2023-09-05 08:30:00 ET
Summary
- KVH Industries is a global leader in mobile connectivity for the maritime industry and provisions, internet, television content, voice services via satellite, and value-added services primarily for the commercial shipping industry.
- Valuation is compelling at ~2.3x 2023 EBITDA with over $3.50 per share in cash and no debt. At ~$5.26 per share, I think the stock can easily more than double.
- KVHI is near its 52-week low and, at $100M market cap, can easily return to its recent highs from April when it was trading near $12 per share.
- There is sparse coverage on KVHI, and the only analyst who has an EBITDA estimate for 2024 is 70% below the company’s original 2023 EBITDA projection, providing a big dislocation.
- I expect the company to announce a sizeable share repurchase program imminently. At current levels, I believe the company is takeout bait.
Misunderstood, Mispriced, Dominant Global Provider & Cash Protected
KVH Industries ( KVHI ) is a microcap trading near its 52-week lows while business and prospects appear to be improving, yet it is so under-followed, that few people are aware or care. For KVHI shareholders (and undoubtedly its board of directors and management team), it is incredibly frustrating. Imagine, the sole publishing sell-side analyst on the Street takes a hatchet to his 2024 projected EBITDA by more than 50% below the company’s 2023 EBITDA guidance (which is 70% below the original projected 2023 EBITDA). This reduction was primarily based on a new entrant to a segment of the business which ONLY comprises 20% of total EBITDA (@similiar margins). Moreover, this company will come out with a similar offering shortly that will stem the tide in that small segment. The stock reaction seems excessive and truly unwarranted.
While SpaceX and other Low Earth Orbit ("LEO") services offer somewhat low latency, they don’t work well far from shore and are thus not reliable enough for commercial users (where close to 80% of KVHI’s business resides). Further, LEO satellites exhibit significant infant mortality, with reliability dropping after the initial year of operation. Additionally, KVHI does not sell into the “Cruise” market. There was also a modest weakness in the small Leisure business (which includes TV streaming), but new products could address this as well. KVHI has close to ~$71m cash, no debt, and sells in more than 150 countries with strong value-added services. Management is reducing costs consistently from their operating model (shifting to a quasi-recurring “Connectivity as a Service” subscription service). KVHI also has a solid private equity company investor with a board seat owning 17% (with approval to buy up to 25%), and a solid management team in place. Add to this a possible share repurchase program, and a strong candidate to be acquired in 2024 and the story seems quite compelling.
Target Price : My upside target is $15.95+ /share based on an acquisition value calculated as follows. Industry takeout multiples typically range between 9-18x EBITDA. My model assumes 2024 EBITDA is roughly flat to slightly up with the current 2023 guidance at ~$14 million. If one conservatively assumes just $10 million of synergies in a strategic combination (i.e., with a satellite/bandwidth buyer – a “vertical” acquisition) and places only a 10x multiple on that, I arrive at $240 million. Add roughly $71 million of cash to arrive at a value of $311 million, or ~$15.95 per share. This value ignores any value for the company’s owned real estate and this target does not include any value accretion from a stock buyback. At recent prices around $5.30, KVHI’s enterprise value (market cap less cash) is a minuscule $31 million and does not reflect the value of this largely recurring model. Management is pursuing and prioritizing operating leverage and free cash flow.
Financial Snapshot
KVH is a global leader in mobile connectivity for the maritime industry, and provisions, internet, television content, voice services via satellite, and value-added services primarily for the commercial shipping industry as well as some leisure & recreation in the marina industry. KVH uses a global Ku band satellite network (as well as cellular) to deliver secure, fast, and seamless global connectivity. KVHI “domes” can be seen atop many yachts and commercial ships around the world, most often under the brand name “ TRACNET ” or “ TRACPHONE ”. It’s also involved in the communications sphere for its military and government clients at sea and on land. The company provides services and products to customers in over 150 countries including underserved markets such as shipping and private vessels and supplies the U.S. Coast Guard as well.
Uses include crew entertainment, communication, file sharing, tracking, and monitoring of equipment. In the Commercial business, the company’s “Agile Plan” gives customers the equipment in exchange for a quasi-recurring “ Connec t ivity as a Service ” which is represented in the profitable Airtime segment. Leisure customers pay for the equipment, but similarly, the profit is in the airtime.
Operating Model
Growing Airtime Subscription Revenues and Services business (“ AgilePlan ”) for the Commercial shipping industry (approximately 75%-80% of revenue) + Leisure segment, (approx. 15%-20% of KVHI business. Potentially partnering to offer LEO satellite service to the Maritime industry and stem the recent loss of subscribers to Starlink). Ongoing shift from a product sales business to a subscription service sales model which has improved margins in recent years. More recently, Starlink’s recent LEO offering has impacted KVH’s Leisure segment which is ONLY 15-20% of KVHI’s business. This segment is mostly recreational boaters who use the product near shore. Commercial segment users are more typically fleets that operate far offshore. The Commercial segment represents roughly 80% of KVHI business.
Accounting for the competitive dynamic in Leisure, management has been assuming that Airtime margins should revert to the high 30’s from the recent levels in the low 40’s. Growing recurring revenues should account for the majority of the total business. Most customers buy through dealers. In the large commercial ship space, others don’t have the capabilities KVH has on service and upsell value-add.
Possible Tailwinds
On the 2Q call, KVHI announced a new/renewed bandwidth deal with Intelsat, and said they are in "late-stage negotiations with two LEO players." Nonetheless, the tone on the conference call was gloomy, as the company laid out the challenges, but did not spend much time on the solutions.
Part of this is likely due to their conservative nature, but perhaps management was also hesitant to say much more about their own LEO strategy because these referenced deals are not final yet. Regardless, I believe the share price reflects maximum fear, which is likely to be reduced in future periods, particularly with new LEO relationships. Oneweb (EchoStar) could partner with KVHI in the maritime segment to bring an LEO offering. Attached is a well done GTMaritime Whitepaper : which explores shipping’s opportunities and challenges on LEO network integration. (Whitepaper Exploring Shipping Opportunity & Challenges for LEO Integration)
2Q23 Negative Surprise
With the 2Q23 report, guidance was reduced to $13.5 million of EBITDA at the midpoint, and the company stated the strategic process for the remaining business did not result in a sale. These two items resulted in the shares losing half their value (and they did not have a lot of air under them to start with). The company discussed competition from Starlink (Low Earth Orbit provider of connectivity) in KVHI’s Leisure segment. Leisure represents about 15%-20% of KVHI’s business. KVHI’s Commercial Business, which represents roughly 80% of the business, is not at risk because LEOs cannot compete in deep offshore like they can at the marina or very near shore. For Commercial customers LEO’s do not provide global coverage and LEO constellations in general expose ships to the risk of communications being dropped as satellites hand off to each other. KVH provides certainty of connection, decades of domain expertise, and superior customer service as opposed to a website.
Distressed Valuat i on
Clearly the fear can be seen in the current $5.40 price. Net of roughly $71 million in cash ($3.60 per share), the business is valued at 2.3x the reduced 2023E EBITDA. Directionally we believe 2024 EBITDA will be greater than 2023 due to new products and “less bad” product margins, but we do not have a current estimate yet until we get a better handle on bandwidth costs under the new agreements. I believe that the consensus 2024 EBITDA estimate of $6 million is low and directionally incorrect.
Private Equity
PE firm Black Diamond accumulated roughly 17% of the company in the open market in the high single-digit price range (estimated) in the last two years. In February 2023 they added their principal, Stephen Deckoff, to the board and the company waived their previous limitation on ownership, allowing BD to make open market purchases of the company up to 25%, provided the incremental 8% is voted with the board. This last point does not represent entrenched management or board, rather it protects shareholders from a large holder making an inadequate offer for the company etc.
Why did the company not get sold in the recent process?
I believe there are many companies both vertically and horizontally that would make compelling partners. Certainly, a satellite/bandwidth provider could have meaningful synergies selling directly to end-users, since bandwidth costs are KVH’s largest expense. Viasat ( VSAT ) is one obvious acquirer, but they are currently busy with their own challenges including integrating their own recent acquisition. Generally, we believe the industry is a bit frozen in terms of decision processes due to the changes in the industry regarding LEOs and other company-specific issues. With a bit of time and improved performance, we still believe there are compelling synergies for many horizontal and vertical buyers. In the interim, I hope that the board takes advantage of the current price to create low-risk value via a buyback or tender offer.
What could go right?
- Share repurchase - the company will not burn cash even at reduced EBITDA levels so there is no doubt about the ability to buy shares. A buyback would be extremely value accretive.
- Possible competitive response to Starlink with LEO offerings.
- New products that address streaming with a cellular solution.
- Traction in hybrid networks solution (satellite, cellular, and Wi-Fi).
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Black Diamond could decide to buy the rest of the company, though the length of the February 2023 standstill agreement is unclear.
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Imp rovement in the Product segment which doesn’t currently contribute to profitability and is a drain on working capital.
Recent Announcements
- March 8, 2023 – KVH TracNet wins Editors’ Choice in Third-annual Best Elex Awards
- February 23, 2023 – KVH TracNet recognized with the 2023 SMART4SEA Connectivity Award
- February 13, 2023 – KVH’s New Crew Internet Service Offers Vital Connectivity to Mariners and Enables Vessel Traffic Allocation
- February 3, 2023 – KVH Industries Announces Support Agreement with Black Diamond Capital Management
- January 19, 2023 – KVH Introduces New Enterprise-grade Cybersecurity and Email Services for Mariners
KVH Product Descriptions
TracNet terminals feature integrated satellite, cellular, and Wi-Fi technology with intelligent, automatic switching to keep ships connected to the best available communication option. The product line is the first to offer a fully integrated hybrid maritime solution of this type, utilizing an algorithm that assesses factors such as availability, cost, and quality of data connection to continually deliver the best performance.
The TracNet product line features three terminals: the ultra-compact 37 cm TracNet H30, the compact 60 cm TracNet H60, and the 1-meter TracNet H90. The antennas offer single-cable install, tuned reflectors, multi-axis stabilization, stabilized skew, digital IMUs, and a commercial-grade rotary joint with continuous azimuth for outstanding reception, even with high speeds and rough seas. This ensures seamless connectivity in both calm and challenging conditions, no matter how far out to sea the ship might be.
Vessels with TracNet on board enjoy 276 million sq. km (106+ million sq. miles) of satellite coverage using KVH’s global, layered HTS network, powered by Intelsat. The network offers VSAT speeds as fast as 20/3 Mbps (down/up). Subscribers also enjoy integrated support for 5G/LTE cellular service in 150+ countries as well as the flexibility to add user-supplied SIM cards for local service. Plus, TracNet terminals can connect to shore-based Wi-Fi networks using the integrated Wi-Fi bridge for additional speed and cost-saving benefits. Vessels with TracNet onboard experience seamless connectivity at the dock, when underway, and when out to sea.
TracNet terminals reflect KVH’s commitment to cybersecurity with integrated, terminal-level protections plus KVH’s multi-level network cybersecurity program. For fleets seeking an additional layer of protection, KVH offers its Managed Firewall service with optional, enterprise-grade cybersecurity, powered by Fortinet. Cloud Email and Crew Internet are also available to TracNet users as value-added services designed to benefit both crew and fleet administrators.
End 2021 Numbers
- ~2.9MM vessels globally as of year-end 2021.
- ~33,000 current VSAT equipped vessels.
- 156,100 vessels that could be VSAT equipped.
- The maritime satellite communications market consisted of 189,400 addressable vessels as of year-end 2021.
- KVH captured ~20% of the VSAT-equipped vessel share as year-end 2021.
Risk Factors
- Cyclicality. There is some economic sensitivity to the business and revenues may reflect that.
- Component Shortages (industry): This has not been a problem and we do not anticipate it will be so. However, supply chain prices can always rise and there is no guarantee the company can raise prices.
- Intensifying competition in Maritime Broadband.
- Customer orders and Industry Pushouts. The timing of customer orders is unpredictable.
- Industry change. The industry is subject to technological change, and a failure to adapt to such change in a timely manner could negatively affect results.
- Pricing pressure. The company's business could be affected by pricing pressure in the market.
Disclosure : I have a beneficial long position in the shares of KVHI either through stock ownership, options, or other derivatives.
I wrote this article myself, and it expresses my own opinions.
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KVH Industries - Compelling Misunderstood Technology Value That Could Easily Double