Disclosure: The author has a short position in one or more of the shares mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
I am late to the shorting party with Avanti Communications (AVN) but given that the interim results yesterday almost drove my apoplectic with rage I have jumped in firmly with two feet.
Let’s start with one of the most offensive pieces of BS spin that I’ve read in a long time. This is the sort of stuff that instantly raises my hackles as well as raising a red flag to the top of my bargepole come flagpole:
“Second quarter revenue was $17.3m, representing 27.7% growth versus the first quarter on a constant currency basis, taking first half revenue to $31.0m with improved year-on-year quality of revenue”
At first glance you think “growth” don’t you? This is a great story isn’t it? No!!!! Here are the revenue figures that can be found further on down in the numbers:
H1 31 Dec 2014 = $ 31.1m
H1 30 Jun 2015 = $ 54.1m
H1 31 Dec 2015 = $ 31.0m
The revenue is declining!!!! Avanti has chosen two completely arbitrary quarterly periods of time to make a completely random “growth” claim that’s actually totally unsupported by the facts. Revenue has fallen since the previous half and it’s fallen compared to the same period last year! If I was a shareholder in this company I’d have to choose between the two immediate actions of (i) getting on the phone to scream at the CFO versus (ii) selling.
You might also note that of this so called “revenue” the balance sheet notes that $44.2m of trade receivables are outstanding, that’s nine months worth of so called “revenue” that’s not actually been paid!
The balance sheet is a train wreck!
At first glance you might feel optimistic when you read in the interims:
“Fully funded business plan through to the launches of HYLAS 3 and 4 with period end cash of $162.6m and further undrawn consented credit capacity of $71.0m”
However, Avanti has primarily financed itself with $645 million of 10% Senior Secured bonds. These bonds have been issued at the level of Avanti Communications Group plc and have security over absolutely everything. In the event of default then the bondholders could theoretically seize everything, leaving shareholders with nothing. And yet I’ve checked with a high-yield market maker and he tells me that the current market price of these “senior secured” 10% interest paying beauties is a mere 72.5% of par. The current yield to maturity is actually well over 21%!
In-essence this is telling you that the bondholders value this company at 72.5% of $645 million, ie circa $467 million.
And what on earth is the CFO warbling on about when he writes “further undrawn consented credit capacity of $71.0m”? There’s no way that a bank would lend here when the bondholders have security over everything and there’s no way that the bondholders are going to put their hands in their pockets gain. So “consented credit capacity” can only mean more finance leasing because the clever thing about finance leasing is that the lessor owns the asset that it leases and hence the bondholders wouldn’t be able to get their grubby little mitts on the leased assets when they enforce their security (what lessors actually do is walk in and threaten to take the equipment away until they get paid-off!).
So shareholders, if you’re lucky enough that the company purchases a large capital asset then the company might be able to lease it, thus layering on some extra leverage to this already massive levered company.
But the bottom line is that the company is running out of cash fast.
The cash balance at the end of December was $162.6 million but $27 million disappears every six months in interest and the company is burning cash in its day to day business. During the last six months $18.9 million was burnt supporting an unprofitable business model and it seems reasonable to conclude that management is going to set fire to another $30 million this year. On the back of an envelope cash will be well below $80 million by the end of December this year leaving less than enough fuel in the tank to last another six months. But that assumes no capex ad with two more tin cans to fire into space there will be capex aplenty.
I fully expect that the accountants will not be able to sign-off the June 2016 accounts as a going concern unless additional equity is injected and with so much debt in the business shareholders would be crazy to fund that.
This has debt for equity conversion written all over it. It’s not a zero (because the bondholders will want a share market where they can dump their shares after the debt for equity swap) and so I therefore generously pencil in a target price of 1p by Christmas.
The Evil Banksta
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