In February I wrote a post detailing the situation at Sitestar (SYTE). If you didn’t read it, Sitestar is a micro-cap ($4M market cap) that was taken over by a couple of activist investors this past December. Most of Sitestar’s value comes from the 42 properties they own around the Roanoke, Virginia area, but they also have a legacy dial-up ISP business and they own the domain first.com. In the last post, I valued the company on a net asset value (NAV) basis somewhere in the range of 7 cents to 9.2 cents (current share price is 5.5 cents). Steven Kiel and Jeff Moore (the two activist investors) haven’t announced their plans for the company yet, but I think some kind of liquidation is one of the more likely outcomes. If a liquidation does happen, a discounted cash flow (DCF) is probably the best way to value the company.
I’ll start with selling off the ISP, the value of which will be determined under the following assumptions:
- Revenue decreases 20% in 2016, then 25%, 30% and 35%. Dial-up ISPs are a melting ice cube and I expect the rate of decline to speed up, not slow down (or level off).
- Operating expenses as a percentage of revenue will slowly increase as fixed costs take up a larger percentage of expenses over time. Eventually there is not enough revenue to spread the fixed costs over and the ISP will become unprofitable. Trailing twelve month ISP operating expenses are $600k and the below model assumes around $200k of those are fixed and thus the ISP would be unprofitable and shut down after 2019. This is of course a wild ass guess, but the ISP has scaled down nicely so far which is why I think fixed costs are a relatively small portion of the current expenses.
- 10% discount rate (numbers in thousands).
Bottom line, the above DCF values the ISP at $732k which is equivalent to $0.01 per share. However, if this division is sold off they won’t get the full $732k (the acquirer has to make money too). If someone paid $600k for this ISP and the above scenario played out, the acquirer would earn a 23% IRR which seems reasonable. So I’ll assume the ISP is sold for $600k tomorrow. Now let’s look at the rest of the business.
In my last post, I estimated the total real estate value could be as high as $6.4 million. I’m going to bump that number up to $6.8 million as I expect the repairs they’re doing on the homes will increase value.
The majority of corporate operating expenses have been removed as the former CEO and CFO are no longer there and I don’t expect the activists to take salaries. For a simple, small business like this they should be able to get away with paying someone part-time to handle their financials. I do think their audit fees will go up in the short-term as previous releases have to be restated. I also put in $50k total for legal fees as they’re pursuing former management about some issues (legal fees described more below).
Last but not least, first.com. While I’m hesitant to put too high of a price tag on this, after thinking more about it I do feel it’s worth more than I originally estimated. I use $300k below, but frankly, I wouldn’t be surprised if it’s worth over a million.
Altogether that puts a value on Sitestar today at $0.0781, or 42% above today’s price of $0.055. There are quite a few assumptions in the above valuation (duh!), a few of which I want to talk about a little more.
- Taxes. At yearend 2014 they had a $2.4 million valuation allowance against tax assets. You probably noticed I didn’t factor in any taxes in the above DCFs, but it’s certainly possible they will owe some. I’m not sure if those NOLs will be usable to offset all the assets (real estate, ISP, first.com) they need to sell.
- Legal fees. There was some shady stuff going on when Frank (former CEO) ran this company. Steven announced in his December shareholder letter that they hired legal counsel to investigate. Predicting the cost and length of legal battles is impossible. They could win a couple hundred grand from Frank if there’s a lot there. They could waste two years in legal fees and get nothing out of it. They could decide the amount of money is small enough that it’s not worth going after. Who knows. I’d venture to guess that the more time and money Steven and Jeff spend on legal fees the more confident they are in the outcome (maybe that’s obvious). They both have a lot of money tied up in Sitestar and they aren’t going to be chasing a long shot. If they end up spending a couple hundred k, I’d say there’s a very good chance of more than a couple hundred k coming back to shareholders.
- Real estate repair costs. The 2014 10-K stated the max repair cost on homes purchased was 25% of the estimated value. I estimated $300k in repairs total which is a little over $7,000 per property and far below the 25% number previous management stated as the max. This dollar amount could be way high or way low, but I’m not overly concerned about it. Jeff is a very experienced real estate investor, so even if they do spend more than expected, I assume those expenses will be reflected in higher sales prices down the road.
- First.com. Who knows what this is worth, but just to give you an idea, if it was sold for $1 million the above DCF would spit out $0.0867 (so an increase of 8.6 cents). If it sold for $150k the per share value would decrease to $0.0762.
- Timeline on all of the above. The DCF assumes the ISP and first.com are sold tomorrow and home sales start slowly ramping up later this year and are entirely sold off by 2018. The farther this stuff gets pushed to the right, the less it’s worth in today’s dollars.
While those are a lot of ifs and maybes, adjusting the DCF for them doesn’t change it as much as you’d think (besides taxes). If everything is fully taxed of course that’d be detrimental to the value, but I don’t expect that. Within reason, just about every way I value the company puts its worth between 6 and 9 cents (insert sex joke here). Overall, I’m comfortable saying there’s solid upside (though probably not a mutli-bagger or anything crazy) with limited downside. Having managers on my side of the table helps with that comfort level as well.