VIK GROVER January 7, 1999 KAUFMAN BROS., L.P. Telecommunications 800 Third Avenue, 25th Floor
212-292-8123 New York, New York 10022
vgrover@kbro.com kbro.com
ABLE TELCOM HOLDING CORP. (ABTEª-$7 *)
RATING: BUY/BUY PRICE TARGET: $23
VINDICATION OF AN ANALYST
No stock has caused us more consternation than ABTE. Having performed a thorough analysis of the company, we
recommended purchase of its stock roughly one year ago when it was trading at roughly $7 per share. As many of you are
painfully aware, the acquisition of MFS Network Technologies, a huge infrastructure services company previously owned by
MCI WorldCom (WCOM-$78 3/8: "BUY/BUY"), became available to ABTE in early 1998. A confusing convertible preferred
equity financing, negotiated to fund a last-minute down-payment on the transaction (commonly referred to by short-sellers as a
"Death Spiral"), resulted in massive downward pressure on ABTE's stock during the following months. That roller-coaster
ride was unlike anything we have seen on Wall Street. We believe it occurred for the wrong reasons.
We performed significant due diligence and analysis on ABTE prior to recommending the stock and regularly visited
management since then in order to further our understanding of the company and to fulfill our fiduciary duty to our clients.
Despite the significant volatility of the company's stock, exacerbated by the spread of misinformation during a "bear raid" in
1998, we continue to stick to our guns: we think ABTE represents an enormous investment opportunity for aggressive
investors seeking a strong play on the accelerating growth of the telecommunications industry in the United States and abroad.
CURRENT VALUATION IS DETACHED FROM THE COMPANY'S TRUE FUNDAMENTALS
We think the company's current valuation makes no sense. In today's environment of bandwidth-mania, how many
telecommunications companies have enough bandwidth? Who do you think builds the networks that have that bandwidth? Who
built every fiber ring for MFS Communications, now part of MCI WorldCom, the most successful telecommunications
company in the history of the world? If you answered ABTE/MFS-NT, move to the front of the class.
With Internet stocks trading in the stratosphere, why would you not buy a company that is trading at an enterprise value/annual
revenues of 0.2x with a price/forward 12-month EPS (P/E) of roughly 6x and a price/forward 12-month EBITDA of roughly
2x?!? Even if you doubled our estimated share base to reflect undue concerns over dilution of equity the company's stock is
cheap by any stretch of the imagination.
In our view, there is no reason why ABTE should not be trading in the mid-teens today (e.g., 15x my FY99 EPS estimate of
$1.18 = $17-$18). We believe the stock has no business being in the single digits. We stand by our due diligence and
recommend that investors ignore the crosscurrents of misinformation that have disrupted the market for ABTE common shares
during the past few months.
THE COMPANY IS POISED TO REBOUND
The following are some major data points we predict will hit the Street during early 1999 and help propel ABTE common
shares significantly higher.
· Additions to ABTE's Board of Directors and management team to supervise ABTE's transition into a $500+MM entity and
enable the firm to achieve its stated goal of an annual run rate in revenues of $1 billion within five years. We believe the
company will seek leadership from high profile executives with experience at Fortune 500 corporations. In our view, the news
of significant Board additions will address concerns over current management of the company.
· Credit line with NationsBank/Montgomery could be increased by 100%-200%, giving ABTE badly needed working capital to
fund substantial projects at MFS-NT and the company's five subsidiaries located throughout the Southeast.
· The company is working to collect several million dollars of accounts receivables to fund working capital needs and bolster its
balance sheet. Naysayers have pointed out that ABTE has limited working capital and therefore will find it difficult to fund
MFS-NT's operations. Yet ABTE has never been totally illiquid. In fact, as of the end of 3Q98 (ended 7/31), the company had
a pro forma current ratio (current assets/current liabilities) of roughly 2.0x, a sign of a relatively healthy working capital
condition. We believe ABTE will significantly improve its liquidity situation as accounts receivables related to long-term
projects at MFS-NT are collected during the coming months.
· Liquidation of the company's Achilles Heel, namely its outstanding $18MM principal Series B convertible preferred stock.
We think the issue could be redeemed for a modest premium in the near future (the terms of the stock allow the holders to
demand a 30% premium for redemption under certain circumstances). Naysayers have highlighted this financing as proof that
ABTE either does not know what it is doing or that the company is a fraud. We could not disagree with these statements more.
Consider the following: If the company was a fraud, why would MCI WorldCom give it 75% of its new construction business
and hundreds of millions of dollars of maintenance business in the United States? Why would NationsBank, which supports
MCI WorldCom, negotiate with ABTE to increase its credit line? Further, if management was so incompetent, why were they
able to buy a $100MM asset from MCI WorldCom for $50MM?
Fiber assets monetized for a significant sum by selling them to a major carrier/telco. We think the purchaser is Williams Cos.
(WMB-$30 7/8). Witness ABTE's 3Q98 10-Q: Williams is mentioned when ABTE talks about what happens to the funds derived
from a sale of its fiber assets. Note that Williams intends to spin-off its telecommunications business in an IPO in mid-1999 and
would be a likely suitor for these assets, which include empty conduits and rights of way (ROWs) that span the entire state of
New York and reach into 60 Hudson Street in Manhattan, the center of the universe for U.S. telecommunications companies. We
think these assets are worth almost as much as the entire market capitalization of ABTE today. They are a hidden asset that, in our
opinion, is not currently in ABTE's stock. We believe the sale of these assets could significantly strengthen the company's balance
sheet, increase shareholder equity (the fiber was written down to $20MM from $60MM when ABTE bought MFS-NT for less
than book value), and catalyze incremental interest in the company's story.
· Injection of additional equity into the company from strategic/friendly investors. We believe such a news event would further
validate our thesis that this company is significantly undervalued at current levels and an enormous investment opportunity for
smart money in the telecommunications business.
· The announcement of strong 4Q98 (ended 10/31) results ahead of Street estimates. We anticipate that ABTE will report revenues
of $100+MM and EPS north of our estimate of $0.22. What price will investors pay for the stock when they see the true revenue
and EPS power of the "new" ABTE and the company leaves FY98 behind? We think it will be a price significantly higher than
$7-$8. Note that the engagement of Arthur Andersen as ABTE's auditors should address any concerns that ABTE's books are in
disarray and that its upcoming 4Q98/FY98 results are ambiguous.
UPSIDE
· To reiterate, we believe numerous data points should be given to the Street in the near future, including: strengthened Board
representation and management, an increased credit line, collections of receivables, liquidation of the outstanding bottomless
convertible preferred, sale of fiber assets to a major telco, the injection of new equity from friendly investors, and strong 4Q98
results.
· We recommend investors buy ABTE in anticipation of the above anticipated positive events. We think they could be announced
in a series of blockbuster headlines that would, in our opinion, drive ABTE's stock much higher than current levels.
TOP PICK FOR 1999
· So again, we reiterate our "BUY/BUY" recommendation on ABTE.
· We are naming ABTE our top infrastructure services pick for 1999.
· Our 12-month price target remains $23, representing +207% appreciation from current levels. |
