In a report issued today, Kaufman Brothers telecommunications analyst Vik Grover reviesd their expectaions of Able:
12-MONTH TARGET: RAISED TO $26 FROM $23
LONG-TERM TARGET: INITIATED AT $50
WHITE KNIGHT POSITIONS ABTE TO BECOME A POWERHOUSE
Recent press releases by ABTE indicate that representatives of Interfiducia Partners, a European investment fund with active interests in numerous telecommunications businesses, have agreed to recapitalize ABTE by retiring the company's $10MM 12% high yield notes and the remaining portion of its series B convertible preferred shares ($18MM principal at last check). We believe the transactions are scheduled to close in the next few weeks. We think the move eliminates concerns over potential dilution of equity and will help ABTE move its business plan to the next level.
REVISING EARNINGS MODEL – RAISING ESTIMATES
On a preliminary basis, we are fine-tuning our earnings model to better reflect the company's revised balance sheet and growth outlook. Key changes to our model include:
1. Increased estimated revenues to just over a half a billion dollars in FY99, approaching $1 billion by FY02. We think there is upside to our target top line growth rate, potentially brought about by mergers and acquisitions with sizable infrastructure services companies in the United States and abroad (i.e., $500MM+).
2. Expanded gross margins to 22.5% by FY02 to account for a heightened focus on higher margin infrastructure projects in the United States and abroad.
3. Cut G&A expenses from 8 *% to 6 *% due to planned elimination of overhead and an increase in productivity from the company's existing employee base.
4. Tweaked depreciation and amortization to 2% of revenues to reflect negative goodwill from the purchase of MFS-NT.
5. Reduced debt to roughly $20MM by FY02 to reflect new management's conservative stance towards the company's capitalization and intent to clean up ABTE's balance sheet so that the company can better bid on substantial projects of $100MM+.
6. Lowered estimated minority interest as a % of revenues to better reflect the diminished contribution of ABTE's foreign joint ventures to the company's financial model.
7. Increased shares outstanding to roughly 25MM by FY00 to reflect the recapitalization of ABTE and conversion of the company's $10MM high yield notes and $18MM series B preferred shares into common equity.
COMPANY HAS SUBSTANTIAL REVENUE AND EARNINGS POWER
Our revised model predicts strong growth in revenues and earnings for ABTE during the next few years. Given the company's planned focus on higher margin projects, planned increase in recurring revenues, movement into hyper-growth international markets, planned streamlining of overhead, anticipated elimination of debt and eradication of the company's convertible preferred shares, we believe ABTE can experience multiple expansion during the coming years that will add momentum to the company's equity valuation. Therefore, we are raising our multiple on forward EPS from 15x in FY99 to 17.5x in FY02.
RECOMMENDATION
· Against this backdrop, we reiterate our "TOP PICK" rating on ABTE.
· We recommend that investors buy ABTE common shares aggressively at current levels to benefit from potential confusion over the company's planned recapitalization.
· We are comfortable with our 4Q98 revenue and EPS estimates of $101MM and $0.22, respectively.
· We expect the company to report 4Q98 financial results by February 13, 1998 and see no red flags in its delayed 10-K filing. In fact, we view the delayed release of audited financials as a unique buying opportunity for savvy investors in tune with the substantial opportunities in front of the "new" ABTE.
· We are raising our near-term target to $19 from $18, representing 15x our revised FY99 EPS estimate of $1.29.
· We are raising our 12-month price target to $26 from $23, representing 15x our revised FY00 EPS estimate of $1.62.
· Further, we are initiating a two to three year price target of $50, representing 17.5x our revised FY02 EPS estimate of $2.86.
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