Friday 23 November 2012

Avanti (AVN) ... sales and receivables

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).


Avanti Communications revenue, receivables and payables, June yr end
Source: Avanti Communications annual reports
Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.

Tuesday 20 November 2012

Avanti (AVN) ... forecasts going wrong way

This morning, the latest broker forecasts for Avanti’s financials appeared in my inbox. For anyone with access to Bloomberg, they are readily available there. For those that do not have access to Bloomberg, I have put them into some charts below; the broker’s identity remains anonymous.

What is remarkable is the degree to which the forecasts from this broker have changed inside of five months. In July last, the broker confidently projected revenue of £56.5m to June 2013, rising to £102m to June 2014, and £138.2m to June 2015. Now it forecasts (no doubt as confidently) revenue of £34.5m to June 2013, rising to £68.2m in June 2014, and £110.5m to June 2015. Further, whereas back in July the broker projected AVN to report EBITDA to June 2013 of £35.9m, the forecast is now for £11.4m.

In the light of the material change to this broker’s projections for AVN’s financials in less than five months, I reckon the latest P&L projections mean less than nothing. However, what I would pay attention to is the net debt forecast. This has risen substantially. In July, the broker was forecasting net debt to finish at £82.7m to June 2013. This morning it projects net debt to now be £58.2m higher at £140.9m to June 2013. Moreover, five months ago it forecast net debt to June 2014 to fall to £31.2m. This morning’s update sees net debt now being £97.0m higher than that at £128.2m.

Given the direction with which the this broker is adjusting its P&L forecasts while raising its net debt projections, it is probably understandable why I remain short.

On another note, specifically “Note 2. Revenue” on page 48 of Avanti’s recent set of accounts, I would appreciate it if anybody could provide some clarity on my understanding of it. As highlighted below, AVN reported £12,461,000 (2011: £5,462,000) of revenue in 2012. Further, my understanding is that revenues from the European Space Agency (ESA - with whom AVN have received funding) represents 36.1% (2011: 20.6%) of this, or c. £4,498,421 (2011: c. £1,125,172). These figures are remarkably close to those in the final paragraph of note 2, where the group highlights that £4,471,000 (2011: £1,081,000) of its turnover was from European countries outside the UK. Does this mean that apart from the ESA, the group had virtually no revenue attributable to outside the UK during 2011-12? That’s what it looks like to me, but I would welcome others views.


"Note 2. Revenue" from Avanti Communications Annual Report and Accounts for the year ended 30 June 2012
Latest broker revenue forecasts compared to those from July 2012
Source: Bloomberg
Latest broker EBITDA forecasts compared to those from July 2012
Source: Bloomberg
Latest broker net debt forecasts compared to those from July 2012
Source: Bloomberg

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.

Friday 16 November 2012

Renishaw (RSW) ... Reni – not so – sure

I have no doubt that Renishaw (mkt cap £1.3bn) is a very good company. But ... in the context of its limited visibility of sales, the anaemic macro backdrop, and what others in the electric component space are saying, its valuation appears bonkers.

Renishaw suggests that its “order book remains at approximately one month’s revenue.” The havoc with which this can impact on forecasts is demonstrated in figure 1, whereby consensus sales forecasts were cut by 17% over a six-month period during 2009. In line with the high operational gearing of the business, the impact of weaker sales on overall 2009 earnings was significant. 2009 earnings fell by 89% YOY.

Bloomberg consensus (figure 2) projects sales to rise by 6.5% in 2013 and a further increase of 7.3% in 2014. I reckon this to be somewhat complacent against the weak macro backdrop. Further, the group’s EBITDA margin is projected to improve to between 32-33% over the next few years. As highlighted above, operational gearing can be high in this business and so any deviation from forecast sales and the impact on profitability could be significant.

The group’s dividend is fairly modest, offering a prospective yield of 2.3%. The shares trade at a multiple of c. 5x book value and a P/E rating of 17.2x 2013 consensus earnings, falling to 16x 2014 consensus earnings. Renishaw is not cheap.

Although Premier Farnell (PFL) and Volex (VLX) both service different customers to each other and to Renishaw, I would imagine that weak underlying demand is relatively pervasive across the electrical component space. As such, I reckon the downgrades to earnings expectations for both PFL and significantly so for VLX over recent months are difficult to ignore. Perhaps more so is the close historic correlation between each company’s share price with Renishaw’s, which has dramatically broken down over recent months.

In light of the above, I can see little reason to justify a significantly higher price for Renishaw, but plenty of scope for a sizeable drop. The risk/reward here appears skewed. I shorted at 1776p/shr. 

The limited forward visibility of sales is demonstrated by the sudden drop in 2009
In the context of the weak macro backdrop, consensus sales forecasts seem complacent
RSW valuation - forward P/E rating and EV/EBITDA multiple
Volex (VLX) earnings momentum - what others in the electric component space are saying is hard to ignore
RSW and VLX share prices - the disconnect is also difficult to ignore
RSW and PFL share prices - another disconnect in the electric component space
Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

Thursday 8 November 2012

Experian (EXPN) ... H1 (still short)

Experian released its half year figures to 30 September 2012 this morning. Aside from the perfunctory stuff at the front, there are four factors towards the back which I reckon should be the main focus.
  1. Operating cash flow in H1 2013 was $433m, marginally down from $439m in H1 2012 (Mar yr-end). The group highlights that cash flow is seasonally weaker in the first half, but still this doesn’t fully explain why it should be lower than the prior year period. This is highlighted by the cash flow conversion being 73% in H1 2013, compared to 79% in H1 2012.

  2. The group is laying out its stall for $110m of “one-off restructuring costs.” Further, the majority of this is suggested to be in cash. $9m of this impacted the H1 cash flow statement, so it would seem the remaining $101m will impact in H2.

  3. Net capex and spend on intangibles (software, databases etc) continues to climb higher. Expenditure on these items rose to $218m in H1 2013, compared to $198m in H1 2012. This equated to 9.5% of sales, while it equated to 9.2% of sales in H1 2012, and 7.2% of sales in H1 2011.

  4. Despite “benchmark” profit again rising, when stripping out goodwill and intangible items, the group’s balance sheet continues to weaken. Net tangible LIABILITIES totalled $2,463bn in H1 2011, $2,645bn in H1 2012, $2,814bn for FY 2012 (Mar yr-end), and rose to $3,187bn in H1 2013. In the light of the loss of shareholder value attributable to PriceGrabber and LowerMyBills, I would be cautious as to the carried value attached to the goodwill and intangibles the group reports arriving at  its total net asset figure.

    The shares are currently flat on the day. For the above reasons and my prior observations (EXPN - a lot of acquisitions, capex and director selling) I remain short.

EXPN share price
EXPN current P/E and EV/EBITDA
EXPN consensus 2013 earnings momentum and share price

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.