$IHS: A broken IPO story
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Often readers of our substack ask us how we “value” companies, figure out risk reward and identify stories that make sense. Momentum stocks with good fundamentals trade at price to sales ratios from 10-60x sales! That is an art not a science hanging tough in these names during corrections. Equally many cannot possibly be justifiable longs based on cash flows even out a bunch of years. Some, however, can. The trick is knowing if you are playing growth at a reasonable price or greater fool.
We got the biggest kick out of the video posted today on CNBC of Mark Minervini, who seems like an absolute fraud momentum player to us. Watch the video. Its hysterical! He clearly does not know what $UPST even does!
Ok, so now let’s discuss a new IPO, a busted one at that. $IHS, a Goldman deal as lead and JPM and C as co book runners. The company planned to go public at $22.50 but was priced at $21, a sign the deal did not have enough demand. The company only sold 22.5 million shares of a total 328 million outstanding, a relatively small float. The stock tanked to $17 day 1 on 10.7m shares and today another 30c on 3.2m shares. So, we haven’t gotten thru a fair amount of the dumpers at this point. Why is this an interesting story? Ok, they are a cell tower companies, think $EQIX or $SBAC. They are a bit concentrated with 95% of revenues from 3 customers, but welcome to a consolidating industry. They are in Latin America, Africa and the Middle East. Like all of the players in the space, its an acquisition of towers game and you use debt and equity to add accretively to your cash flow per share.
Here are the metrics: 328m shares out x $16.69 equals an equity cap of $5.5 billion. We think the debt is around $1.5 billion pro forma for the IPO, so the enterprise value (EV) is around $7 billion. They are growing 10-15% their revenues which is faster than $SBAC and $EQIX. The EV/EBITDA multiple on $SBAC on 2022 is nearly 30x while $EQIX is about 23x. Here $IHS has a EV of $7 billion and EBITDA of nearly $1 billion annually with free cash flow (FCF) of around $500m. No matter how you slice it, this broken deal is worth owning. 7x EBITDA versus peers at 3x that? What gives? Well, average contract lengths are another 7 years at which time they likely renew. No issue there. Perhaps it’s the countries they operate? Well, they are strong growth areas, albeit lower ARPU by cell phone customer versus developed nations. But this too is “so what?” ARPUs are likely to rise over time and its already the business model they operate generating these impressive numbers. Their Nigerian customer had a restructuring which led to a bad debt incurred of about $38m a few years back. Well that’s not good. The customer 9mobile is about 13% of revenues but has since been sold and is operating “successfully”. So the hair here is you are getting a cell tower play at 1/3 the valuation of developed peers to compensate for the emerging market risk of their carriers. At the end of the day, the towers get used and paid to be used. Customer issues can crop up, but we all know the usage is growing annually and whether its 9mobile or you replace that traffic with other carriers, its about total usage within a country.
Our thought here is broken deals cycle thru the flippers and then they stabilize and rise if the company is a good risk/reward. We think $IHS has this chance and should be a double with patience. For those who want to play for “a bounce” we would use $20 as your target and if you use stop losses, probably $15 would be a spot to say “no mas”. We started a position today and hope to see the bounce start in the next couple of weeks.
This ain’t $UPST and Mr. Monervini, but that’s a good thing. Know what you own. $IHS might not be for everyone, but its EV/EBITDA and FCF yield of about 7% seem right to us for a long trade.
Rob’s Educated Guesses
This company is interesting from a hardware perspective. As with other EM sector considerations, is currency risk considered "negligible?'