International Opportunities #3: Bahnhof AB - A private Internet provider?

Privacy as a business model

'This piece is an opinion and for information purposes only, and it isn't investment advice. Seek a duly licensed professional for investment advice.'

Housekeeping

Good morning fellow coffee-drinkers. Thanks for the feedback on my write-up of the Warsaw Stock Exchange. Since then, I have read the deep-dives from Swen Lorenz (undervalued-shares.com is a paid service which is well worth it) and from GlobalStockPicking (free, also great). If you are still interested in the Warsaw Stock Exchange, check them out; they go more into detail than I wrote.

Just like last time, the report is in no way a deep dive and needs much further investigation before investing.

As always, feel free to contact me on Twitter @InvestRoiss or leave your comment below. I am want to be long Bahnhof AB ( I requested market access via Interactive Brokers and they made it availiable to buy via the Frankfurt Stock Exchange, but there is no volume).

Bahnhof AB

It hardly happens that I come across a company and am amazed. Bahnhof is one of those. While its name is ridiculous (Bahnhof = Train station in German), it has all the things I look for as an investor:

• Small ($450m market cap)

• Extensive insider ownership (around 50%)

• Hard to buy (I had to request access on IB to buy on the Frankfurt Exchange as they won't let me buy it on the Swedish Spot Market)

• Uncovered and not researched (Not a single analyst covers them, and they only release their reports in Swedish)

• Long runway.

• A clear catalyst (uplisting on the Swedish OMX Midcap Exchange in the First Quarter of 2022)

• Activist stance toward privacy

Introduction

Bahnhof AB is a Swedish internet service provider and an operator of data centers founded in 1994. They take an activist role in favor of privacy, hosting the Wikileaks servers from 2010-2012 and routing and encrypting their customers' traffic over VPN to avoid the Data Detention Directive from the Swedish government and altogether boycotting China. Pionen is an impressive data center in an old converted nuclear bunker that looks awesome.

Business Overview

While the company has recently made more effort to get into the cloud business, its bread and butter is as an internet service provider. They are the only ones in Sweden to offer 10 Gbit internet, and they work together with real estate companies. They announced a new partnership with Fastighets AB, which real estate projects will create more than ten thousand tenants and commercial premises. 

Bahnhof won the Swedish quality index the third year in a row. However, Ownit, another Swedish ISP, has regularly bested them in terms of customer service. Swedish tech enthusiast on forums such as sweclockers agree, that Ownit and Bahnhof are the two best options. Many choose the cheaper option depending on their region, Ownit for customer service and Bahnhof for privacy. 

I wish that Bahnhof would prioritize improving the support, but the privacy reputation Bahnhof has built over more than two decades will be hard to replicate by any competitors.

At the end of 2020, they had 395,511 private customers and an increase of 38,000. In the half-year 2021 report, they mention 410,395. In the coming years, they will expand their broadband services into other areas of Sweden, such as Norrland, to further increase customer growth. 

Their B2B business is also growing to 1/3 of the sales for Bahnhof.

Through significant investments into their data centers like Thule to enable 25% more Rackspace, they are currently rolling out their cloud offerings to international customers. Those offerings include OpenStack, Kubernetes, and 3D Rendering. Cloud offerings are generally high margins. While the company doesn't offer any unique cloud features, its stance on privacy and secure data centers provide a compelling reason. 

Ownership, Financial and Catalyst

What I love about the company is the considerable insider ownership. The CEO Jon Karlung is the biggest shareholder via his company KN Telcom and his private shares. As a result, he owns over 50% of the company, with the remaining significant shareholders being small institutions or pension funds. 

The company doesn't dilute shareholders since 2013, outstanding shares have been flat. The company mainly finances its facilities with its funds and bank credits. They are acquiring plot rights and building permits for facilities in Stockholm's inner city.

The company has paid a dividend for 13 years. While a dividend isn't an investment requirement, it helps when evaluating the cash flow of smaller companies.

Since 2010 the company has increased revenues by at least 13% and net income by 8%, and has no debt.

While the company is not well covered, it is still far from cheap. With an EV/EBIT of 19x the LTM, it is not a company that would fall into a value basket. 

Telenor, Verizon, and AT&T are all trading around 12x EV/EBIT. While the difference is stark, those three are stagnating, while Bahnhof is still growing. Just as I wouldn't call Bahnhof AB cheap, I wouldn't call it expensive either. 

The company is currently carrying out its list change from the Spotlight trading venue to the Swedish OMX Midcap and expects to list there during the first quarter of 2022. It does so to gain more exposure internationally. While the up-listing requires more financial disclosures, I am confident that this will be positive for the company. 

Privacy Activism and ESG

Bahnhof has regularly taken an activist stance for privacy to the point that they even came under the lawmakers' scrutiny for the failure to store IP - Addresses in 2009. They also hosted the Wikileaks servers from 2010-2012 and route their customers' traffic through a VPN to circumvent the Data Retention Policy of the Swedish Government. 

Bahnhof and Ericsson (another Swedish company mainly known for its MP3 player collaboration with Sony) have boycotted China and are the only Swedish companies to do so. Bahnhof sees China as the world's first digital dictatorship, an Orwellian dystopia on steroids as they call it. The company feels that as the Swedish government increases its data storage policies and control of communication that its role will be more critical in the future. 

Personally, I have to agree. The amount of data companies and governments save and analyze about us is enormous. ESG is already a crucial factor for many private and institutional investors, and privacy will become another pillar in those investment decisions. It might take a decade, but just like now, investors are shunning fossil fuels; there might come a time when they start to turn on privacy invaders. 

What is also great is that Bahnhof doesn't just spout ESG; they live it. They reuse excess heat for house heating (gold certified by CEEDA) and use biofuel for their Diesel emergency generators, which are biodegradable and offer longer storage time. 

Problems

Just like any other company, Bahnhof has its problems. While its support is good compared to more prominent Telecoms in Sweden, it needs to improve to gain more market share. Additionally, the company doesn't report in English yet, a problem that is hopefully vindicated with the up-listing. The cloud can be a significant growth provider, but it can also hinder the company's cash flow requiring ongoing investments.

The biggest problem, however, is the privacy stance of Bahnhof. While it is one of its biggest assets, it can also become one of its downfalls. If the company reverses its stance on privacy, it will lose many customers, eroding any future trust. On the other side are the government regulations. If the company is too hard on its privacy stance and fails to comply with the government, huge fines and lawsuits might follow. As a result, Bahnhof's privacy ideology is a two-edged sword. 

Conclusion

Bahnhof AB is currently an exceptional opportunity. My investment decision is because of insider ownership, their size, and their activist stance on privacy. Add the catalyst of the up-listing, and we have a company that deserves a closer look. I believe that Bahnhof will continue to expand and deliver. Please do your research and contact a professional before making any investment decisions. 

@InvestRoiss. I would also appreciate you sharing my posts.