Author Topic: ASCMA - Ascent Capital Group Inc  (Read 8153 times)

A Dhandho Investor

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ASCMA - Ascent Capital Group Inc
« on: February 28, 2014, 02:49:08 AM »
This one has been covered in the May 2013 version of Value Investor insight and is one of the ideas of Murray Stahl (you can find the exhibit attached to this post).

It is a holding company that was spun from Discovery Holding in 2008 and currently owns 100% of Monitronics, the second largest US home security company, after ADT.

Positives:
  • Involvement of John Malone (capital allocation)
  • The home security market is fragmented -> room for growth
  • Valuation: 8*FCF - 9* EBITDA

The stock has had a sellof recently after ADT releasing bad Q4 2013 results, but recovered yesterday after releasing solid Q4 results:

http://www.ascentcapitalgroupinc.com/pdfs/Ascent_Q4_Release_2_26_14_FINAL_405_pmET.pdf

Any thoughts?


prevalou

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Re: ASCMA - Ascent Capital Group Inc
« Reply #1 on: February 28, 2014, 03:02:02 AM »
Steady state free cash flow is not very high because of the cost to renew customers (not to forget this cost in any analysis). I think steady state free cash flow is 50/60 m$ after interest expense, compared to 1 B$ market cap.

mountboney

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Re: ASCMA - Ascent Capital Group Inc
« Reply #2 on: February 28, 2014, 06:05:52 AM »
I've been looking for short opportunities and one idea is home security.  DIY web based systems can be purchased for $300-400 that send instant notification via web or text.  Maybe not for everyone but the damage to margins for the contract based providers is a significant risk.

Phaceliacapital

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Re: ASCMA - Ascent Capital Group Inc
« Reply #3 on: March 04, 2014, 12:12:56 AM »
So for players like ADT and Ascent the bear case is that: Competition from DIY systems will hurt margins and/or sales?

What kind of moats are we looking at for the existing players?

- Switching Costs?
- Brand name?
- Low cost producer?

And maybe extra competition from Cable/telco companies?

http://rt.com/usa/telecom-home-security-companies-503/ (dated article)


The harder you work, the luckier you get.

Picasso

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Re: ASCMA - Ascent Capital Group Inc
« Reply #4 on: October 03, 2014, 10:32:55 AM »
Hey guys I have been trying to wrap my arms around this Malone spin-off.  Here's what I have:

4% market share in a highly fragmented market of home security (Monitronics is the actual subsidiary).  They employ a dealer based model so this a very capital light business model where they pay to acquire subscribers through dealers and acquisitions. 

On a trailing 12 month basis (in millions):

325.8 of EBITDA
- 102.5 interest
- 2.8 taxes
---------------------
219.70 cash from operations

Okay so now you've got some churn on the subscribers.  They are doing a 12.3% churn rate as of last quarter.  Based on the last quarter, they have 1,056,106 accounts.  They pay about $1400 to acquire customers, so let's say $181 million of churn cost. 

So we're left with let's say $40 million of free cash flow. 

13.7 million shares at $62 is a $850 million dollar market cap producing a 4.7% free cash flow yield.

This is where I get a bit curious because you have a lot of movement in the free cash flow based on the churn rates.  If you move up to a 15% churn, I get basically no free cash flow.  Unless some of my numbers are off such as the interest expense.

Any investors in ASCMA?  There are risks in the Telco's going after their market but their churn rates seem to have stablized more so than ADT.  I am trying to get a better idea of the steady state free cash flow.

Thoughts would be helpful, thanks.

Ham Hockers

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Re: ASCMA - Ascent Capital Group Inc
« Reply #5 on: October 03, 2014, 10:49:49 AM »
Hey guys I have been trying to wrap my arms around this Malone spin-off.  Here's what I have:

4% market share in a highly fragmented market of home security (Monitronics is the actual subsidiary).  They employ a dealer based model so this a very capital light business model where they pay to acquire subscribers through dealers and acquisitions. 

On a trailing 12 month basis (in millions):

325.8 of EBITDA
- 102.5 interest
- 2.8 taxes
---------------------
219.70 cash from operations

Okay so now you've got some churn on the subscribers.  They are doing a 12.3% churn rate as of last quarter.  Based on the last quarter, they have 1,056,106 accounts.  They pay about $1400 to acquire customers, so let's say $181 million of churn cost. 

So we're left with let's say $40 million of free cash flow. 

13.7 million shares at $62 is a $850 million dollar market cap producing a 4.7% free cash flow yield.

This is where I get a bit curious because you have a lot of movement in the free cash flow based on the churn rates.  If you move up to a 15% churn, I get basically no free cash flow.  Unless some of my numbers are off such as the interest expense.

Any investors in ASCMA?  There are risks in the Telco's going after their market but their churn rates seem to have stablized more so than ADT.  I am trying to get a better idea of the steady state free cash flow.

Thoughts would be helpful, thanks.

I used to own.

Your per-customer acquisition cost looks too low. I think they have historically paid around 36x recurring monthly revenue and RMR has been in the mid-$40 per account.

The Security Networks acquisition was at an even higher multiple. I think it was 58x. Granted, they had some explanation for the premium (the reason they gave escapes me, right now) but it was not cheap.

I bought in 2011. Acquisition costs ticked up, churn rates ticked up (yes, maybe life-cycle effects, but still) so my estimate of steady state FCF kept going down and the economics of the business kept looking worse. Also, I would guess that in a strong employment recovery, with people moving more often, that loss rates continue to increase.

Picasso

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Re: ASCMA - Ascent Capital Group Inc
« Reply #6 on: October 03, 2014, 11:00:17 AM »
So at a 12.3% churn rate, we are looking at about $10 million of free cash flow at a $1600 cost.  If churn moves up to say 15% at a $1400 cost, you get no free cash flow.

I would think that the cost per acquisition would actually drop if churn rates move up.  The last conference call I looked at, it seemed they were still buying from dealers at $1400. 

I think if I were to get interested the convertible bonds look more interesting from a risk management standpoint.  6.3% yield to 07/15/20 with a 102.80 conversion price.

Thanks

Ham Hockers

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Re: ASCMA - Ascent Capital Group Inc
« Reply #7 on: October 03, 2014, 11:11:28 AM »
So at a 12.3% churn rate, we are looking at about $10 million of free cash flow at a $1600 cost.  If churn moves up to say 15% at a $1400 cost, you get no free cash flow.

I would think that the cost per acquisition would actually drop if churn rates move up.  The last conference call I looked at, it seemed they were still buying from dealers at $1400. 

I think if I were to get interested the convertible bonds look more interesting from a risk management standpoint.  6.3% yield to 07/15/20 with a 102.80 conversion price.

Thanks

I have it at closer to $1600 per acquisition, but that's not really important, what's important is the multiple paid, because that's what you're going to use to figure out replacement cost anyway. They've always been close to 3 years worth of RMR, and on the last conf call they confirmed it was ticking up from the 35x they paid on average during the prior year.

fisch777

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Re: ASCMA - Ascent Capital Group Inc
« Reply #8 on: October 03, 2014, 12:30:35 PM »
Management uses an 11.5% "full-cycle" RMR churn, which they note is less than unit churn since pricing has generally trended upwards.  This makes some sense to me, as on average, you are likely churning older customers (ie those out of contract), so those customer RMRs you are churning on the margin are likely less than the average RMR across the portfolio.  So, it would effectively take fewer new subscriber units (at higher RMR, with advanced features, etc) to replace the churn.  This is a steady state analysis, after all.

If you use TTM earnings you should probably use an average of the subscriber base over TTM, as the current sub number is what will churn over the next 12 months.

Management has been pretty adamant they are seeing <zero> effect from new telco competition on the last 2 calls (after ADT warned about increased competition driving marketing spend, etc).

Regarding pace of disconnections, ADT believes this is leveling off as the pace of house moves seems to have plateaued towards the end of 2013. 


Picasso

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Re: ASCMA - Ascent Capital Group Inc
« Reply #9 on: October 03, 2014, 12:45:50 PM »

If you use TTM earnings you should probably use an average of the subscriber base over TTM, as the current sub number is what will churn over the next 12 months.


Good point.  I notice they disclose monthly weighted average accounts of 1,014,902.  At a $1600 cost and 11.5% churn, this amounts to $187 million.  So $33 million of free cash flow which is not too far off from my original estimates since I had a lower cost but higher churn.  Each $100 dollars of cost reduction per subscriber is about $12 million of free cash flow.  There doesn't seem to be much room to wiggle when I compare it to someone like ADT at $1350.

The big thing is that churn rate.  I don't think you'll see a significant move lower in the churn, but it may move up.  A 14% churn can turn this cash flow negative. 

It makes me wonder if there is some NFLX like volatility in store for ADT or ASCMA where the stock got absolutely crushed when that happened.

It seems to me like you need to have a lot of trust in management.