2023-12-03 09:13:10 ET
Summary
- ATN International is a telco with operations in the US and internationally, serving rural and remote markets.
- The company has been undergoing a significant capex program in 2022 and 2023. As capex comes down in 2024, ATN should see a return to positive free cash flows.
- ATN is well positioned to benefit from US infrastructure grants and the expected growth in oil production in Guyana and accompanying economic boom.
- I expect the market will re-rate ATN in 2024 as these tailwinds start to manifest themselves.
ATN International (ATNI) is a telco serving an oddball set of geographies in the US and internationally. Multiple potential positive catalysts makes it an interesting proposition at the current price.
First, ATN has been going through a huge capex program in the past two years. From 2024 onwards capex will come down again and the company should get back to producing positive free cash flow while reaping the benefits of the capex.
Second, ATN's US operations are in rural and remote markets (Alaska and the US Southwest) and the company is set to benefit from US federal infrastructure grants to improve connectivity in these areas. This should allow ATN to continue network growth even while bringing its self-funded capex down.
Third, one of ATN's main international markets is Guyana. Oil production in Guyana is expected to grow significantly in the coming years. As the leading telco in Guyana, ATN should be well positioned to take advantage of the income growth Guyana's population should experience.
Fourth, while speculative, if interest rates were to start coming down in 2024, as some major investors believe , it would likely provide a boost to the valuation of all telcos. In ATN's case this would combine with the company-specific tailwinds listed above.
I believe the combination of these factors could make the market change its recently very negative view on ATN. The heavy capex and resulting lack of free cash flow in has understandably not combined well with rising interest rates in 2023.
Introduction To ATN
ATN has telco operations in both the US and internationally with revenue roughly evenly split between them. In the US they operate in Alaska and in the Southwest, both geographies including a lot of rural, remote and/or Native American communities. Internationally, they serve various Caribbean markets as well as Guyana. The Alaskan part was acquired in early 2021 and is part-owned with another investor with ATN having operational control.
Geographic revenue split (ATN Investor Presentation)
ATN's explicit strategy is to focus on geographies that due to remoteness or small population have not attracted much telco investment. The goal is to effectively lock up these markets by being the first to invest in modern infrastructure and making it uneconomical for competitors to enter. ATN refers to this as the "First to Fiber" strategy:
Explanation of First to Fiber strategy (ATN Investor Presentation)
I think this strategy makes sense, but it comes with negatives too. There is a reason these markets aren't attracting other telcos, mainly that they are too small to be worth the trouble for companies of size. By gathering many such markets into one company, the hope is ATN in total will be large enough to be of interest to the market and also get some scale benefits.
In the US, ATN is primarily a provider of fixed connections. While the company does own significant mobile infrastructure in the Southwest, they are winding down their mobile retail offering. Instead their mobile infrastructure is used to provide managed services to both AT&T (T) and Verizon (VZ) (the deal closed subsequent to the article in the link) who effectively outsource their network in the US Southwest to ATN. It is not a high margin business, but it is a very stable source of revenue as both AT&T and Verizon have committed to 5+ year contracts.
In the international markets, ATN tends to be a full service provider offering both fixed and mobile connectivity.
ATN: The Capex Factor
The company has been expanding both its network and its customer count domestically and internationally in recent quarters:
ATN Operating Metrics (ATN International)
This growth has been driven in large part by ATN's heavy capex along with a medium sized US acquisition at the end of 2022 . In 2022 capex came in at ~$160 million (~22% of revenue) while in 2023 it is course for somewhere between $160 and $170 million based on ATN's current guidance.
Those are significant outlays considering that ATN produced $103 million in operating cash flow in 2022 and for the first 9 months of 2023 has produced $89 million. ATN has thus had to finance their capex partly through debt with their leverage ratio standing at 2.3x as of Q3 with a stated long-term goal of 2x or less.
The good news is ATN has guided for capex to come down to $120 to $130 million in 2024 with management seeming confident they'll be able to return to positive free cash flows. On the latest earnings call ATN management indicated that they expect to deploy that free cash flow towards either an increase in the dividend (current yield is ~2.7%) or increased share buybacks:
Yes. I think we're primarily focused on the shareholder side as opposed to M&A. We've been investing a lot in the business and it's time to sort of deliver on that. I think on the stock buybacks, I think through September 30, we were at nearly $12 million this year, and that leaves us with at the end of September, we would have had about $7.5 million left in existing program. So typically, in December timeframe and sometimes at other times, the Board will kind of look at those sort of capital allocation decisions, dividends, buybacks and all the rest.
ATN management has indicated they expect gains from their capex program will arrive gradually as they load customers onto their new infrastructure (see their Q3 earnings call). ATN also expects to be able to cut costs by shutting down old and now redundant infrastructure. This was also discussed on the Q3 call:
As we mentioned in the last two quarters, ATN is focused on rightsizing the cost structure necessary to support the business into the future and improve overall operating margins. As a result, we recorded a $1.4 million restructuring cost in the quarter and $4.6 million year-to-date, reflecting mainly costs associated with decommissioning network and reduction in force expenses. We expect the majority of our operational review to be complete in the fourth quarter and do not anticipate any further restructuring costs into 2024.
The company hasn't quantified these savings, except the above comment that they expect the upfront restructuring costs to be done after 2023. Given the company is on course to spend ~$6 million in 2023 on restructuring one-offs, getting rid of those will in itself provide a good boost to 2024 results. In general ATN has offered little hard detail on what growth it expects in 2024 and beyond, whether in terms of customers or revenue, apart from its 2023 guidance of EBITDA of $183 to $193 million and preliminary 2024 EBITDA guidance of $200 to $208 million.
It is somewhat frustrating not to be able to predict with more certainty how much benefit ATN actually will get from its capex drive in the coming years. Instead all that can be said is ATN is now through the painful part of paying for the capex and will get to reap the benefits in the coming years. How big those benefits are ATN will have demonstrate through its earnings.
ATN in the US: Well Positioned For Infrastructure Grants
While capex coming down will be a good thing for ATN's cash flows, it could be bad for future customer and revenue growth. However, thanks to the geographies ATN targets in the US, the company should be able to make use of federal grants to continue growing their network despite decreasing their self-funded capex. These are exactly the kinds of market for which the US federal government wants to increase connectivity .
This is also not just a theoretical boost. In 2023 to date, ATN has received $78 million in such support and has been awarded $100 million in construction grants that are still to be completed with that number increasing $20 million from the end of 2022. The full details can be found in ATN's latest 10-Q in the section "Government Support and Spectrum Matters" which also provides details on the (many) different programs the US federal government provides support through.
ATN doesn't provide much hard detail on the impacts of the federal grants it receives, nor on the specific timing of activities related to it. As such, it is hard to say how much benefit ATN will ultimately derive from such grants whether measured in customers or revenue. I would expect the quite large grant numbers above to give ATN a decent amount of new subscribers - and those subscribers should likely stick around, given the lack of alternative providers - but for the actual impact it will have to be demonstrated over time.
As such, I do not think ATN being well positioned to participate in federal infrastructure programs is an immediate catalyst. It is better seen as a tailwind of unknown strength that should help results over the coming years.
Guyana: Oil Boom Boost
In Guyana, ATN International owns the leading telco ( gtt) . Guyana is currently in the midst of a major increase in oil production. This increased oil production should make Guyana's economy grow at a rapid clip for years with a frankly ridiculous expected GDP growth rate of 38.4% in 2023 .
All things being equal, that should also make the country's main telco worth more. While Guyana's population of only ~800.000 does put a natural cap on the worth of gtt, it may become an asset ATN can sell at a premium to investors looking for exposure to Guyana's rapid growth. It also bears mentioning that a lot of ATN's recent capex has been for a fiber buildout in Guyana.
Financials And valuation
I have already mentioned ATN having a reasonably solid leverage ratio of 2.3. For earnings, adjusted EBITDA in 2021 came in at $129 million, but that was based on less than a full year of revenue from the previously mentioned Alaskan acquisition made in 2021.
For 2022 adjusted EBITDA landed at $165 million. Assuming ATN hits the midpoint of its guidance, 2023 adjusted EBITDA will be $188 million. For 2024, again using the midpoint of guidance, adjusted EBITDA should be $204 million. That would equal 25% growth from 2022 to 2024 which indicates there is some substance to the company's growth story.
ATN currently has an enterprise value $1.06 billion . Using the projected adjusted EBITDA values above for 2023 and 2024 results in EV/EBITDA ratios of ~5.6 and ~5.1 respectively. This is below telco averages . My theory is that if ATN delivers both growth and positive free cash flow in 2024, the market will be willing to grant it an EV/EBITDA ratio of ~6 in line with its telco peers. This would imply an enterprise value of $1.224 billion, market cap of $644 million and share price of ~$41. This is where I'm putting my target price for now.
It would not be hard to come up with a higher target price by giving more weight to ATN's expected EBITDA growth beyond 2024, but I want to be conservative given the lack of hard data to quantify such growth and would want more evidence first.
ATN is currently only covered by three analysts who have t arget share prices ranging from $39 to $52 . ATN insiders has been buying the stock in the open market in recent days , but not at a level where I would consider it more than a small positive sign.
Risks
There is no guarantee ATN will actually deliver the results its capex program is meant to bring. The company's story is on the complicated side and it's possible the market will remain uninterested. Interest rates may have to come down for investors to regain their appetite for telcos in general.
The company may in the long run be hampered by people migrating away from the rural and remote geographies it is focusing on, but I find this of little relevance to the investment case in the near term. In Guyana ATN could benefit from the oil boom attracting more people to the country.
It bears mentioning that ~33% of ATN is owned by the executive chairman Michael Prior who was also the CEO until very recently . This is likely why the company has seemed quite sanguine about the poor share price performance in 2023. There is no chance of anyone forcing a change in strategy on ATN and so short-term share price developments likely matters less to management compared to peers who are more at risk of activist investors showing up.
The company has historically been quite adventurous in some of its investments, at one point venturing into Indian renewables (now divested). Should the company embark on new such adventures, shareholders would have to accept they are along for ride given the ownership situation.
There's also an argument to be made that investing in ATN is somewhat pointless when there are much larger telcos around that offer higher dividend yields in the 6-7% range. That is fair, but what ATN offers is a better growth story, albeit one that is frustratingly hard to quantify. On the plus side, ATN - by virtue of its focus on niche geographies - generally has less competition in its markets than might be the case for many larger telcos in bigger markets.
Finally, the government grant story could also turn negative if the US federal government were to start cutting the programs ATN benefits from. I do not see any near-term risk of this, however.
Conclusion
To sum up, I think ATN International has multiple tailwinds in its future that the market is not currently giving them much (if any) credit for. I think that could change as capex comes down and the company gets back to positive free cash flow, perhaps aided by the company returning capital through either an increased dividend or buybacks.
I have therefore established a moderate position with a target price of $41. My hope would be to see this reached within 2024 as the company demonstrates that it is delivering growth and free cash flow as promised. This is not an investment I will have infinite patience with, so if this does not materialize or the market remains uninterested, I would probably make an exit at or before the end of 2024.
I do not see major downside risks, except perhaps true black swan events like Venezuela's long-running border dispute with Guyana spinning completely out of control or something equally unexpected (to be clear, I would be extremely surprised if that actually did occur).
There have been rumors in the past that ATN was considering shopping the company to buyers . That went quiet but could perhaps be revived if M&A activity for telcos increase. If so, this could serve as an additional catalyst.
For further details see:
ATN International: Better Times On The Horizon