Trill Value

OTELCO, INC. March 1, 2019

C o mmu n i c a t i o n S e r v i c e s H e a d q u a r t e r s : On e o n t a , A L U S A Research Analyst:

S y mb o l : OT E L Current Price: $15.50 Wi l l i a m H o u s t o n
R e c o mme n d a t i o n : B U Y Target Range: $30-$60 Wi l h o u s t o n 5 5 @g ma i l . c o m

COMPANY STATISTICS
Market Cap ($ Mn): $51.68
Company Overview
Enterprise Value ($ Mn): $120.88
Otelco, Inc. (OTEL) is a telecommunications provider offering a full menu of business and
Avg Volume: 7,215
52-Week Range: $12.10 - $17.75 residential voice and data communications solutions like high-speed Internet, hosted
Dividend Yield: N/A business solutions and quality residential phone service, to rural America, now spanning
EPS: 2.76
seven states including Alabama, Maine, Massachusetts, Missouri, New Hampshire,
P/E: 5.53x
P/B: 4.74x Vermont, and West Virginia.
P/S: 0.78x
P/CF: 5.17x Market Position: Because their operations are mainly in rural areas, Otelco isn’t quite as
P/FCF 4.57x
susceptible to the big telecom powerhouses (Verizon, AT&T, etc.,) as other small telecom
EV/Revenue: 1.83x
EV/EBITDA: 4.83x companies.
Return on Equity: 152.58%
Return on Assets: 9.70% Turnaround Effort: After exiting Chapter 11 Bankruptcy in 2013, Otelco has been
Profit Margin: 14.33%
successfully de-leveraging and paying back their loans. From the 4Q in 2016 to the 4Q in
Operating Margin: 26.93%
Current Ratio: 1.23 2018, Otelco has reduced their leverage ratio from 3.48 to 2.90, a reduction of $12.4 million
Debt/Equity: 669.70 of debt in fourteen months. If they get their leverage ratio below 2.5 before the end of this
BVPS: 3.22
year, (and I expect they will) they will get more flexibility with their CoBank Credit agreement
% Held by Insiders: 39.09%
% Held by Institutions: 11.90% in 2020.

Source: Yahoo Finance

ACAM Funding: A 2016 FCC order to preserve and advance services in areas served by

rate-of-return carrier and drive rural broadband expansion. This allows Otelco to grow faster

for much less money, funding will go through 2026.

Large Shareholder: An investor named Ira Sochet, owns approximately 34% of the

company, and has not stopped his accumulation of shares.

 Page 2 Otelco, Inc.

Investment Thesis

I rate Otelco, Inc. (OTEL) as a Strong Buy with a Target Price Range of $30-$60. My recommendation is driven by the following

key points:

• Trading Far Below Intrinsic Value – Based on several previous telecom mergers and acquisitions, I have calculated the fair

share price of OTEL to be more than double the current price that its shares are trading at. More on this in the ‘Valuation’

section. Additionally, this stock is perceived as an “melting ice cube” (an old company in a slowing industry, in this case the

landline phone company business). However, the CEO has already committed to saying all new construction will be on fiber

lines, not copper, this means that Otelco is becoming a high-speed broadband company and moving away from their slowing

business of years prior.

• Successfully Making a Comeback Run – If OTEL can continue to make progress on their turnaround plan, and pay off debt,

they will soon be able to shift their focus to getting their falling revenues and earnings back up. Additionally, they will be allowed

to pay a dividend. Again, they will need to cut their leverage ratio to 2.5 by the end of this year, to open up more possibilities.

• Diamond in The Rough – In a world where almost every stock is relentlessly analyzed, it’s nearly impossible to find good

companies trading at a discount to their book value, NCAV, NNWC, etc., Additionally the loopholes in modern accounting

certainly don’t help. You will be very disappointed if you try to find good companies that are trading at a discount to some

valuation metric by using a screen, as investing is much more difficult than just generating lists of stocks that meet certain

parameters. For the most part I have found that companies are cheap for a very good reason, especially when in a bull market.

However, occasionally you can find companies with hidden assets that aren’t reflected in their balance sheet. In the ‘Valuation’

section I will dive deeper into this.

• Potential for Acquisition – The telecom sector has seen rapid consolidation over the past few years, unfortunately for Otelco,

their bankruptcy kept them from participating as no one wanted to make an offer. But since then, they have rapidly improved

financially and are close to becoming an attractive acquisition target. As they continue to de-leverage, they should begin to gain

some attention from analysts and firms. More on this in the ‘Potential Catalysts’ section.
Otelco, Inc. Page 3

Potential Catalysts

• Acquisition – Expected Time (Six months – Two years) As I briefly mentioned before, the telecom sector is under rapid

consolidation, and likely will be for the foreseeable future. As Otelco continues to pay off their debt, it would be logically to

assume that every day, Otelco, looks more and more suitable to possible buyers. I believe that it will take at least 6 months

for them to become a suitable option for buyers, and I expect that if they are interested in being bought out, that such an

acquisition shall take place in no more than two years from today’s date.

• Dividend Announcement – Expected Time (One year – Three years) Due to Otelco’s restructures credit agreement, Otelco

is allowed to distribute dividends and/or stock buybacks up to a maximum of $1.25 million dollars in 2018 and 2019. Under

the old agreement, Otelco wasn’t allowed to pay a dividend at all, so this news was perceived as good. However, it is

unlikely that Otelco will pay a dividend any time soon, as their main priority is to reduce debt. While they could announce a

dividend at any time, I believe it is most likely that they will wait to do so until 2019 at the earliest. I think it is wise for the

company to wait until 2020, but I don’t see them waiting any longer than 2021. As the dividend will increase interest in the

stock, driving the price up.

• Big Money Interest – Expected Time (One year – Three years) As Otelco becomes healthier, they will not only attract

buyers, but also bigger investment firms. Currently, there are some shares are held by institutions, but there’s plenty of room

for more. If big money moves into the stock, then of course the price will go up. For this to happen I believe that Otelco will

need to further reduce their debt, which they are clearly focused on doing.

• Ira Sochet – Expected Time: (N/A) Assuming Ira continues to buy more shares of Otelco, at some point you have to think

that he will enough shares to take the company private, should he want. Even if he doesn’t want to do this, he has the power

to make sure that any acquisition deals are fair for shareholders, as its in his best interest to do so. At the very least his large

and growing stake in the company shows a big vote of confidence.

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Valuation
My target price range for Otelco, is $30 - $60, which represents a minimum of almost 100% upside from the current share price.

Here is how I got to this target:

Valuation analysis: To show how I came up with my valuation for Otelco, I am going to using the value of Otelco’s ‘fiber route

miles’, essentially these are the miles of fiber lines that Otelco owns. The reason I decided to value Otelco this way was because I

saw other companies in the industry being acquired for sums based on their fiber miles.

For example

• In 2016, Crown Castle bought FiberNet for $1.5 billion in cash, FiberNet had approximately 11,500 route miles of fiber.

Simple math tells us that FiberNet sold to Crown Castle International for a little over $130,000 per route mile

• In 2017, Uniti bought Southern Light for $700 million, Southern Light had 5,700 fiber route miles. Again, some quick

calculations show us that means that Southern Light sold to Uniti for $121,000 per route mile

So, to use these examples as a way of valuing Otelco, I needed to find out how much of these fiber miles Otelco had. To do so I

looked at their latest Q3 presentation which said they had 2000 miles of fiber. Now, when looking at the two examples before this

paragraph we can take the most conservative estimation of $ per fiber mile which is $121,000 and see that with that valuation,

Otelco’s fiber miles are given a $242 million valuation. Now if you take out the long-term debt ($75M) you get $167M. Then we

divide that by the # of shares outstanding (3.39M), and we get an approximate price per share of $49.26. In comparison the, stock

currently trades at only around $15.55 per share. In other words, a valuation of this company based on nothing, but their fiber miles

and debt shows Otelco to be undervalued by more than 100%.

Of course, the big caveat here, is that we used a price per fiber mile from a previous acquisition, so who really knows what one

would pay for Otelco’s fiber miles, but I doubt that different company’s fiber miles vary too much in value.

Another way that companies have been valued in acquisitions in this industry is by their revenue.

For example

• In 2016, Consolidated Communications sold its subsidiary, Heartland Telecom, to two other companies for $22.5M,

considering Heartlands revenue was $7M, this shows that the buyers valued Heartland at about 3.2x revenue.

• In 2017, Again, Consolidated Communications, decided to sell another part of its business, Peoples Mutual Telephone

Company, this time to River Street Management Services for $21M. Considering PMTC had $6.5 in revenue, we see that

the buyer valued them at about 3.2x revenue.

Otelco, Inc. Page 5

Valuation (Continued)
To value Otelco using the previous revenue examples, I found Otelco’s revenue ($66.66M) and multiplied it by the revenue multiplier

from the previous two examples (3.2x), which equals $213M. Then, just like in the fiber mile valuation technique, we take out the

$75M in debt, getting us a total value of $138M. Dividing the total value by the 3.39M shares outstanding, we get about $40.70 per

share. Which again, is a price point that is over 100% of Otelco’s current price.

One thing to keep in mind is that the two valuation methods we have used only work if Otelco is going to be acquired. While I think

there is a good chance that this happen, it is not a given. So, to present a fairer evaluation of Otelco, below I have compared the

company to its peers with the EV/EBITDA multiple, a very common multiple used in stock evaluation

Here is the table that shows the EV/EBITDA of Otelco’s competitors, the groups average, and how Otelco stacks up.

(Remember lower # = more value)

Ticker EV/EBITDA
ALSK 4.26
WIN 5.40
CBB 7.56

ATNI 7.34
CNSL 6.54
SHEN 11.11
LICT 5.99
NUVR 7.52
AVERAGE 6.96
OTEL 4.83

As you can see based on EV/EBITDA, Otelco is far more undervalued than all but one of their peers, this strengthens the accuracy of

our valuation results from Section 3.

Lastly, something that I find very interesting is that Otelco’s sales ($66.10M) far exceed their market cap ($51.68M). There’s not a lot

of companies out there that can say they bring in more revenue than the total value the market is valuing their company at.
 Page 6 Otelco, Inc.

Investment Risks
When investing it is important to keep in mind that there are always risks, while risks can vary in severity and type, anyone who

tells you an investment is ‘risk free’ (unless they are talking about government backed treasury bills), is a lying fool.

There are innumerable amounts of risks in all stocks, and I am not going to write an entire novel detailing and describing every

single risk, instead I’m going to mention the risks, that in my opinion, are the most important at this time. Of course, if you are

going to invest in Otelco, or any security, you should go through the company’s SEC filings, where they are required to list the

biggest risks to their business in great detail.

• Debt Load – Otelco’s debt, is, in my opinion, the single biggest risk to shareholders. It is the reason why Otelco hasn’t been

able to focus more of their time and money on improving their declining revenues and earnings. While I think the company is

and has been taking impressive steps in the right direction, it is clear that there is still a lot of work to be done. To more clearly

explain and describe the specific ways that I think Otelco could be hurt by their debt risk, I have included below the two

scenarios that I think are most likely to happen in the next couple years. Both scenarios would negatively affect companies

with lots of debt, like Otelco.

o Rising Interest Rates – With the economy in the last innings of one of the longest bull runs in history, it seems

likely that the economy is due for a downturn at some point in the next few years. With that being said it is very

likely that the fed will increase rates at least a few times in preparation for the recession. It’s hard to forecast the

rate hikes for the current fed, as they keep changing their mind on what they want to do. However as of today,

they have projected at least three rate hikes before the year 2021. This is meaningful because rate hikes will

make it harder for them to pay back their loans. In my opinion, I believe a recession will likely happen before the

year 2021 anyway, meaning that when the recession does happen, The Fed will have to lower rates. But it is still

almost certain that they will have to raise interest rates at least a little before a recession has the chance to

come. As long as Otelco continues to prioritize debt payoff they should be able to survive the rate hikes, but

there is no guarantee.

o Recession – Otelco’s business operations are impacted by the state of the economy just like almost all other

companies. In an economic downturn, consumers have less money to spend and this ends up hurting

businesses. Otelco is no exception to this and their revenue and earnings will be impacted by a recession. While

this is a pretty bland and general risk, I think it is important to include because many economists are speculating

that the next recession will be caused by the massive amounts of debt held by our country’s companies. They

think that when loans get harder to pay back, and the era of easy money fueled by post Great-Recession

quantitate easing, ends, that many of the overly leveraged companies will find themselves in a big hole that they

may not be able to dig themselves out of.

Otelco, Inc. Page 7

Valuation Extras
Peer Comparison

To show another example of just how undervalued Otelco is, below is a comparison of Otelco and another company in their
industry:

Metric (FY 2018) Company A Company B (Otelco)

Revenue $65.3 Million $66.1 Million
Net Income $8.8 Million $9.5 Million
EPS $1.69/share $2.76/share
Dividend $0.12/share No Dividend
Debt $66.2 Million $73.01 Million

Now based on those metrics you would probably think that the two companies would be valued at around the same
valuation....right?
Well, instead the market cap of Company A is almost double (over $47 Million) the market cap of Company B (Otelco). Sure,
company A pays a dividend and has less debt, but all things considered, the valuation discrepancy between the two seems
ridiculous. I should also mention that Company A, looks undervalued as well, making Otelco seem very undervalued.

Interesting Opportunity

Despite the incredible gain in stock price Otelco has had over the past few years (225% over the last three years), things went
slightly south this year. As the stock ended the year slightly down. And that simply makes no sense to me. For example, here
is where Otelco is this year compared to last year:

- $11.4 Million less debt

- $1.9 Million more EBITDA
- A Cash Balance of $1 million higher than last year
- Will receive $92k more funding from CAF II, that they didn’t get last year
- New operating and billing system estimated to save $750k/year
- Will receive a much higher dividend from CoBank than they did last year ($0.2 Million)

It just amazes me that you can pay a little less for shares now than you could last year, as the company has clearly gotten
more valuable.

Final Thoughts

I have no idea if the market will ever come to their senses on Otelco, and if they do, I have no idea on when that will happen.
But I do believe, through my extensive research and analysis, that Otelco is trading for cents on the dollar. That doesn’t mean
Otelco will be a good investment, but I believe, after my in-depth research, that this is a real value opportunity and not a value
trap.

Read Disclaimer
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Disclaimer
I do not provide personal investment advice and I am not a qualified licensed investment advisor. I am an amateur investor. All

information found here, including any ideas, opinions views, predictions, forecasts, commentaries, suggestions, or stock picks,

expressed or implied herein, are for informational, entertainment or education purposes only and should not be constructed as

personal investment advice. While the information provided is believed to be accurate, it may include errors or inaccuracies. I will

not and cannot be held liable for any actions you take as a result of anything you read here. Conduct your own due diligence or

consult a licensed financial advisor or broker before making any and all investment decisions. Any investments, trades,

speculations, or decisions made on the basis of any information found in this report, expressed or implied herein, are committed at

your own, financial or otherwise.