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Avanti Communications - target price 1p by Christmas

By Evil Banksta | Friday 5 February 2016


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.

Regards,

The Evil Banksta


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More on AVN


Comments

5 comments

  1. In the last 5 years this company has declared operating losses of $232.92 million. No bank or sane institution would finance such a business. Only on AIM can such companies flourish!


  2. Drunken Sailor

    EB

    The business model requires large up front expenditure for later payback once satellites are fully in use. They are only part way through the high upfront expenditure phase.

    I am not fully convinced by their explanation of how H1 – H1 is flat in numerical terms but still represents 18% growth.

    “Revenue was $31.0m (H1 2015: $31.1m). The year-on-year comparison was impacted by the translation of Sterling and Euro revenues into Avanti’s reporting currency of US$. In addition to that, the first half of 2015 contained an element of revenues to sub-contractors and higher low margin equipment sales than for the six months ended 31 December 2015. Adjusting for these factors, underlying revenue grew 18%”

    However it is possible I suppose. What is more important is whether you believe the forward growth statements:

    “$40.0m of contract wins mainly with government and large telecoms customers in the second quarter which are expected to make a strong revenue contribution in the second half”

    “Guidance of 50% continuing business constant currency revenue growth for the full year to 30 June 2016 supported by the second quarter order intake and a strong order pipeline “

    Also note:

    “During the first half, Top-20 Customer Bandwidth Revenue Growth increased 44.0%, driven by increasing demand from core customers. This drove an increase in Average Fleet Utilisation into the 25% to 30% range in the second quarter, from the 20% to 25% range in the first quarter.”

    Thus they can grow a lot more revenues with no increase in expenditure.

    The company still expects to burn cash overall when CAPEX is included until 2018:

    “Avanti has fixed cost bond finance at 10%, which is not repayable until October 2019 when we would expect to refinance it at lower rates. The Group held period end cash of $162.6m and furthermore has consent to draw down up to a further $71.0m in credit from multiple facilities. We do not expect to need to use this, but it does mean that Avanti has surplus cash headroom at the low point in our own business plan in mid-2018 of over $90 million, giving us very strong headroom and full confidence in our full funding to maturity.”

    This does rely on the revenue growing as expected from here on in.

    It does all depend on whether or not you believe the company or you think they are just telling porkies – they do offer excuses for most of your other points, may be these are true or may be they are just BS. If they are telling porkies, you will make money on your short. However if they are telling the truth and revenue is growing due to significant new sign ups, which continue to grow at the expected rate you could be badly burned.

    I would not be long or short of this stock at the moment. Full year figures will be the key indicator. If the revenue has grown and the receivables are received as the company says they will be in Q3, then this could be one to buy.

    PS a couple of Typos it should be H2 to 30 Jun 15 not H1 and it is tin cans (very expensive ones hence the CAPEX) not tun cans

  3. BS indeed – what can possibly be meant by the “quality of revenue”, given that revenue is fundamentally a purely quantitative concept and assuming wonga obtained through illegal activity such as drug dealing or arms trafficking is known to be excepted! Images of the wrong (and – hence – the right) kind of snow spring to mind…


  4. Drunken Sailor

    JPS I would guess that high quality revenue is cash that is paid reliably on time from big customers under long term contracts, where as poor quality revenue would be invoices that are not paid on time or at all and there is no repeat order. Piss poor quality revenue is where you have not even invoiced, but are accruing anyway, even though the chances of actually being able to even invoice for that amount are low – Ie the sort of revenue Quindell used to report and SGH do still report, but not for all that much longer.


  5. Drunken Sailor

    The key question is: Is Avanti full of shit or are revenues really rising?

    You have to read between the lines a bit to get these figures but:

    Q1 – Sep 14 Revenue $15.5m
    “Backlog at the end of the quarter was $420 million having taken $15.5 million from backlog to revenue” so all revenue was backlog
    Q2 – Dec 14 $15.55m (H1 revenue was $31.05m).
    Interims – “Revenues for the six months to 31 December 2014 increased 24.4% to $31.1m (H1 2014: $25.0m).”
    Q3 – Mar 15 $17.85m “Revenue for the 9 months ended 31 March 2015 increased 26.0% to $48.9m. Constant currency continuing business revenue up 54.5%”
    Q4 – Jun 15 $36.3m “ As anticipated, this core recurring revenue growth was augmented in the fourth quarter with non-recurring revenue”
    Q1 – Sep 15 $13.75m “Revenue was $13.7m, representing 23.4% sequential growth over the previous quarter on a constant currency continuing business basis”
    Q2 – Dec 15 $17.3m “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 “

    So the proportion of real revenue to made up revenue seems to be improving, whilst taking out the non recurring revenue of Q4, overall (ie real plus made up) revenue looks to be pretty flat.

    There is a possibility,now more of the revenue is real and recurring, that Avanti might be genuinely growing. The Q3 update and how they spin it will be interesting.

    In UK we tend to take unlimited and relatively cheap internet access for granted. That is not the case around the world. Where I am at the moment Internet access is limited and if you breach your package you pay through the nose for a top up to see you to the end of the month. Internet access does seem to be a must have even though a lot of the people here are not all that wealthy. There might be something in the Avanti business model – it is too early to say. Q3 might give some indication, but better to wait for full year results before taking the plunge either way in my view.

    I am still not tempted to buy or short as the case is not clear cut either way, however a punt on the short tack does look a marginally better bet than a punt on the long tack at the moment


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