Category: Uncategorized

Why should you care about Cyan?  They continue to prove their market leading digital security offering by booking new contracts, the most noteworthy a global group agreement with Orange.  This adds a higher level of certainty to financial results over the next 2-3 years (pending successful rollout).  Despite this, the company is trading at ~6.0-7.0x EBITDA vs. peers in the low to high teens.  The stock has suffered from a 2019 EBITDA cut (increased investment spend but increased 2021 EBITDA guidance as a result) and the fact it trades on a lower German exchange (plan to uplist to Frankfurt in 2020).  It was announced on 11/13/19 that the company has retained Lazard for a strategic review, “To fully capitalize on such growth opportunities, the management board of cyan AG has decided to evaluate potential options regarding its US Expansion Strategy.” 

Cyan is a digital security company that offers white-label solutions to mostly mobile network operators, but also other financial companies and governments.  The slide below from their Investor Presentation best summarizes what offerings they bring to the market. 

I’m not an expert on the technology by any means.  Cyan will tell you their key differentiation vs. peers is the ability to offer both On-Net and Endpoint services at scale.  Looking at the contract wins over the past year+, I tend to believe them.

The company has successfully implemented their programs for T Mobile in Austria* and Poland and have announced the following:

• 11/2018 Aon strategic partnership on digital security
• 12/2018 Orange global group 6 year contract
• 7/2019 T-Mobile Austria contract extended, ahead of schedule, by 1.5 years until mid 2022. Added integration of fixed network customers into the customer spectrum
• 7/2019 Telecom Argentina proof of concept installation
• 7/2019 Wirecard strategic partnership
• 11/2019 Flash Mobile sale of 60mm new licenses across LatAm

The Orange contract is the biggie. Across the entire system Cyan will be in 28 countries, exposed to 260mm fixed and residential customers, across residential and business accounts. Implementation has been ongoing throughout 2019 with rollout in France in Q4 2019 with the rest of Europe and Africa to follow in Q1 2020.

Based on the estimated implementation rate of this contract, Cyan issued 2021 guidance of Revenue of at least €60mm. This has since increased to Revenue of at least €75mm and an EBITDA margin target of 50% after the company increased investment spending to capture the additional new business opportunities available. They included the following slide in their Q319 results.

I think the 2021 guidance is conservative. The biggest driver right now will be the successful implementation of the Orange contract. Cyan assumptions here are a 6.4% adoption rate with an average ARPU of €1.56/year. This will vary between €1 to €4 depending on the different areas as Europe will be a lot different than Africa. The T-Mobile Austria and Poland adoption reached 25% in the first 3 years, here the ARPU was between €1.50 to €2. Based on the varying geographies in the Orange deal there will likely be different sales strategies such as opt-in, opt-out, and mandatory plans. As Orange shares in the revenue, they have an incentive to lean towards stickier strategies such as opt-out and mandatory plans that would vastly increase the 6.4% adoption estimate.

Even if we don’t assume any upside to adoption, Cyan currently is trading at <6.5x 2021 EBITDA. Give a low-end peer group multiple of 12x EBITDA, shares would trade at nearly €40 vs. ~€20/share today. That doesn’t include any additional contract wins or the value this asset could have to a strategic with the ability to penetrate the U.S. market. The strategic review outcome is a win-win in my mind: either/or the company lists in the U.S. bringing much deserved attention to the name, or the company sells itself at what I think would be a value at least 2x current prices.

*Worth noting Cyan did a 10% capital raise in July to support the increased level of growth spending and it was done at €28/share. The major shareholders all participated and even agreed to a 12-month lock-up. Management holds ~8% of shares outstanding and ~38% is split between 3 Austrian entrepreneurs.

To avoid burying the lede (I feel if anything I can get to be too verbose sometimes), I bought some more shares of Turtle Beach today and wanted to highlight it for the simple fact that I think it is super cheap, I’m not vain enough to think anyone is, or should, be looking at my for Buy signals.

I wrote about Turtle Beach (HEAR) last November and since then the stock has dropped from $15 to $9. But the story is far from what these two numbers would lead you to believe.

From my article in November, “Currently the market is valuing HEAR as if sales will completely revert back to pre-battle royale levels. This is just not going to happen. While we are not going to see an 80% top-line growth number in 2019, and may even see a modest decline, HEAR is positioned with a clean balance sheet to drive profitable growth beyond 2020. Management has identified adjacent growth initiatives and now has the balance sheet to pursue these…After a normalization year in 2019, with revenue off slightly from 2018, I would expect HEAR to deliver continued growth as it continues to dominate the console headset market while building market share in the PC headset market. The PC market increases HEAR’s addressable market by about 50% and the company will begin targeting a 10-20% market share in the next couple years…FCF and EBITDA could both fall 50% and HEAR would be trading around a 10% FCF yield and less than 10.0x EV/EBITDA.”

EBITDA is expected to fall by about 50% in 2019 but at $29mm, the company is trading only at a 4.7x multiple (EV assumes that HEAR used the revolver to finance the $15.6mm purchase of Roccat). I expect FCF to be ~$22mm this year, giving us a very attractive FCF yield.

Mentioned above, the company purchased ROCCAT to gain a greater entry into the PC gaming market and it also opens up more doors to Europe and Asia.

I still remain confident in Turtle Beach’s ability to dominate the console headset market. The acquisition of ROCCAT provides a platform to address the PC market which is just as large as the console market (company is targeting getting ROCCAT sales from $30mm currently to $100mm). Looking at Logitech, they trade at about a 17x EBITDA multiple. I’m not calling for that type of premium valuation on HEAR as I see the differences in the respective businesses, but a <5.0x multiple is way too cheap to me. That’s why I bought more today and will likely buy more in the near future as long as this basement price persists. I’m hoping the company has been executing on its $15mm buyback program at these sub-$9 prices!

I came across ENSV this week and it checked enough boxes to pique my interest.

ENSV is an oilfield services company providing frac water heating, hot oiling and acidizing, and water transfer services across many of the major domestic oil and gas  basins in the U.S (DJ/Niobrara, Bakken, Marcellus and Utica Shale, the Jonah Field, Green River and Powder River Basins, the Eagle Ford Shale, and the Stack and Scoop).  The business is inherently cyclical with many of the services needed in colder weather periods, making the 1st and 4th Quarter about 70% of annual activity.

Like anything oil related, it fell throughout 4Q 2018.

However, as the title suggests, the company hasn’t recovered at all YTD.

The company survived the depths of the last cycle without too many bruises, and came out on the other side with a much improved fleet in terms of size and service offerings like Water Transfer (revenue grew ~100% to $4.2mm in ’18) to differentiate vs. customers.  

2018 results were good.  Revenue grew 26.5% to $46.9mm while EBITDA grew 29% to $4.9mm. (For comparison’s sake, ENSV’s peaks reached during the last cycle occurred in 2014 with Revenue of $56.6mm and EBITDA of $11.5mm.)

Results look even better than ‘good’  given the cyclicality: the 4Q18 meltdown in oil prices paused many oil companies’ spending until 2019 and As a result 4Q Revenue only grew 13% while EBITDA fell 11%.

The company pre-reported some 1Q 2019 numbers on 4/25/19: Revenue of $26.2mm, +29% YoY, with EBITDA and Net Income expected to grow YoY also.

The company’s balance sheet is one aspect that does give me some pause, at first glance, with Total Debt of $38mm.  However, when you account for the fact that the CEO, CFO, and COO all have long-term options as part of their incentive comp that only vest if/when Debt/EBITDA reaches 1.5x, I expect debt reduction to be a focus throughout 2019 and beyond.

The largest shareholder is a small and micro cap hedge fund, Cross River Partners, that owns 23% of the company and has a seat on the board.

Conclusion

ENSV checks a lot of boxes of being an interesting opportunity.  Management has the proper incentives in place: skin in the game and LT options vesting on Debt/EBITDA 1.5x/share price reaching $2.25.  While the business is competitive, ENSV’s scale in this niche will be able to beat smaller regional operators.  I also wouldn’t be surprised to see more tuck-in acquisitions throughout 2019.  The price is where I pause for now, in a world where oil remains > $50/bbl consistently I think ENSV’s EBITDA could get back to the peaks seen in 2014 and surpass it.  With a current EV ~$60mm, at $11mm EBITDA, EV/EBITDA is already in the range of its peers, 5-7x EV/EBITDA.

I would need to see some more information around the utilization trends of the company’s rigs.  While I recognize the increase in fleet size, at what point do we see that paying off?  Revenue is getting close to 2014 peaks but EBITDA isn’t despite this increase.  I’ll also be interested in commentary around the Alder acquisition on the Q1 19 call.  ENSV issued an 8-K in April that disclosed the purchase price was dropping by $2mm.  Has the performance lagged? Were there items not disclosed prior to purchase?  I’ll be staying on the sidelines for now, but this is one I will be watching closely going forward.

 

Liberty Media Corporation distributed tracking stock* in April associated with the company’s ownership of the Atlanta Braves. With virtually no pro sports franchises available to invest in, in the public markets I figured it was at least worth a look. I think the market currently is vastly undervaluing the assets an investor gets exposure to through the Liberty Braves company (BATRA/BATRB/BATRK)*.

 

Through BATRA you not only get exposure to a pro sports franchise in a top-10 market but ownership of the real-estate development surrounding the team’s new stadium, as well as a fast-growing technology company looking to capitalize on the cord-cutting trend. All of this is currently valued by the market at approximately $1.195bn which I feel currently barely recognizes the value of the Atlanta Braves, assuming no future growth, while ignoring the real estate and technology assets. Note that the market value mentioned above will conflict with market value indicated by the stock as Liberty Media holds a 15.5% equity stake in Liberty Braves not indicated in the shares outstanding.

 

 

Atlanta Braves

Valuing a pro sports franchise is different than your typical valuation exercise as virtually no team is publically traded and value is typically only recognized in a sale. Sales have occurred infrequently lately in large part due to the increases in franchise values in recent years. Despite this, let’s attempt to get an arbitrary value for the Atlanta Braves. Through the first 9mos of 2016, Liberty Braves’ revenues totaled $244mm. Analyst estimates call for $247mm in 2016 as the business is very seasonal, with Q1 and Q4 experiencing very low revenues due to almost no games being played unless the team makes a playoff run.

 

There have been 6 private market sales of pro sports franchises since 2012. Excluding outliers, the average price to sales ratio was 4.5x. Applying this metric to the Braves would give us a $1.1bn valuation.

(Source: Liberty Media investor presentation)

 

But this isn’t an accurate depiction of value as the Braves have a brand new stadium opening in 2017. If you look at the six most recent MLB new stadiums, the teams experienced an average 19% 1-year revenue bump. Applying this to projected 2016 revenue, then applying the 4.5x transaction multiple, gives us a more accurate valuation estimate of $1.3bn.

(Source: Liberty Media investor presentation)

The intriguing part to me is that the market barely even recognizes the value of the Braves and there are two more assets that investors get exposure to.

 

Real Estate

The Braves also own the real estate development around the new ballpark, including the following assets:

 

(Source: Liberty Media investor presentation)

 

The real estate development is on schedule to be completed throughout 2017. Net equity value when adjusting for third-party investment and Braves-level debt is $200mm.

 

MLB Advanced Media

Finally, probably the most exciting asset the Braves stock gives us exposure to. All 30 MLB teams have an equal ownership stake in Major League Baseball Advanced Media (MLBAM). MLBAM is the media arm of Major League Baseball operating all 30 teams websites, streaming MLB games as well as handling streaming capabilities for the WWE, NHL, PGA Tour, and even HBO.

 

In early 2016 Walt Disney purchased 1/3 of BAM Tech, MLBAM’s streaming technology company, for $1bn with an option to own up to 2/3rds of the company over the next four years. This values each team’s stake at $67mm. When CEO Bob Iger was making the rounds on CNBC and Bloomberg post-investment, he was very clear that the goal of the BAM Tech stake is to partner the company with ESPN to create an over-the-top sports package to sell directly to consumers. With each company’s stake in BAM Tech currently at $67mm, I would safely wager that the value of that position is much higher given where the media landscape is likely headed.

 

Conclusion

The market currently is valuing the Liberty Braves at $1.195bn. If we add up our three value estimates: Atlanta Braves $1.3bn, Mixed-use Real Estate Development $200mm, BAM Tech stake $67mm. This gives us a total value of $1.567bn, a 31% discount to market value. It is important to note that our calculation concerned values of the assets and did not include any growth assumptions for the Braves, which would in turn lead to growth for the real estate surrounding the ballpark. It also assumed the value of the BAM Tech stake based on the Walt Disney investment, assuming no earnings growth associated with Disney’s partnership.

To compare to the stock outstanding, make sure to adjust for Liberty Media’s 15.5% equity stake that is not included in the shares outstanding.

 

Full disclosure, this is one of the companies I bought when I rebalanced my portfolio for 2017. I think it is a great value and you basically get the Braves, with no upside, through the current price with free option values on the real estate and the BAM Tech stake.

 

Please comment and tell me how wrong I am!

 

 

 

 

* The goal of the tracking stock is to better differentiate the performance and value of separate businesses within the company while hopefully reducing NAV discounts and boosting the parent stock price.

 

*There are 3 separate tickers out there associated with the Liberty Braves: BATRA, BATRB, and BATRK. BATRA has 1 vote per share, BATRB has 10 votes per share, and BATRK has no votes attributable.