Here’s Farukh Farooqi’s take (via Oozing Alpha):
Last week, Primus Telecom announced Q110 results which handsomely exceeded my expectations and Plan Projections. In my opinion, Primus is one of the most attractively priced post-reorg equities from the current bankruptcy cycle.
As a reminder, Primus Telecom emerged from Chapter 11 on July 1, 2009 after restructuring its debt down to $255 mm from $316 mm pre-bankruptcy. It is an integrated telecommunications company which provides voice, VOIP, Internet, wireless, data and hosting services to business and residential customers.
The Co has 9.7 mm shares and its equity market cap is $65 mm. It has total debt of $254 mm, cash of $63 mm. Its enterprise value is $256 mm. The stock currently trades at an EV/LTM EBITDA of 3x, Price/Free Cash Flow of 2x and an EV/Free Cash Flow of 7x.
Over the past four quarters, it has generated EBITDA of $87 mm of which 54% was from Canada, 41% from Australia and ROW accounted for 5%. U.S. and Europe are meaningless to Primus’s profitability.
On May 17, it reported Q110 adjusted EBITDA of $23.4 mm and EBITDA is now at an annualized run rate of $90+ mm compared to its projected 2010 EBITDA of $67 mm per Plan of Reorganization.
In Q110, it generated free cash flow of $12.8 mm, paid down $3.4 mm of capital leases and retired $9.5 mm of its 14.25% notes.
Revenues from VoIP, Broadband and Data Centers over the past four quarters totaled $220 mm. Datacenters is currently a $38 mm business with 42% EBTIDA margin compared to the Company’s overall margin of 11%. According to management, this business can grow 40%-50% within Primus’ existing footprint and become a significant contributor to future profitability.
Primus’ Net Debt/LTM EBITDA ratio is at 2.2x which, in my opinion, is quite manageable.
Comp EV/EBITDA multiples range between 5x-6x. For Primus, a 4x EV/EBITDA multiple would imply a $16 price for the common stock.
So in summary, Primus is inexpensive, undiscovered and has been growing EBITDA for the past four quarters. It is a levered equity so with this improving profitability and debt pay down, the stock could benefit meaningfully.
The bear case on the story is that Primus’s traditional voice revenues continue to decline due to product substitution (wireless/internet for fixed line voice). This is an industry issue, not Primus-specific. Primus contends that over the years, it has grown its VoIP/Data/Internet business and its reliance on Voice, while significant, continues to decline. Voice accounted for 54%, 52% and 48% of revenues in 2007, 2008 and 2009, respectively.
It is important to note that this slowly fading voice business is the cash engine for the Co (requires little R&D and capital expenditure). The key to Primus’s success, in my view, will be to manage this transition effectively and allocate capital to higher growth businesses with a keen eye on return on invested capital.
Says Wally the Tiger at Zero Hedge:
Primus Telecommunications Group Inc. (Ticker: PMUG.OB) provides integrated telecommunications services primarily in the United States, Australia, Canada, Brazil, the United Kingdom, and western Europe. Primus’ stock trades on the over-the-counter bulletin board, as the company emerged from bankruptcy on July 1, 2009 and has not yet relisted on a major exchange. The company has substantial size, with LTM revenue and EBITDA of $826 million and $86 million, respectively. Importantly, Primus’ management estimates that the company will generate $23-28 million of annual free cash flow, or $2.38-2.89/share of FCF, representing a 34-41% FCF yield at its current $7.00 share price. On a multiple basis, it also trades very inexpensively, at 3.1x EV/EBITDA and 0.3x EV/Revenue (as of June 15, 2010). Potential catalysts may include: (i) listing on major exchange; (ii) continued use of FCF to retire debt; and (iii) potential sale of entire company. The company’s exposure to Canada and Australia are large positives given their relative stability. Per the proxy, as of May 1, 2010, Primus’ top eight shareholders collectively owned 45.3% of the company’s stock.
The stock bounces around on low volume, so it might be worth watching.