Following on from my initial
comments on Avanti Communications (AVN) (AVN - a space oddity), I reckon the group’s adoption
of increasingly conservative accounting required further investigation.
So here’s something of an investigation.
Of the several items which struck me as odd in AVN’s recent announcements, one
feature was …
“… the Board has adopted an increasingly
conservative accounting treatment for certain FY12 transactions, particularly
relating to the deferral of income over the lifetime of contracts, regardless
of upfront cash inflows.”
I thought this was a peculiar
statement to make. However, having read AVN’s recently released 2012 annual report,
I reckon it is less the deferred income which warrants attention and more so
the group’s trade receivables and particularly its accrued income.
Within the table below, I have
reproduced several of the key items from the accounts, which relate to revenue,
receivables and payables.
The company reported £12,461,000
of revenue during 2012 (2011: £5,462,000). Of this 36.1% or c. £4,489,000 (2011:
20.6% or c. £1,125,000) was reported to be revenue attributable to the European
Space Agency (ESA). AVN has an agreement with ESA whereby in 2006 it
entered into a contract with ESA to receive funding for the build of its
HYLAS 1 satellite in return for which ESA received the right to use up to
10% of the capacity on HYLAS 1 for a period of three years if the capacity is
available. As such, AVN has £20,705,000 of deferred income on its balance sheet
relating to the ESA. I.e. it is working off the funding it received and booking
the relevant level of revenue as it delivers to ESA. This looks fairly
straightforward.
Taking the ESA revenue aside
leaves AVN with c. £7,963,000 of non-ESA related revenue in 2012 (2011: c. £4,337,000).
The company has £13,475,000 (2011: 7,916,000) in current trade and other receivables.
Of this, £10,019,000 (2011: £5,276,000) relates to net trade receivables,
accrued income and other receivables. This is over 15 months of sales. Can anyone explain to me why this is so high?
To me it looks like the company is financing its customers. The circumstances
over the company’s “acquisition” of Filiago also pointed to that view (AVN - still a space oddity).
I would further add that current
assets are supposed to be current! That is, they are expected to be turned into
cash within a year. Intuitively it seems odd that 15 months of revenue is
expected to be turned into cash within 12 months. Is this normal?
And another thing. The company
reported £1,441,000 (2011: 1,170,000) of trade receivables. However, it has
provisioned for £268,000 (2011: £53,000) against this. I.e. it has provisioned
for 19% of the cash it expects to receive from trade receivables, which is up
from 5% in 2011. That seems extraordinarily high.
So the company has 15 months of
sales due to be turned into cash within 12 months, and of that cash due, it is
increasingly less confident of receiving it. This is altogether a strange classification
of trade receivables and again draws attention to the unnerving increase of the
company’s prospective net debt profile as recently forecast by its broker (AVN - forecasts going the wrong way).
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| Avanti Communications revenue, receivables and payables, June yr end Source: Avanti Communications annual reports |
