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Value Idea Contest: RRsat Global Communications

December 11, 2012 | About:
Mark Lin

Mark Lin

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Headquartered in Airport City Israel and listed in 2006, RRsat Global Communications Network Ltd. (RRST) provides global, end-to-end, content management and distribution services to the rapidly expanding television and radio broadcasting industries, covering more than 150 countries. Through its RRsat Global Network, composed of satellite and terrestrial fiber optic capacity and the public Internet, RRST provides high-quality and flexible global distribution services 24/7 to more than 640 channels reaching multi-platform operators, Internet TV and direct-to-home viewers worldwide. More than 130 television and radio channels use RRsat’s advanced production and playout centers comprising comprehensive media asset management services.

Valuation and Financial Analysis

RRST is currently trading at a trailing 12 months P/E of 22.64 and a trailing 12 months EV/EBITDA of 4.20. Its current P/B valuations at 1.29x represent a 44% discount to its five-year average P/B of 2.31x. RRST achieved a ROE of 8.8% for the past 12 months and a five-year average ROE of 12.8%. RRST has been profitable in every single year in the past decade. RRST is debt-free, with net cash of $36.9 million representing 34% of its current market capitalization of $108.8 million.

Besides its huge net cash balance on the books, RRST benefits from consistent positive operating cash flow and negative 37 days working capital as of Sept. 30, 2012. RRST's business model allows it to operate with negative working capital, because it receives significant deferred income in the form of customers advance payments and deposits approximating the last one to three months of long term service agreements with customers. Also, its maintenance capex in the range of $6 million to $8 million per year from 2008 through 2011 was mostly backed by contracts.

Business and Financial Risks

Customer concentration is not an issue for RRST, as it has a diversified revenue mix, with its largest customer and top 10 customers accounting for 5.4% and 21.6% of revenues, respectively.

RRST leases transmission capacity instead of owning its own fleet of satellites or fiber network, in order to minimize capital expenditures, and reduce potential risk of underutilization of capacity in its network. Also, RRST is generally required to commit to lease satellite capacity on a long-term basis, typically longer than the corresponding commitment that it obtains from its customers. Furthermore, it currently leases 14.9% of its satellite transmission capacity pursuant to preemptible leases, meaning that it has to obtain capacity on other satellites, in the event that the satellite fleet operator preempts its transponder. RRST's continued success is dependent on its ability to balance its supplier and customer capacity commitment.

RRST relies on the Inmarsat satellite network to provide mobile satellite services. These services on the Inmarsat satellite network are provided pursuant to an authorization granted to RRST under a Space Segment Access Service Agreement and a Network Services Distribution Agreement. The agreements, which RRST signed in March 2009, remain in effect unless terminated by Inmarsat with a prior notice of at least two years, with a minimum term ending April 14, 2014. Also, Inmarsat announced a reorganization plan in January 2012, to include its subsidiary companies within a new organizational structure, which will provide direct and indirect distribution of services under the Inmarsat brand name. RRST's current and potential customers may prefer to procure services directly from Inmarsat, rather than from a vendor for Inmarsat services such as RRST.

Business Quality and Capital Allocation

RRST's business possesses significant barriers to entry. New entrants will have to procure a critical mass of transponder capacity on multiple satellite platforms and negotiate with multiple suppliers. In addition, given that the nature of RRST's business entails a lengthy sales cycle, typically 3 to 12 months before a customer commits, the new entrant will incur a substantial long-term financial commitment for the capacity, without any assurance of revenues.

RRST has a stable and predictable business model, with $87 million of 2012 revenues and $74 million of 2013 revenue already covered by backlog. Most of its customers have entered into long-term contracts with RRST, with it having a contracted backlog totaling $184 million through 2027. It also benefits from high contract renewal rates typically exceeding 75%. There are also high customer switching costs for its customers, as they are dedicated to transmission frequencies and/or transmission encryption unique to RRST's network.

RRST's core business is riding on the growth in global satellite video transmission and HDTV set-top boxes penetration. Euroconsult forecasts 5,000 new TV channels should be launched between 2012 and 2021, with new standards such as HD, 3D and Ultra-HD supporting growth. HDTV penetration is also expected to reach 500 million households, three times the current capacity, by 2016.

RRST sees growth opportunities in the occasional use market and has recently acquired SM2 Sports & Media Solutions, a U.S.-based premier provider of occasional use international sports distribution and syndication services in November 2012. RRST currently offers occasional use services for sports, news and events with a fleet of flyaways and over 10 transportable satellite news-gathering services units, this currently contributes only less than 5% of RRST's revenues versus 15% to 30% in its main competitors.

RRST initiated dividends in 2008 and currently sports a dividend yield of 5%.



Conclusion


RRST is attractively priced at 1.29x P/B, a 44% discount to its five-year average P/B of 2.31x. RRST's net asset value is backed by a significant net cash balance of $37 million representing 34%. of its current market capitalization. Management has clear visibility of revenue streams, with $87 million of 2012 revenues and $74 million of 2013 revenue already covered by backlog. Besides riding on the secular growth in global satellite video transmission, RRST is also actively expanding its occasional use services, which is part of the $3 billion video contribution global market expected to double in 2020. RRST's gross, operating and EBITDA margins, as of the third quarter of 2012, are at their highest in two years, boosted by falling average transponders capacity fill rates and corresponding lower lease rates.

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Mark Lin
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