Glentel Part 1: IntroductionAugust 5th, 2014 | Posted by in GLN
Monte Sol and its affiliates own Glentel shares. In the future Monte Sol and its affiliates may reduce or increase their investments in Glentel depending on changes in share price or business performance. Monte Sol and its affiliates have no obligation to disclose any future transactions in Glentel shares. The analysis presented here is the author’s own. It is believed to be accurate but does not constitute due diligence. This write-up constitutes analysis and/or market commentary and is not an investment recommendation and as such, should not be used in isolation to make an investment decision. The author undertakes no obligation to update this report based on any future events or information. Estimates are subject to numerous assumptions, risks and uncertainties which change over time.
All figures are denominated in Canadian Dollars.
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To those who are still reading this blog, thank you for your persistence despite my infrequent posting. I hope the following pieces will serve as fair reward for your patience.
Part 1: Introduction
Glentel is a very well-run company, operating an above-average business, currently trading for 8x depressed cash earnings of approximately $1.30, and yielding 5%.
The company is currently suffering through three simultaneous but unrelated business challenges. At least two of these three challenges are likely to subside within the next three years. As they do, I expect cash earnings to approach $1.90 per share, equating to a P/E of less than 6x based on GLN’s current ~$11.00 share price.
On EV/EBITDA basis, GLN shares trade at approximately 6x. But based on my 2016 forecast, and giving the company credit for interim retained earnings, GLN trades for approximately 3.5x EBITDA.
To put this valuation in context, the most closely comparable public company to Glentel is Carphone Warehouse, which trades in Britain under CPW. Carphone Warehouse was just acquired for 8x trailing EBITDA. That multiple, if applied to Glentel, would value the company at $17 per share today, and at $27 per share based on my 2016 projections.
Glentel is a company beset by headwinds. Changes to Canadian wireless contract laws have driven down the company’s Canadian sales by 15%. Poor performance by a business partner, Target, has hurt new stores. And a major contract loss at a recently-acquired Australian subsidiary will probably result in a full write-off.
If you can put this maelstrom out of your head for just a moment, Glentel is actually an attractive business deftly managed by heavily-invested insiders. The company has a history of 15-30% returns on equity and 25% annual EBITDA growth. The founding family still owns 55% of the company and is strongly incentivized to see GLN shares trade for fair value.
It is worth noting that GLN shares are highly illiquid, with average trading volume standing at about 10,000 shares per day. In recent weeks the share price has been pressured by selling from entities related to Glentel’s founding family. I believe the purpose of these sales has been to fund those entities’ endeavors, rather than to express a view of Glentel’s value or business prospects. In this sense, I believe the recent insider selling is forced and uneconomic.
Glentel operates retail stores that sell cell phones, tablets, accessories, and voice and data plans. Glentel runs mall stores as well as “store-in-store” kiosks inside broadline retail chain stores such as Target, Costco, and BJ’s. In total, the company operates more than 1,400 stores, with almost 500 in Canada, more than 700 in the U.S., and under 200 in Australia.
Glentel was founded by Allan and Tom Skidmore, who began operating cell phone service centers in Canada in 1985. Tom Skidmore remains the company’s CEO, and the Skidmore family still owns 12 of the 22 million outstanding Glentel shares. The family is active in a number of private businesses in addition to Glentel.
In Canada, Glentel primarily runs “walk-in” mall stores that sell multiple phone/carrier brands out of the same store. Most of these stores operate under the name “Wireless Wave” or “Tbooth Wireless”. In addition to this core Canadian business, Glentel recently began operating Target-branded cell phone kiosks within Target Canada stores.
In the U.S., Glentel operates Verizon-exclusive stores, with roughly 350 stores owned and operated by the company, and another 400 owned but franchised out.
In Australia, Glentel operates independent multi-carrier stores, but the future of these stores is in question due to the loss of a major carrier (more on this in posts to come).
Cell phone retailing is competitive. But while it is competitive, it is not commoditized. For prospective investors in Glentel, this distinction is important. In a commodity industry, every company’s product is the same, so cost of production determines the winner. But in a competitive industry, skill is the determining factor; he who plays the game best, wins.
For our purposes, the game is selling phones. In that vein, here are Glentel’s ‘stats’ by season:
If you are playing the game of selling phones, this is the team you want to be on.
But the market is indifferent, at best, to this thinking. At worst, it is in outright disagreement:
In the coming posts I will lay out my case. To be continued.
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