TPC – Tel Pacific Limited

Investment Summary – Would you buy this business?
Pay 8.9 cents a share for the business and in return you receive

  1. 17 cents a share of cash plus you get
  2. A profitable business with long term growth potential

And then it gets better…….

The company pays you a dividend of 3 cents a share (33.7% dividend yield).

So your cost is now 5.9 cents a share and

  1. You still own your part of the business which now retains 14 cents a share in cash plus
  2. You still own your share of the same profitable business with long term growth potential.

The company
Tel Pacific Limited (ASX:TPC) main business had been the sale of prepaid telephone call cards for overseas phone calls typically to those unable to afford to make international calls on their home phone. Tel Pacific has been operating since 1996.

The company also has:
1. A couple of brands selling mobile phone contracts
2. A service called Mobile Real Time Monitoring; and
3. A recently signed agreement to distribute retail electricity and gas in NSW which kicked off in April 2014 under the brand name CovaU.

The management
Tel Pacific’s managing director is the founder Charles Huang who ‘started up’ the business while in his third year of university in 1996.

The company’s chairman is a guy named Greg McCann. Mr McCann is also the chairman of Moko.mobi Limited(ASX:MKB) an exciting business in the mobile social networking space which is attempting to list on the NASDAQ at present. Mr McCann is also a director of the NBN in Tasmania and appears to be quite a well connected and intelligent guy.

From my research, I can see that management, employees and directors of Tel Pacific own at least 55% of the company’s stock meaning they have plenty of skin in the game and good motivation to continue growing the business.

Upon selling the international calling card business, management declared a 3 cent dividend which in my view, shows they are acting in the interest of all shareholders.

The situation
When I discovered the company in November, the company was trading at 13 cents a share and my estimate of the company’s intrinsic value was 28 cents. Even with the main part of their business (pre paid international call cards) dwindling I thought it was a good proposition given their profitability and the potential for the new ‘energy’ side of the business with CovaU about to open its doors.

I started accumulating shares in this thinly traded stock on the 24th of December. By March the share price had fallen to 7 cents. For three weeks in March I was pretty much the only buyer of shares between 7 cents and 10 cents with our average price being 8.9 cents a share.

On the 24th March, the company announced the sale of the prepaid call card business for $19 million. The share price immediately shot up to 14 cents on this news. All of a sudden, the business has 17 cents per share in cash.

We have paid 8.9 cents a share. The company now has cash of 17 cents a share. The company has actually just gone ex-dividend paying a 3 cent dividend in May. So effectively after the dividend is paid our cost will be 5.9 cents a share and the company will still retain 14 cents a share in cash.

So, we have paid 5.9 cents a share. In return we own shares in an asset (Tel Pacific) that has 14 cents a share in cash plus an ongoing business with good long term potential.

The risks
The business has given up its most profitable division albeit a declining business.

However, Tel Pacific still retains:
1. The ongoing business selling mobile phone contracts (GoTalk and Hello Mobile brands)
2. The Mobile Real Time Monitoring which has a three year contract in place; and probably more importantly for the long term
3. CovaU which is the new business which begun supplying energy (electricity and gas) in NSW in April.

It will take time for CovaU to develop brand awareness and generate sales of their electricity and gas contracts to homes. However, growing off a base of zero will mean any growth will be significant. And, the company certainly has the financial resources and management to make this happen over time.

With at least 55% of the company’s stock held by directors and management , it means the stock is thinly traded and probably more suited (less risky) for those with longer term investment horizons.

The opportunities
I can see that Tel Pacific now have a number of great options going forward. They include and are not limited to:

  1. Growing the energy business CovaU in NSW which is the immediate opportunity
  2. Potentially expanding the CovaU energy offering by picking up agreements to supply gas and electricity in other states across Australia
  3. Opportunities to make sensible acquisitions in either the telecommunications and /or energy space
  4. Management have hinted in an announcement of potential capital management activities. A share buy-back for instance would increase the value of the company for all shareholders
  5. Continued payment of excellent dividends
  6. Or perhaps a combination of all of these options


Is it trading at a bargain price?

Based on my view of the business which retains 14 cents a share in cash, anyone buying below a 14 cent share price is effectively buying the business for free (or cheaper than free).

With a current market capitalization of about $11.8 Million and Cash of $15.2 Million, this makes Enterprise Value a figure of negative $3.4 Million. The negative figure implies that you are buying the business for less than free which I have never seen before.

The chart

Summary
In summary, Tel Pacific is a great little business that maintains stable recurring revenue from its mobile phone brands and mobile phone monitoring business and will begin to generate revenue in its emerging retail energy business. The company has savvy and connected management. And, it has the resource of a massive amount of cash on hand relative to the size of the business to continue growing the business and acting in the interest of all shareholders.

I would not be surprised if all shareholders continue to be paid dividends in the vicinity of 3 cents per annum meaning that The Edge Fund will likely be paid our remaining capital outlay (5.9 cents) within the next two years making our investment in Tel Pacific free at that time.

Sharing the love

At the current share price, we hold the right amount of shares based on our position sizing and risk management rules. So, while we see it as a no brainer to buy more shares, we may as well share our insights so that others can potentially benefit from fractional ownership in this business.

If the share price happens to fall below our initial average share price and we can buy a less than free business even cheaper, we will likely be a buyer thereby reducing our average cost. And, with a 33% dividend coming next week, we may reinvest this cash in the business in any case.


This article is published by Dean Mico.


Disclosure: The Edge Fund owns shares in Tel Pacific Limited.

In fact, The Edge Fund owns enough shares to be a Top 20 shareholder which is a nice little milestone for us as it is our first and hopefully the first of many Top 20 holdings.


The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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