By Tom Winnifrith | Wednesday 21 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.
Ceteris paribus Avanti Communications (AVN) will be trading whilst insolvent within weeks - its cash will not be sufficient to meet contracted capex and bills payable. That is why it is delaying publishing audited results for the year to June 30th 2016 - no auditor is going to sign off on anything from what is an insolvency waiting to happen. Avanti is trying to hide the awful truth but industry sources are revealing its desperate measures to stay afloat.
Avanti has stated that cash at september 9th 2016 was $56 million down from $57 million at June 30th ( itself a fall from $122.4 million three months earlier) but if you think that the cashburn has been slashed think again. First up, September 9 is not September 30 ( the quarter end and a true comparator with June 30) and a lot of unavoidable cash outflows (payroll, quarterly rents etc) go out in the last week of the month. Whilst Avanti tried to get as many of those who owed its cash to pay ahead of this arbitary 9th September date you cannot flatter cash inflows like this forever.
More importantly, a source in the industry tells me that Avanti is padding its cash with two other tried and tested techniques of those in trouble. Firstly, anyone owed £20,000 or more by Avanti is now being asked to accept not payment as per invoice but a payment plan. Most are agreeing. This pushes up trade payables but flatters the short term cash position by deferring actual outflows. This can produce a one off sugar rush gain for the stated cash position but after a while the effect just runs out.
Secondly, I am told by the source that Avanti is running down its stocks. Allegedly it is currently out of stock of customer hardware to go with its 30Mbps service and it is not doing anything to replenish that stock. Long term you can see a problem in that business model. Pro tem running down inventory boosts cash. But again it is a one off measure.
The bottom line is that by September 30 cash will be well under $50 million and trade payables will have been bloated. Avanti has managed to persuade bond holders to accept new bonds in lieu of cash interest payments of $32.25 million due in October. And it has also pushed capex on Hylas 4 out from Q1 this year to Q3 - that is to say January to March 2017 - but it cannot push that out any more otherwise Hylas 4 is toast.
And thus, ceteris paribus, by the middle to end of next month cash will be closer to $40 million than $50 million and with the inventory and payables "squeezes" unwinding and some minor capex just unavoidable, the "normal" cashburn of up to $10 million a month will be resuming. Meanwhile contracted capex that is critical to the business plan of $39 million will be less than three months away. You can see the problem that an auditor has in signing off on this company. That it is drowning in debt is not disputed, the issue is that it will simply run out of hard cash by January.
The failure of Avanti to let us know detailed projections of the September 30th cash position so that we could do a meaningful comparator with June 30th is telling. Disgraced Nomad Cenkos now needs to push it on its inventory and trade payables position to establish just what measures are being taken to keep the lights on. Perhaps Cenkos has leaned from its shaming over Quindell and might actually ask the right questions this time around?
Without signed off accounts how can Avanti raise fresh equity or bond finance? It seems a hopeless case and, as the questions mount, the shares, now back to 27p bid, remain a stonking sell.
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