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Avanti Communications – A Day to Buy as Results Go Down Badly

By Tom Winnifrith | Wednesday 10 October 2012

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.

Shares in AIM listed satellite operator Avanti Communications (AVN) have slumped today by 62.75p to 286p after results for the year to June 30th 2012 were announced and were received poorly. Adding to Avanti’s misery bear raider Evil Knievil announced that he had gone short at 295p. He is wrong and this is a buying opportunity. I say this as someone who tipped the shares first at 116p in August 2004 and who has continually rated them as a buy at anything up to an all time high of almost £8. I still believe that the shares will in due course move sharply higher and my target price is £16.81. Here is why.

The results for the year to June 30th 2012 are in some ways in line in other ways not.  Revenues increased by 246% to £15 million £2.8m below stated guidance due to a decision to smooth revenues over the entire life of new contracts. This is an accounting change (ahead of a move to the full list) not a change in trading. The EBITDA loss was £5.3m compared to estimates from house broker Cenkos of a profit of £2.1m due to the accounting change and also extra investment in sales and marketing functions.

Post year end the company successfully launched its second satellite Hylas 2 and it was announced today that technical upgrades means that it has 22% more capacity available for sale than had been expected, at 11 GHZ. Hylas 3 is fully financed and will be launched in 2015. The company has year end cash of £76.7 million although it also has long term debt so net debt was £98.3 million.

The sales backlog increased during the year by 57% to £268 million. That gives you an idea of the scale of future revenue growth as Hylas 1 & 2 fill up capacity. Historic numbers are really not relevant.

The accounting change spooked a few. What has spooked more is a warning that the build up to full capacity on HYLAS 1 & 2 will be slower than expected. Cenkos phrases it thus.

While the Board still expects that both HYLAS 1 and 2 will be at full capacity in 2016 the view now is that this process will be much more back-end weighted. In addition, near term expectations have become more prudent to reflect actual rather than potential new business wins and customers are also increasingly placing orders on the basis of a ramp up in bandwidth capacity. Our new forecasts below are approximately 40% lower in terms of revenue and with a corresponding flow through to EBITDA where the reduction is c.50% in FY14 “

So make no mistake, this is a profits warning. Results for 2014 will not be as good as some had hoped. But this is not a stock you value on the basis of 2014 numbers. By the end of 2014 HYLAS 1 will be almost sold out but it is tiny compared to HYLAS 2 which in turn is tiny when compared to HYLAS 3. You will not see Hylas 3 start to generate meaningful revenues until the last months of the 2016 financial year. But the run rate of adding to order backlog looks to underpin what are new expectations.

So what will Avanti deliver?

Cenkos now expects that revenues for 2013, 2014 and 2015 will be £34.5 million, £68.7 million and £110.6 million which equates to EBITDA of £11.4 million, £39.7 million and £76.9 million respectively. By the year to June 2015 it forecasts earnings of 33.1p per share.

Rather annoyingly there are no broker forecasts available for 2016 when HYLAS 1 and 2 are at full capacity and HYLAS 3 starts to chip in a bit. However on the basis of the run rate in booking new orders Avanti seems confident that without compromising on price it will have HYLAS 1 and 2 full by 2016 on which basis I still believe that free operational cashflow will be £80 million in FY 2016. By 2018 with HYLAS 3 really driving the show that number should be c£240 million.

So let’s be clear. Avanti will not deliver what we had hoped for in 2013 and 2014 but it will still be profitable. It does not have any funding issues and indeed will be 2015 have 3 satellites in space. I would value the company on the basis of forecast 2018 cashflows (i.e. when all 3 satellites are at or near full capacity) on multiple of 11. Discount that back at 5% a year and you get a one year target of £16.81.

Clearly after today’s news I do not expect the shares to hit that level at once (indeed for several years). It will take a good while for Avanti to restore confidence and it really has to hit its new forecasts.  However, I note that three directors have today bought 30,000 shares between them. £90,000 is not an insignificant amount to spend. You know how I value Avanti. Cenkos puts it thus:

It is still apparent in the implicit sales price per MHz of the current EV (c.$300 compared to market prices of $2000). This EV also only reflects the build costs of the fleet and assuming all 3 satellites can be filled, EPS can reach into 3 figures on a 5 year plus view.”

Again one might discount that earnings number of well over a 100p back at 5% a year and you are effectively paying a derisory multiple for what is a growth business.  Today has not been fun but for a long term investor this is a very good opportunity buy for multibagging capital gain.

Libertarian investment writer Tom Winnifrith writes extensively for a number of US and UK financial websites. All of that material appears on his own blog, which also carries his extensive original non financial material, at – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith

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