jebmo’s posthaven

Background:

Townsquare Media (NYSE:TSQ) operates in two segments - Local marketing solutions (radio) and live events. It owns and operates 317 radio stations in the US as of last 10-Q, which generate around 65% of the company's revenue YTD. What makes TSQ unique is that it focuses on small and mid-size markets for its radio business where it can operate with less competition. Its largest market is Albany with a population of roughly 500k, but most of its stations operate in markets with populations in the 20-50k range. Their radio station business is highly cash generative and has yielded consistent and steady growth (up 3.5% YTD ex-political).

Why does this opportunity exist?

Townsquare Media's heavy debt load steers away many risk-averse investors. With a market cap of 214 million (assuming diluted shares), the company has long-term debt of 631 million, including operating leases. Though management has spoken about reducing its debt load in the past, it has been slow to deliver.

Live events business has struggled YTD with revenue down 7 percent and will most likely end up struggling in 4th quarter as well due to customer fears after the Las Vegas tragedy. On top of this, Congress's actions restricting H-2b visa program hindered margins for live events business, as TSQ is reliant on foreign workers for some of their operations. This resulted in management having to find some shorter term solutions so they could staff their events.

So what's the good news?

The risks of heavy debt load may be somewhat overblown. TSQ is highly cash generative and pays a reasonable weighted average interest rate of 5.4% on its debt. Moreover, the company is targeting a net leverage position of around 4.0x Adjusted EBITDA, which is more than achievable should EBITDA rise back to its previous levels and beyond in 2018 and 2019. The slow paydown of the debt load is very much due to management finding lucrative acquisition opportunities in the past, which it seems it is easing up on for the moment.

The company is cheap - subtracting capex, rent expense, cash interest, and cash taxes from Adjusted EBITDA results in a trailing FCFE yield of ~20% at current levels and though Congress's visa actions may remain in place, much of the margin decline was due to the company having to find shorter term solutions to the new visa restrictions. With more time to prepare, we can expect the company to boast slightly higher margins than before, but not at the same level as prior to the H-2b visa restrictions.

In recent calls, management has discussed possible divestitures from the live events business. Contrary to what seems to be popular opinion, I believe this is a positive step for the company. While radio stations are steady cash generating machines, the lower margin live events business is seasonal and can be adversely affected by things like weather and changes in customer preferences and trends. The company has even gone as far as to name two Co-CEOs (one in charge of each segment), thus increasing the gap between the live events and radio business even further. However, seeing as TSQ runs over 550 live events, they will most likely be strategic about which ones to divest from. I highly suggest listening to the last earnings call, as it even looks like some analysts and funds are waiting for more details on these divestitures before taking a position.

According to the last earnings call, management may also start paying dividends in the back half of 2018. Though this makes little difference to me, many investors simply expect dividends from companies operating in mature industries like radio. However, this will be dependent on the company meeting its leverage target, which, with strategic divestitures, I believe is very likely.

Valuation

Note: All references to EV or Adj. EBITDA assume the capitalization of operating leases and the addition of rent expense to EBITDA. Also, all ratios and valuation assume diluted shares of 28.221 million.

The company currently trades at an EV/Adj. EBITDA multiple of 6.1. This is hardly justified for a highly cash generative company. Though I believe this is because of the riskiness of their live events business as well as their debt load. Assuming TSQ ends 2017 with a 1% decline in revenue growth and 21% Adj. EBITDA Margins (which is well below the average of around 25%), I believe the company will end 2017 with Adjusted EBITDA of around 107 million (adding back rent expense) and economic FCFE of around 26 million. This leads to a FCFE yield of around 12% for 2017. Using an 8x EBITDA multiple, we get a valuation of $10.5 per share - 41% upside from current levels. TSQ has significant NOLs, so free cash flow may be a better valuation method.

However, I believe the real magic happens in 2018/2019 with either the divestiture or turn-around some of the company's live events. I believe Adjusted EBITDA margins can get back up to at least 23% even without many divestitures and zero sales growth. This can lead to Adjusted EBITDA of over 117 million in 2018-2019 along with 35 million in FCFE (forward yield of 16%). If we assume a very modest reduction of net debt to 530 million (vs. 578 million, including operating leases) and an 8x EBITDA multiple gives us a share value of $14.20 - a 91% upside.

Be aware that due to its high leverage, the share price is very sensitive to the EBITDA multiple chosen. Choosing a 7.5x multiple leads to a $12.20 valuation. However, I still believe that there is a significant margin of safety at these levels.

Catalysts

• Smarter capital allocation, dividend payments and divestitures of underperforming live events.
• Turnaround of live events business
• Debt paid down to more manageable level

Risks

• Further delay in debt pay down will also delay the initiation dividend payments
• Further short-term deterioration of live events attendance due to gun violence and/or terrorism
• Stock is volatile and low volume so it's easily knocked down by small sales

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Disclosure: I am/we are long TSQ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.