertise will help. Would not say this is a big factor on whether this company is going to live up to the Altman Z statistics or not.

* any indications how the various TTK business units are growing together?
As majority ownership in Citylink (website is horrible) is 5yrs old and Araneo over 3yrs these two acquisitions are well bedded in and I would say very complimentry given a quick search of there website. David has already thrashed Farmside management and I imagine has a bit more to go but will get their I'm sure.

* how is staff morale at TTK (is the unique company culture the right thing for the people working there) and are there differences in different units?
Good question and I would love to spend a day on the floor of the company, talk to some of the employees etc but unfortunately any investment I make in TTK is only likely to be around the $5k mark so undertaking that expedition would have a decent wack on my returns. Speculation via google hasn't produced anything.

[The Grinch]

Now for the lies.

I know I will be shot for posting two optimistic calls in a row (I like CAV) and particularly given how many negative comments on this company to date - not to mention my valuation is done on an unorthodox basis.

Valuation: $1.44-1.76
Rated: Buy (Gutometer tells me valuation is definitely on the low side)

Reason: When you look at this company from an EBIT point of view most of your models and calc's are going to lead you towards an ugly/distorted verdict. Due to the companies significant depreciation expenses (predominantly on Network Hardware that they have given a mix of between 5-40 years life) the EBIT I feel is not a true reflection of income. If you analyse the company with plenty of reference to their cashflow statements the numbers start to come closer to the reality that David Ware speaks of i.e. TTK seems to pay an average 50% of net operating cashflow as dividends and the remainder goes towards paying interest, Tax and investing in infrastructure. The company based on cashflow is still able to pay a 20c divie going forward however this would break the trend of under 60% of cashflow going into Divies and TTK have highlighted the need to invest in further infrastructure going forward to fix there Farmside acquisition and adjust to Nationals rocking the industry boat.

I believe TTK still has another 12 months before there is light at the end of the tunnel. Expect a bit more price weakness but imagine I will own shares by Christmas.

Appreciate thoughts etc.

Regards
TG

Altman Z - I have followed the standard Z model for non-manufacturing entities and excluded all none cash expenses (depreciation/amortisation etc) and goodwill. At 2.8 it isn't good but not overly concerning as long as it does not maintain its trend.

Times Interest Earned - When looked at from EBIT point of view is not flash (2.84) but if looked at from a cashflow point of view (which I thing is more appropriate for TTK as they have significant none cash expenses) they are sitting at a very healthy 6.32.

TIE
2014	2013	2012	2011	2010
2.84	3.10	6.12	4.62	3.42
6.32

Altman Z 2014 (in 000's)
	Working Capital:	$ 90
	Total Assets:	$ 58,648
	T1:	0.0015
	Retained Earnings	$ 7,551
	Total Assets:	$ 58,648
	T2:	0.1288
	EBIT:	$ 13,241
	Total Assets:	$ 58,648
	T3:	0.2258
	MVE:	$ 45,390
	Total Liabilities:	$ 53,703
	T4:	0.8452
	Zscore:	2.83

Operating Costs
		Dep. On network assets:	$ 7,410
		Impairment of assets:	$ 1,486
		Amort. of intangibles:	$ 502
		Telco development levy:	$ 549
		Network operating costs:	$ 14,085
		other operating costs:	$ 13,103
			$ 37,135
		Non cash expenses:	$ 9,398

[BlackPeter]

Hi TG ... interesting analysis ... and thanks for looking into my questions.

Not sure, whether your target price would be that controversial - hey, the current SP is anyway in the band you quoted (which happens to be quite similar to the band I am working with: roughly 1.55 to 1.75 just based on history and earnings) ... and the lonely analyst quoted by FT who dared to do a 12 month prediction comes up with $1.75 as well.

Obviously - a company can't live from cash flow forever ... at some stage the NPAT must come back (or the flow will stop) - and this is where I would probably put some different priorities on your findings.

Looking at their business segments:

Mobile Radio ... yes, they started with PMR and managed to keep that going - and I do have some trust in the guy who runs this division (Peter Baines). However - it is certainly not a growth business, and there are some risks for them due to competition from newer technologies and other emerging networks (be it cellphones or be it the public mobile radio network) ... i.e. I wouldn't bet the farm based on this part of their business.

High Speed Internet in towns: Makes currently money, but there are a lot of bigger players around. I wish them (TTK) well, but I am not really sure, whether I see their unique advantages in this area.

Which brings us to the connection of remote areas to broadband and cell phone services. In my view this segment (if they get it right) is the only real growth proposition they have - and the potential could be huge (think not just New Zealand, there are zillions of remote areas around the globe in need of connection). Having specialist knowledge in this domain can be huge.

So - IMHO it will be crucial that they get the Chathams and Haast right (and I have no indication of the opposite, but I don't know and I haven't yet seen a project without risks) - and it will be very important that there are more of these projects and that they get them into their sales pipeline. Given that the elections are over am I optimistic National makes good on its promises to put more money into rural connectivity, and they should be well positioned to get their fair share (or a bit more ...).

Discl: holding. DYOR.

[The Grinch]

Hey BP

Cheers and appreciate the feedback.

Thoughts

Obviously - a company can't live from cash flow forever ... at some stage the NPAT must come back (or the flow will stop) - and this is where I would probably put some different priorities on your findings.

Agreed especially when they only have $58mil worth of assets - can hardly continue to depreciate at the $7-9mil mark for long. I guess I felt that there recent troubles stemmed more from difficulties with the Farmside Acquisition and that once they have worked through this it would be back to the good old days especially as this transitions them further away from the PMR space.

Mobile Radio ... yes, they started with PMR and managed to keep that going - and I do have some trust in the guy who runs this division (Peter Baines). However - it is certainly not a growth business, and there are some risks for them due to competition from newer technologies and other emerging networks (be it cellphones or be it the public mobile radio network) ... i.e. I wouldn't bet the farm based on this part of their business.

Very true and seen in their effort to grow revenues in other areas.

High Speed Internet in towns: Makes money currently, but there are a lot of bigger players around. I wish them (TTK) well, but I am not really sure, whether I see their unique advantages in this area.

True, scary space to be in. I guess I feel that they have coped well to date and I'm a firm believer in good management making the right opportunities eventuate.

Which brings us to the connection of remote areas to broadband and cell phone services. In my view this segment (if they get it right) is the only real growth proposition they have - and the potential could be huge (think not just New Zealand, there are zillions of remote areas around the globe in need of connection). Having specialist knowledge in this domain can be huge.

So - IMHO it will be crucial that they get the Chathams and Haast right (and I have no indication of the opposite, but I don't know and I haven't yet seen a project without risks) - and it will be very important that there are more of these projects and that they get them into their sales pipeline. Given that the elections are over am I optimistic National makes good on its promises to put more money into rural connectivity, and they should be well positioned to get their fair share (or a bit more ...).

Very good point and well taken, I will have to adjust my sails a little it seems.

Regards
TG

[winner69]

Cant quite follow you guys when you say Obviously - a company can't live from cash flow forever ... at some stage the NPAT must come back (or the flow will stop)

I would have though that strong operating cash flows were an imperative, and more important than a reported NPAT number

Don't those cash flows fund future investment and pay that 15 cent dividend?

The operating cash flows in $9.4m in F13 and the $10.5m in F14 were pretty respectable. However what you both say they could and should be better. To me both these numbers more important than NPAT

Maybe something is lost in translation

[BlackPeter]

Cant quite follow you guys when you say Obviously - a company can't live from cash flow forever ... at some stage the NPAT must come back (or the flow will stop)

I would have though that strong operating cash flows were an imperative, and more important than a reported NPAT number

Don't those cash flows fund future investment and pay that 15 cent dividend?

The operating cash flows in $9.4m in F13 and the $10.5m in F14 were pretty respectable. However what you both say they could and should be better. To me both these numbers more important than NPAT

Maybe something is lost in translation

Hi Winner,

Quite simple ... if a company lives off cash flow which is higher than its NPAT, than something has to give ... typically the company would write off something and not replace (e.g. good will, like TTK this year). The book value is falling - and as soon as the book value of the company is lower than their liabilities, it is (not just technically) bankrupt, which sort of stops the "living of cash flow game".

Admittedly, some companies (with high NTA or lots of undervalued assets) can play this game a long time. TTK unfortunately can't - not much fat left in the system.

Makes sense?

[BIRMANBOY]

This company badly needs some good news. The SP is continuing its decline again, and just when I though it had evened out and reached a level of comfort...whoops ..some selling pressure kicks in again. Oh well watching again......slow motion train wreck (for SP anyway).

[Chaowee88]

This company badly needs some good news. The SP is continuing its decline again, and just when I though it had evened out and reached a level of comfort...whoops ..some selling pressure kicks in again. Oh well watching again......slow motion train wreck (for SP anyway).

Shouldn't come as any surprise. The SP is only being held up by the dividend now that it ex, investors fret over whether or not the dividend is sustainable. Debt has blown out to nearly 35 Mill and for a company with just around 5 million free cash flow that 7X Debt to FCF. Ugly to say the least. Add in the market cap of 42 million enterprise value is 77 million/5 = 15.4X wayyy too high. Compare that to JWI for example, debt 12.5 market cap at 15C = 13.4 = enterprise value of 25.9, FCF as per last 3 years is approx 3 - 3.5 million = 25.9/3 = 8.633X and JWI says their debt is too high and don't pay a divie.

Obviously investors have priced TTK higher because it offers investors a dividend but really they burning holes in their pockets because funding a 15C divie each year is costing them approx 4.2 million, essentially all of their free cash flow.

From my perspective I think they can still fall further..

[percy]

Shouldn't come as any surprise. The SP is only being held up by the dividend now that it ex, investors fret over whether or not the dividend is sustainable. Debt has blown out to nearly 35 Mill and for a company with just around 5 million free cash flow that 7X Debt to FCF. Ugly to say the least. Add in the market cap of 42 million enterprise value is 77 million/5 = 15.4X wayyy too high. Compare that to JWI for example, debt 12.5 market cap at 15C = 13.4 = enterprise value of 25.9, FCF as per last 3 years is approx 3 - 3.5 million = 25.9/3 = 8.633X and JWI says their debt is too high and don't pay a divie.

Obviously investors have priced TTK higher because it offers investors a dividend but really they burning holes in their pockets because funding a 15C divie each year is costing them approx 4.2 million, essentially all of their free cash flow.

From my perspective I think they can still fall further..

Have to agree with you.An excellent post.
Not flash a few weeks ago has now turned ugly!!
A lot of shares for sale.!

[couta1]

Have to agree with you.An excellent post.
Not flash a few weeks ago has now turned ugly!!
A lot of shares for sale.!

Considering it recently shed a 7.5c divvy it doesn't look any more ugly than a lot of other stocks right now eg Air NZ $2.21 pre divvy now $1.79 etc etc.I see one large block of 100k shares the rest small blocks and I remember quite a few months back there was a block of 200k shares on the block(Excuse the pun)