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Avanti Communications - a letter to the Financial Reporting Council re 2015 accounts

By Tom Winnifrith, The Sheriff of AIM | Friday 4 December 2015

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Now that, post the fraud Quindell (QPP) I am such good friends with the only watchdog with teeth, the Financial Reporting Council (FRC) I have written to my pals asking them to investigate whether the 2015 accounts for Avanti Communications PLC (AVN) give a true impression of how the business is doing. I do not think they do. But Avanti also has other worries which is why the shares will crash.

The real problem is that having missed all operationg metrics with an admirable conistency, Avanti is not generating enough cash to cover its bloated PLC costs and humungous interest bill. I reckon that it will be out of cash but loaded with unrepayable debt by next June.

But the accounts for the year to June 30 2015 also trouble me greatly. Hence the letter to the FRC asking them to have a butcher's which is below.

Formal request to investigate annual accounts for Avanti Communications PLC for the year to June 30 2015

Dear Xxxxx.

In the last financial year Avanti Communications reported sales of $85 million. It reported an EBITDA profit of $16 million. However the company included within those numbers a one off transaction that was booked as both sales and profits of $25.1 million. This is thus a material deal in terms of bloating sales and allowing the company to report an EBITDA profit rather than a loss.

The transaction was a sort of swap arrangement with SES, the Luxembourg based global satellite operator, whereby it acquired from SES the right to use a 3Ghz Ka band payload for its remaining life of 13.5 years for a fixed cost, payable per annum, plus a variable cost based on capacity sold. In return it granted SES “in perpetuity, certain spectrum rights related to geographic markets which the group does not seek to operate”

Despite the fact that the only money changing hands here is to be from Avanti to SES, this transaction (contrary to its treatment by SES, a €10 billion company) appears in the accounts as a sale which conjures revenue of $25.1 million from (as it where) outer space. Furthermore, as this spectrum appears to have cost Avanti nothing and was not carried on the balance sheet the revenue feeds straight to the P&L account.

Over the coming years Avanti will be paying SES around $13 million under this deal. Avanti will not receive a cent for transferring an asset it was patently unable to monetise.

Correctly, in my view, SES has not recorded this deal as a purchase in its book. Why should it? It is not paying a dime. Instead it will over subsequent years be gaining an incremental income stream.

How can two companies report the same transaction in different ways? I put it to you that one of the two is representing it in a way that does not reflect the actual impact of the deal and that this is Avanti Communications. And thus I request that you investigate this matter.

I remain yours sincerely

Tom Winnifrith

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  1. I’ve been short this one for a while. Could be another zero but will take a while.

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