By Tom Winnifrith, The Sheriff of AIM | Sunday 18 September 2016
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.
Hat tip to reader G for fisking the horseshit RNS from Avanti Communications (AVN) on Friday which should be read as a tacit admission that the game is over. This remains a slam dunk sell and almost certain zero. Here's why.
Despite the huffing and puffing of Cenkos' and Jefferies' equity salesmen, the shares still closed down on Friday, which shows that even though Avanti rampers are all over the PI bulletin boards, the professionals were able to see through it. A few things really stood out:
1. If the answer to a debt crisis is more debt, and that debt is 39% more expensive, then you don't have an answer. The bondholders are being induced to hold off on demanding cash with a coupon that is worth $45m for 6 months instead of the $32.5 they were due. So the annualised interest rate is now 14%. This means that debt on 1st October will rise to around $700m! Over 8x revenues! No wonder Avant is struggling to find more mugs (sorry: "strategic investors") to bail out the bondholders.
2. Avanti is also asking for permission to hold back the FY16 results and the Q1 FY17 results. How bad must these results be if they don't want people to see them? What one-offs have they tucked away that will be revealed? (Or what huge bonuses have the Board paid themselves? Last year's one-off "revenue" gain allowed them to pay themselves bonuses of $1.2m despite a huge fail in hitting market forecasts.) Or did KPMG just laugh when asked to sign off on the Going Concern statement?
3. Avanti fudged the only KPI offered: Avanti has a history of changing KPIs when they don't suit. This time it fudged the one KPI it announced, capacity sold by proforma-ing it for "significant new customer wins"
4. And what were these wins? This is a company that announces pretty much everything, so why didn't it announce this pearl of good news? Shareholders would be very happy to have some good news. Maybe because it wasn't long term bandwidth sales. There are reports from the satellite conference last week in Paris that its Artemis satellite has moved around the world and is now providing services to MEASAT as a position holder. Shareholders should be worried that this was either one-off revenue (or very short term as Artemis is almost at the end of its life).
5. Guidance: this was reduced to 35% to 40%; so at 35%, that's a 30% decrease in guidance. Huge but no explanation about what's caused it so no ability to work out if even 35% is reasonable.
6. Which brings us to the Q4 financial performance. In the midst of the July announcements about running out of money, no-one has asked about the jump in Q4 FY16 performance and asked whether it was bandwidth or one-off. In the 3 quarters to end of Q3 FY16, it achieved sales of $50.5 million and EBITDA loss of $3.1million. In Q3 itself, it managed revenues of only $19.5 million and EBITDA of $0.4 million. By the year end, this had jumped to $83 million and an EBITDA profit of $8 million. So there was a massive jump in Q4 to $32.5 million in sales and $11.1 million in EBITDA compared to Q3 of revenues of $19.5 million and an EBITDA of $0.4 million which they made very little noise about. How much of this was MEASAT/Artemis?
Was any of it the sale of the African gateways stations to Schoenburg? (reports of which has now mostly been expunged from the internet). If you do the basic maths, you can see that something funny happened in Q4; they've predicted YOY growth of 35% to 40%. So they're targeting $83 million + 40% for FY 17 = revenues of $116.2 million. But that is less than 4 x the $32.5 million of revenues reported in Q4. So how much of Q4 was One offs or how much business are they expecting to lose? If there were a lot of one-offs, no wonder they want to keep the results and Q1 FY17 out of the market. If things were going well, they'd be shouting from the rooftops.
In the 2nd announcement, the headline trumpeted a €10.7 million contract funded by ESA. In the text, it included the words "up to" infront of the €10.7 million - a pretty crucial miss from the headline. No indication whether the contract is less or much less. Also, what they didn't say was how much of the contract is bandwidth - it seems probable that a lot is hardware given there's a lot of Africa to cover and no-one in these areas has much hardware. The good thing for Avanti is that it can probably account for this €10.7 million all as revenue, even if they are sub-contracting the hardware out. So great for revenue but not good for margin.
Then lets get on to the rumours about Facebook having to buy Avanti's capacity after the SpaceX explosion with the Amos satellite on board. The difference in price expectations is going to put the kibbosh on that. Avanti has very proudly said it is selling at $2,000 per Mb per month (even though David Williams has admitted himself that prices in the market had fallen hugely last year). According to the respected equity research analyst, Chris Quilty, Facebook was paying just $100 per Mb per month. So it was paying just 1/20th what Avanti needs. See HERE
If true, this just shows how uncompetitive Avanti is.
All in all this remains a slow motion car crash. Sell.
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