Avanti Communications Share Discussion Threads

[dangersimpson2] 08/2/2016 13:41

chris,

What you say about long investment cycle companies in general makes sense. The issues with Avanti as I see them though are:

1. They pushed ahead with large capex on HYLAS 3 & 4 when their sales performance on existing space assets suggests that the demand was not there yet - at least based on current pricing. They would have been better waiting to see if there was a market for more capacity.

2. They failed to recognise that the company was struggling and cut their costs accordingly. Admin expenses has remained high and is increasing as they try to up the sales force. They should have been cutting back as soon as they started missing forecasts.

3. Their bond redemption profile doesn't match the reality of their cashflow cycle. It seems they were too optimistic going for 2019 redemption.

The means that they are left with a large debt burden and no cashflow to service this unless they manage to turn the business around rapidly. This is why the bonds are pricing a significant chance of default.

Yes, the bonds are expensive but only a fool lends at 10% if they think they will lose the underlying loan. From the shareholders point of view 10% is cheap if it gets AVN to positive cash flow and is redeemable at par thereafter.

But the point is that if the bonds default the equity is worthless. The assets may have value but the proceeds will go to bond holders in the event of default. Either the bond pricing is wrong or the equity pricing. It's quite valid to believe that it is the bond pricing that is wrong but you can't believe that the bond holders are sensibly pricing a risk of default and that the equity is still worth $220m.

[cocker] 08/2/2016 11:50

Chris I do know how they work & I agree with some of your valid points. However, at the end of the day a debt of such magnitude needs paying back & could well prove AVN's downfall. The take up of Hylas 1 /2 have fallen well short of management's expectations. The market has made such an assumption & that is why the share price is at where it is.

[waterloo01] 08/2/2016 11:46

Poor advertising and expensiveness have been blamed for the woeful uptake of the government's subsided satellite broadband scheme, with just 24 people having so far signed up.

[cocker] 08/2/2016 11:02

To be honest I am not sure that I have ever seen such a share with such a bull/bear case. Obviously the debt is a huge worry to any investor & the management's ability to miss forecast on a regular basis is of concern. However, the fact that the satellite's are in orbit & working without any concern is a big bull case. I sold out on Friday purely on the basis that the market is hammering stocks that have such debt & I will review my options on a daily basis.

[elrico] 08/2/2016 09:43

I am not sure why anyone would feel bears will be nervous, do you have the share graph the wrong way up? Re; net asset value, I don’t believe anyone suggested the satellites had no value, however, the case for the satellite equating to or near current mc is just fanciful and quite frankly, foolish, but would go some way to explaining why he invested.

As for the Edison note; it’s tosh, has no credibility, it’s full of assumptions and hasn’t even noticed the creative accounting where $25m was booked as receivables when in fact this simply was not the case.

It’s obvious some here have invested in the sector thinking it an exciting one for the future and simply ignored the accounts, this as you can see is proving a mistake. The latest reports were uber-bullish, but the share price is telling you nobody believes the management anymore. AVANTI is an illiquid share that swings so use any swing up as an exit.

[jeffian] 06/2/2016 23:24

"The company remains “very confident” that it will sell out the capacity on Hylas-1 within the targeted 3 years of service launch" (Research note 5th October 2011)

"Average Fleet Utilisation was at the upper end of the 20% to 25% range during the period" (Q1 2016 trading update).

They're just not selling or hitting their revenue forecasts. I'm out.

[weatherman] 06/2/2016 20:53

So Avanti may need more cash...even Inmarsat is investing $1bn in satellites - I guess much of this will be borrowed.

[michaelmouse] 06/2/2016 14:26

Those who have gone short sounding nervous. Understandably so following the excellent note by Edison Research with value of £4.27 on the stock.

By the way net asset value is easy to understand. Firstly you'd have to be an idiot to assign no value to the satellites already in orbit. Those assets will depreciate over several years, but this will be reflected in subsequent reports. Other satellite's will of course be launched.

What has been assigned no value in the balance sheet is the orbital slots which are worth around $180m and not far shy of Avanti's current market cap. These are significant assets indeed, and will be coveted by others.

Two things should worry those with a short position. 1) A possible offer for the company 2) Avanti hitting or getting close to their revenue target for the year. I've frequently seen illiquid company's share prices multi-bag in days or in some instances a day when the story suddenly changes. This is more than possible here. Shorts exacerbate the price rises as they try and rush through a narrow gap in the door before it closes tightly shut. Must be scary when you're betting with money you don't actually have?

Anyway, more importantly here's that link to the excellent Edison Research note again:-

Edison research initiated coverage today. Valuation of £4.27:-

Financial Times Limited&email=[e-mail]

[dangersimpson2] 06/2/2016 12:56

Yes Africa has 1.1bn people compared to just 60m in the uk. So if we scale up the 24 people who have taken up satellite broadband in the uk to the whole of africa...

hxxp://www.theregister.co.uk/2016/01/25/folk_shun_subsidised_satellite_broadband/

...AVN will have an additional 444 users. It'll take a few years to get those of course but this is going to be huge ;-)

[nugacity] 06/2/2016 11:06

Cannot help thinking we are in a chicken and egg situation.
Until Africa is using broadband how are people going to learn about Avanti's offering?

[elrico] 05/2/2016 21:27

JK - That’s exactly what I have been saying for a while now. The emotional and blinkered will make excuses for the bond yields because, 1; they don't understand them, 2; they are emotionally involved, 3; forget it’s an investment and not a family member in trouble.

One chap posted yesterday the sats in orbit almost equated to the MC as of yesterday, which is clearly wrong. Now I am prepared to accept this was not a deliberate attempt to fool anyone, it is more likely that he did not understand the asset value in orbit has a limited life, therefore a wrong conclusion.

[elrico] 05/2/2016 21:23

There we again with the emotional language, it only blinkers the vision!

Point of correction, Todays bear case was not a TW piece, but it is the 3rd author this week to publish a bear case on share price this week. One of them must be right.

[akajimmy9] 05/2/2016 20:30

All junk bonds have seen their spread widen. Edison showed a chart of avanti bond price, which was in line with high yield junk bonds.

Time will tell. If avanti keep up to their 50% per annum revenue growth, which they seem confident about.

[estienne] 05/2/2016 18:45

And when its 300p at Christmas you will see just how stupid TW is

[elrico] 05/2/2016 18:36

1p by christmas - "bloggers" seem to be lining up to with bear note, but this one at least give a value.

[dangersimpson2] 05/2/2016 12:25

Just a couple of issues with the Edison note as I see it:

1. They model CoS as flat despite rapidly increasing revenue. Avanti haven't managed this in the past as CoS have always fluctuated roughly in step with revenue.

2. They apply their DCF to EBIT (p.8) so they have ignored debt interest. At 2021 they get a cumulative DFC of $308m which if they had included $64m pa interest payment would see cumulative DCF near zero and all the value in the terminal valuation. (Even without this error the major value is in the terminal calculation.)

3. A terminal valuation is a really bad way to model assets with a limited life span. Also I can't see any of the assumptions made...maybe it features the capex fairy launching extra satellites for them for free!

4. Their cashflow model Exhibit 14 on p.10 is completely different to the numbers used in the DFC Exhibit 7 on p.8!

5. As others have already pointed out that assuming a 12.2% Discount Rate with debt at 21% YTM (I haven't directly checked this so am relying on others for this info - I do know from the accounts it cost them 10.9% to issue more notes 6m ago) would appear quite optimistic.

[elrico] 05/2/2016 10:17

Gary - I was not patronising you, merely pointing out a fact, which does make a material difference...SPECIALLY as I suggested AVANTI had more cash than reality, an error on my part. At the risk of repeating myself and being accused of deramping or working in cahoots with a group of shorters, YES I do think a round of refinancing will be needed because I don't believe AVANTI will meet its targets, it does afterall have a history which makes such an assumption a reseanable one. AVANTI quote cash figure of $90m including $71m facility, but the latter is not agreed, the bond holders have to pony up here and given they are already taking a haircut, at what cost? So, assume this is not drawn on the company has little wriggle room before June 30.

Eample of accounting which gives me confidence I am closer to reality than you; last years Q4 results AVANTI booked sales $25m and EBITDA OF $25m, and how much did this actually equate? Zip, 0! Creative accounting!! Further, its committed to $14m outflow over time, which equates to negative cash outflow, not $25m profit.

The CEO spun a picture of growth near 28% when in fact a mere $100k was the differenceand that was in reality, negative.

Looking back at the recent contract wins and the statement which appears to suugest AVNTI will be booking c$29m in each Q would suggest a strong H2, but this is more like smoke and mirrors, because this is in all probability going to be a repeat of the accounting practise I mention in my 2nd para.

What are the bonds telling you? I seen the same with AFREN in 2015.

[garymott] 05/2/2016 07:59

Elrico,You were wrong on the cash position (fact), so please don't patronize me about arguing over the $/£ exchange rate. Putting that to one side, do you still believe that new finance will be needed to be raised this summer as you stated recently?