Is this one of the most undervalued listed companies in the UK ?
Avanti Screenmedia was established by David Bestwick, ASG’s Chief Technology Officer in 1996. The company is now led by David Williams who made his name in financing the TMT’s in the past decade. Williams is now the CEO. Bestwick holds 3.1%, Williams 3.7%.
ASG has two main businesses - first the least exciting, the screen business. ASG provide plasma/lcd screens for shops and malls. They also provide the programme, advertisement and video making for customers using the screens. These screens add to the ambience of stores, creating a better experience for the customers and suggesting products to buy. They also are able to track customer trends within store and help stores target their market.
You can see it all here:
This side of the business is doing well, had sales of £8.5m and made £1.9m pre tax profit last year. At the recent trading statement ASG said:
“Avanti has finished its year to 30 June 2006 well. It has a strong pipeline of screenmedia business which it expects to close early in the new financial year and also experienced a surge in advertising in the last quarter, beating budget for the quarter by some 10%.
David Williams commented on the advertising performance: "We believe that this is partly as a result of increased market acceptance of our medium, following sustained ground work by our excellent sales force, but also partly because we are now bundling other opportunities like experiential marketing, Bluetooth download to mobiles and point of sale promotions with our screen advertising to deliver a richer proposition to clients.”
Earnings are heavily weighted to H2.
NOW THE EXCITING BIT - SATELLITE!
In November ASG announced it had raised £25m in a placing . Together with this placing ASG were awarded a grant of between £23.1m and £24.5m from the European Space Agency. Together this pays for the launch of HYLAS, a communications satellite to be positioned 34 degrees west over the Atlantic near Brazil and to service Europe with broadband and high definition TV. The grant is guaranteed, it is Avanti’s and basically a gift - nice work if you can get it!
The satellite is due to be launched late 2008 and the income should be huge. There are 40 transponders on it, most of which Avanti will rent out. This satellite will have around 15 years life and will bring in at least 1m Euros per transponder per year
“A London conference on May 15 was told that Hylas would bridge the UK’s “digital divide”. Lord Sainsbury, UK science minister, told delegates: “It will enable Avanti to provide broadband and HDTV services using new business models and technologies in markets which are highly under-supplied; in the process correcting some significant market failure in relation to the digital divide and analogue television switch-off. It should also provide a good return for our investors, the typical European market price for a transponder is currently in excess of €1m per annum."
That‘s income of at least 40m Euros per year for 15 years once it‘s up there, “AT LEAST!”
This sky space is very valuable. Believe me the ESA doesn’t give £24m away lightly, it will be supplying a niche demand for both satellite broadband to remote areas and high definition TV which is going to explode in demand.
SUM OF THE PARTS:
The even more exciting news is that ASG has already started selling options places on the satellite. They have secured options of £25m. Of this £5m is development costs for clients and will go to the P&L account in the year just completed.
So from late 2008 there is going to be big income on high margins coming in and ahead of that there will be a lot of development fees.
What if the satellite blows up on launch? Well it’s insured so ASG get paid out the £45m or so cost of the satellite - cash.
So here we have a screen business bringing in £3m pre-tax profit and growing at a decent clip. No tax paid this year and I suspect low or no tax for a while with the investment in R&D that has gone into the satellite business. About 17p eps was forecast for the business in the coming year on the pre-satellite forecasts. Let’s say a forward PE of just 10. That gives a value of 170p a share for the screen business: (£38m)
The £50m cash the company has must be worth £40m discounted = 180p a share (£40m)
Now the satellite business less the £40m we have discounted above. What is that worth? Well £28m income at least from the satellite on very good margins. I’d say at least 35% being very conservative - £10m profit per annum, £7m post tax. Satellite companies like this trade on PE’s of 30, look at Sky or ISAT. 950p a share (£210m).
So I reckon the sum of the parts 18 months from here could be at least £288m or £13 a share.
The current market cap is £66m and 299p a share.
That’s 18 months out. We need to discount that as there is time to wait, potential blow up on launch (tho that’s covered for the base cost of £45m by insurance)
I think there’s a good case for these to be £5 now and a steady strong re-rating up to mid 2008 to £13 with a greater re-rating when we see how much over £700K per annum they rent transponders out. And I’ve allowed nothing for further £5m development fees they will get like the recent one between now and launch.
Looks a classic case of a mis-valuation where the market hasn’t grasped the business model.
What’s more I’ve good reason to believe Avanti will sell of the screens business and become a pure satellite play. If they sold it off at the valuation set out above (£38m) that would mean we are left with a pure satellite play, probably worth £250m and a further £38m in the bank.
Got to be worth a bit of the portfolio invested in it on a risk/reward basis surely? For a BSkyB “Mini-Me” .
The chart broke out today - full year results are due around mid September.