... Anyone analysing this one at the moment?
I have traded in and out of this name a couple of times. A look at the recent FY 2018 earnings has gotten me interested again.
In the 2018 earnings release, management reported that it was eliminating the dividend. It also reported that it had reduced total debt from $43.5 million to $25.6 million. Less cash on the balance sheet, net debt stands at $14.8 million.
PRT's FY 2018 free cash flow was around $29.3 million. On an enterprise value of $100 million, that's a free cash flow yield of nearly 30%. On the equity, it's a free cash flow yield of 34%.
With the dividend eliminated, PRT can quite comfortably apply this free cash to completely paying off its debt in 2019? PRT's management has not said that this is what it plans to do. But it is clear from the fact that the board has eliminated the dividend that management and the board have made deleveraging the business a priority. What is this going to do to the equity?
The market values PRT's equity presently at $86 million. Free-to-air broadcasting is a declining business. The future looks even bleaker for a rural broadcaster like PRT. But the fact that free-to-air broadcasting is a declining business doesn't mean that PRT won't throw off generous amounts of cash in the meantime. It just means that trying to predict PRT's future cash flows will be accompanied with a degree of uncertainty. The question is: can we make allowance for that?
Just say PRT's free cash flow declines by 15% for the next 3 years. Say also that over that period PRT pays down each year $4.93 million of debt so that by the start of 2022 it is debt-free. Assume maintenance CapEx remains stable at around $3.6 million annually.
At the end of the 3 year period, PRT has returned to you over $47.5 million (after principal payments) and left you with a debt-free business that, at the start of 2022, continues to throw off $16.3 million in free cash.
The present value of $47.5 million + $16.3 million at a 15% discount rate over 4 years is $36.5 million. On an initial investment of $86 million (PRT's market cap as at the close of 14 September 2018), that is a 42.4% return. Less the free cash returned to you by the end of year 4, your $22.2 million principal is still earning $13.9 million in free cash or a 62% return.
The bottom line is that PRT eventually turns into a cash cow - a slowly dissolving cash cow, admittedly, but a cash cow nonetheless.