LICT - LICT Corp. - A Shareholder-Friendly Monopoly

Summary

• LICT Corporation is an overlooked, illiquid stock with incredible management that operates what is effectively a monopoly.
• LICT is in a growing industry that is being supported by cultural trends in both the U.S. and the government.
• While the price of the stock is high, its valuation is cheap when considering the incredibly low risk associated with this company.

LICT Corporation (LICT) is an undervalued monopoly that has heavy cultural and regulatory tailwinds, a pristine balance sheet, stable and growing revenues, and a shareholder-friendly management team.

Company Overview

LICT Corp. is the parent of a collection of rural telecom companies that, in my opinion, are monopolies. As per Yahoo Finance :

LICT, via its subsidiaries, offers high-speed broadband services, including internet access through copper-based digital subscriber lines, fiber optic facilities, fixed wireless, and cable modems; video services through traditional cable television services and internet protocol television services; voice over internet protocol services; wireless voice communications services; and other telecommunications-related services. The company operates in California, Iowa, Kansas, Michigan, New Mexico, Utah, and Wisconsin. As of Dec. 31, 2021, it had a total of 30,687 voice lines; 5,832 miles of fiber optic cable; 11,522 miles of copper cable; and 816 miles of coaxial cable.

Mario Gabelli, the billionaire founder of GAMCO, controls the company and is extremely shareholder friendly. As per the company's slide deck , from 1985 to 2019 it has compounded its investment at 16.84%, which is almost double the rate of the S&P 500's 8.6%.

Tailwinds

LICT is in the rural telecom industry, which has been rather underinvested in, due to the fact that many industry heavyweights saw very few opportunities or profitability by operating in thinly populated areas. As a result, rural telecom companies exist in an extremely fragmented industry. Due to the fragmentation and underinvestment there is no competition - they're the only option for people (and businesses) who live/operate in these rural areas. However, due to COVID-19, many people have migrated away from urban areas and into more remote areas in search of more space. As many of these new people are working remotely, the demand and necessity for high-speed internet across the U.S., regardless of population density, has never been higher.

Local, state, and federal governments that understood the economic benefits of providing high-speed internet, even in remote areas, began subsidizing investments in these areas. In their most recent 10-K , management said that "to accelerate and deliver what is required, a tidal wave of funds is flowing [through government programs]." LICT has heavily benefited from these subsidies, as well as the surge in public funding through state universal funds, state loans and grants, infrastructure bills, and - most importantly - the Alternative Connect America Cost Model, or ACAM .

ACAM is one program that has incentivized these rural telecom companies to invest in remote or thinly covered areas. As per LICT's latest annual filing :

A-CAM and A-CAM II revenues were $32.0 million and $32.1 million, in 2021 and 2020, respectively. The annual A-CAM transitional decrease for our California and Iowa companies will be completed in 2023 and LICT's total A-CAM will be $31.9 million annually from 2023 through 2028.

So until 2028, LICT expects to receive almost $32 million in government revenue just from the ACAM Program. This will allow LICT to expand into additional regions with little to no coverage and expand their rural monopolies.

But wait, there's more - as of Oct. 27, 2022, the U.S. Department of Agriculture (USDA) announced that the department is providing $759 million to bring high-speed internet access to people living and working across 24 states. This funding granted LICT and its subsidiaries grants worth almost $127 million as shown below:

A quick note that the company's entire enterprise value is ~$342.38M, so this one grant is ~37% of the company's enterprise value. Furthermore, since this was announced shares are down 12%, which makes no sense.

As per USDA Secretary Tom Vilsack :

USDA partners with small towns, local utilities and cooperatives, and private companies to increase access to high-speed internet so people in rural America have the opportunity to build brighter futures.

The U.S. government knows how essential the internet is becoming. I believe we will continue to see government support for more high-speed coverage across the nation.

Valuation

Let's begin by looking at this company's investment and growth. For some additional context on rural telcos, many have relied on revenue via the landline. However, the landline has been a dying business as cell phones have become more mainstream. As a result, LICT's savvy management team has been investing heavily in the non-regulated cell service businesses. As of 2021, these growing revenues have become the majority of their business.

During the last five years we have seen management of the following metrics at a CAGR of:

• Revenue: 7.32%
• EBITDA: 21.94%
• Capex = 13.75%
• Free cash flow* = 9.3%

(* = EBITDA less capital expenditure as per a 2020 presentation .)

Capex is growing faster than revenue, but obviously off of a much much smaller base. Below is an image that highlights how dramatic these differences are.

As a result of this success, we have seen management fully pay down their debt, decrease the share count substantially, and have ample liquidity. Additionally, in the latest 10-K management stated:

Our share buyback has been more active in recent years. In 2021, we reduced our year-end share count to 17,871 from 18,533 in 2020. We prefer buybacks to cash dividends as we repurchase shares below what we believe is our best estimate of intrinsic value while providing liquidity for shareholders. We have shared with you our target of 40% plus or minus of net income as a soft financial number for the board to permit share repurchases.

Management believes that shares are undervalued, given the firm's growth trajectory and how they are executing. Assuming the firm's net income remains constant, using their LTM net income, we should see another ~500 shares taken out of circulation and see EPS increase accordingly.

Additionally, using extremely conservative assumptions shown in the image from my DCF - and not even including the new revenue streams that will be created by the USDA grants - we can see that shares are already 30% underpriced.

Investment Risks

In my opinion, the biggest risk is liquidity. Shares are very illiquid and there is generally a big spread between the bid and ask. You must be prepared to hold your investment for the long term. Short-term trading is not an option.

Additionally, there are no earnings calls, and communications with management outside the 10-K are few and far between. We do see them present at conferences, but because they're an OTC company they don't have the same regulatory constraints to be as transparent as a company that trades on a major exchange like the NYSE or Nasdaq.

Conclusion

LICT Corporation is a very profitable business, with little competition and new revenue streams coming on board with government support. The risk/reward is very favorable given management's track record of execution, the company's pristine balance sheet, and the macro and regulatory tailwinds behind them. I expect this company to continue to compound at a faster rate than the S&P 500 and will continue to be a shareholder for the long haul.

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