this is from Vanshap Capital, which is a US fund that owns AXX. good to see US investors taking note of AXX
https://www.beyondproxy.com/axia-netmedia/
The following commentary is taken from the Vanshap Capital letter for Q3 2013.
The name Axia NetMedia (Toronto: AXX) is misleadingly high-tech for a relatively low-tech utility-like business model. We are typically quite wary of investing in dynamic technology-centric businesses, but unlike most as we will describe, fiber is relatively static and the competitive position is monopolistic in nature.
Axia provides critical high-speed fiber infrastructure to primarily underserviced markets in rural Alberta, Canada and throughout France. Core customers include local government related entities and wholesalers who in turn sell the fiber to retail clients servicing residences and small businesses. The alternatives for much of the serviced population are slow dial-up or DSL lines, options becoming increasingly outdated.
Axia’s flagship asset is a contract to manage the Alberta SuperNet, a fiber optic network launched in 2005. The contract is generating approximately 70% of the company’s EBITDA, and the market has long been concerned about a non-renewal. An integral part of our original thesis was that Axia would retain the Alberta contract, but generate substantially less profit from the operation. Instead, Axia surprised, announcing out of the blue that the contract was extended for three years, and we surmise profitability will be roughly maintained. We believe substantial investment opportunities exist to extend the fiber network to connect additional rural communities and small enterprises, a potential C$400 million opportunity, meaning the cash-flow stream may actually grow materially over time.
The other core asset is a 50% ownership of an entity named Covage, which in turn controls access to 19 regional fiber networks around France. These networks are finally beginning to mature and are providing a growing stream of cash flow, allowing the company to reinvest in expansion of existing networks or new networks altogether. We believe incremental cash flow margins from new customers on maturing networks may be as high as 70%, similar to the economics in Alberta.
We estimate that through a combination of government grants and Axia’s capital, C$900 million has been invested in Alberta and France combined. While Axia does not own the underlying core backhaul part of the fiber networks, the company has long-term contractual control over the network in France and is uniquely positioned to retain long-term control over SuperNet in Alberta. One might wonder how much money is being made from that C$900 million investment, and that is the crux of the problem and the opportunity. As some indication, since 2005, the year the SuperNet began, Axia’s share price has gone exactly nowhere and the stock was widely considered ‘dead money.’ But a lot has changed and we believe a lot of value has recently been created.
For one, Axia had similar but far less successful investments in Spain and Singapore that have recently been sold, which are slated to generate an estimated C$37 million of cash proceeds for the company, equivalent to 25% of the current market capitalization. Second, the large investment in Covage, the French network, is just now maturing and self-sustaining. Third, long-term guaranteed access to Alberta’s backhaul network is more likely with the recent removal of competitor Bell Canada from the SuperNet contract. Lastly, we believe banks will be more likely to lend Axia money with guaranteed network access in place, which could significantly enhance return on equity.
Comparable telecommunications businesses—which are generally larger and more levered enterprises—are currently priced at about 6x EBITDA. Axia, in contrast, has no debt and has much more growth potential, but thus far lacks access to low-cost capital. Assuming the positives and negative offset, and applying the comparable multiple to our 2016 estimate of EBITDA, the value would equate to C$3.30 per share. We believe our valuation to be quite conservative as we have not included any benefit from new network expansion opportunities in Alberta or France, both of which we consider likely.