Monday 23 September 2013

Avanti (AVN) ... bizarre reaction to further downgrades

Tuesday 24th September 2013

Avanti Communications reported its 2013 year end results on Tuesday 10th September. Bizarrely its share price has risen 49% on the back of this. If anything, I reckon the update and ensuing broker forecasts (see below) confirmed its weaker outlook.

Disappointingly, the company provided no update to its backlog, which was last reported on 10th July 2013 within its year end trading update. Two months prior, Avanti indicated the backlog stood at £290m. As at 30th June 2013, the group’s backlog over the next three years was reportedly:

FYE June 2014: £42m

FYE June 2015: £46m

FYE June 2016: £40m

This was re-iterated Tuesday 10th September, however, had the backlog been improved upon, then one would've thought the company pleased to update it. It didn't. I took that to imply that there’s been no further improvement during the two months since June.

The latest broker forecasts indicate further downgrades. I’d noticed the dramatic downgrades in November last (forecasts going wrong way) and the latest downgrades are just as severe. However, what is more concerning is the projected net debt profile and significant increase in forecast net debt for FY 2015.

In July 2012, Avanti’s broker confidently projected revenue of £56.5m to June 2013. This was downgraded by 39% in November 2012 to £34.5m. The final out-turn was 40% below November’s forecast and 64% lower than that in July 2012. 2015 revenue projections have also substantially fallen. Whereas £138.2m of revenue for 2015 was projected in July 2012, this was lowered by 20% to £110.5m in November 2012 and is now forecast to be 33% lower at £74.2m.

EBITDA projections have fared worse. In July 2012, £38.5m of EBITDA was expected for FY 2013. It came in at a negative £8.8m. For FY 2015, Avanti is now forecast to achieve £38.7m in EBITDA, which is 66% below July 2012’s projected £113.6m and 51% lower than November 2012’s predicted £79.4m.

What is most concerning is the evolution of the group’s net debt profile. Whereas in July 2012, Avanti expected to finish with net debt of £82.7m, this was raised to a forecast £140.9m in November 2012. The final result was £167.2m of net debt, or over twice that forecast a year prior. In July 2012, the group was forecast to be net cash positive by FY 2015, with net cash of £44.8m. July 2012’s projection is now thought to be off the mark by £209.3m. FY2015 net debt is forecast at a whopping £164.5m.

I looked to Avanti’s house broker’s latest research note to learn why the net debt level would remain so sticky over the next few years. The group is projected to spend £20.5m on capex and £2.1m on maintenance capex each year in 2014 and 2015. So a total capex related outflow of £45.2m during the next two years. This will be offset by a forecast £17.7m of operating cash flow in 2014 and a further £40.1m in 2015, or a cumulative £57.8m in operating cash over the next two years. Debt service payments are also projected to be at a cumulative £10.0m over 2014-15. Oddly, despite projecting £45.2m of capex related spend during 2014-15 and anticipating £62.4m in depreciation over the same period, Avanti’s house broker envisages its fixed assets on the balance sheet to increase by £100m from £424.8m in 2013 to £524.0m in 2015. These numbers appear difficult to square and if anyone has any suggestions as to how they can be reconciled I would be interested to hear.

With projected net debt remaining a burden, the group has indicated its ambition to seek access to further debt. Avanti declares:

“The Company continues to investigate some significant new business opportunities, and believes that the flexibility to grow offered by a bond financing structure might be more suited to its medium term needs.  Avanti has accordingly retained advisers to consider bond finance options, with a view to enabling it to respond quickly and positively to these opportunities as they arise.”

One interpretation may be, they need more cash and equity financing is not readily available. What is somewhat more apparent is that the company is still not yet capable of financing growth out of operational cash flows. It can barely service its current debt pile from its existing stock and flow of cash; well last year it couldn’t. It is forecast to be able to service debt out of operating cash in 2014 but unable to cover capex spend. Both net interest and capex are only covered by operating cash by 2015 and even then there is only £13.3m of headroom according to its house broker. In light of the poor forecasting record of Avanti’s broker I would be uncomfortable with that prediction.
Assuming that access to further debt financing is forthcoming, I would be interested to learn what the new creditors would have security over. It is the current debt providers, which have “a charge over the assets of the company”. Therefore it would appear that any further debt would be unsecured and therefore more costly. The group currently has an available drawdown of $328.2m with US Ex-Im bank and COFACE, at an interest rate of 5.5%. It is these lenders which have security over the assets of the company. Incidentally the company indicates that practically all of this available facility is now drawn down. With a reported £38.6m of cash on the balance sheet, a projected £28.3m of combined capex and debt service cost scheduled for 2014, the group is likely to be keen to get access to further funding sewn up soon.
Some investors may be encouraged that the directors have dipped into their pockets over the last few weeks to purchase Avanti stock. While this may appear promising, this is not unusual in promotions where the price has collapsed. I would also point out that Avanti’s CEO, Mr D Williams, was compensated by £749,693 in total remuneration during 2012, and most likely similar in 2013. Since the year end results, he has bought a further 10,000 shares at 180p, or £18,000 worth of stock. This appears a token purchase compared to the c. 858k shares that directors sold in 2010 at prices of 475p, 700p, and 735p/shr.

I reckon that the debt position is insurmountable for this satellite promotion; particularly as further debt appears imminent. Accordingly, I have increased my short position. 

And another thing ...
No mention of Filiago (still a space oddity). Whatever did become of that?

Avanti share price
Source: Bloomberg
Latest house broker revenue forecasts compared to those from July 2012 and November 2012
Source: Bloomberg
Latest house broker EBITDA forecasts compared to those from July 2012 and November 2012
Source: Bloomberg
Latest house broker net debt forecasts compared to those from July 2012 and November 2012
Source: Bloomberg
Historic progression of consensus revenue forecasts
Source: Bloomberg
Historic progression of consensus EBITDA forecasts
Source: Bloomberg
Historic progression of consensus net debt forecasts
Source: Bloomberg
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