Wednesday 17 December 2014

Dialight (DIA) ... here we go again?

Wednesday 17th December 2014

I reckon Dialight is a grossly overvalued business. All I see is a business capitalised at £255 million, with little in the way of IP, and a dismal record of free cash flow generation. For example, on my calculations it achieved a free cash outflow of £4.6 million in 2013, as compared to a paltry free cash inflow of £2.5 million in 2012. More recently, its free cash outflow looks to have been a further £1.1 million in H1 2014. Other investors may be more enthused by this achievement or believe that there is some actual IP in the business and that it can be protected. Nonetheless ...

I have shorted the shares at 785p/shr as I reckon DIA is lining up to disappoint for the second year running to deliver a second win: Dialight ... a dimmer switch?

In its Interim Management Statement (IMS) from 7th November 2013, the group stated that:

"As in recent years, the Group's financial results are weighted to the second half, and in particular the seasonally-strong fourth quarter. As ever the precise timing of Industrial Lighting orders remains difficult to predict, although the Group continues to expect underlying profit before tax from continuing operations to be broadly in line with the prior year."

In the event, profit before tax (PBT) from continuing operations was £14.4 million to 31st December 2013 (2012: £19.7 million) or 27% below the prior year. 

The company warned with a trading update on 8th January 2014, where it stated that the miss was partly driven by:

"... The late receipt of almost £3m of Lighting orders that will now be delivered in 2014 and decisions by certain US customers in December to defer Lightning orders will result in a shortfall against our previous expectations."

A further £3 million in the revenue miss was attributable to the Traffic business:

"In addition, the combined performance of the Traffic business both in the USA and Europe was also down £3m in revenues on the prior year."

Skip forward to this year's IMS from 19th November 2014 and the group's perfunctory statement regarding second half (and in particular Q4) weighted lighting orders remains. But this time there is a slightly different caveat: 

"... While any further major unforeseen disruptions to production could result in additional slippage this year, we are encouraged that underlying market demand is strong and production is running smoothly at this time."

We've been down this road before and so I don't place much faith in the group's assurances and visibility of earnings. 

While the group's revenue has grown strongly over recent years, by 12% YOY in 2012, 14% YOY in 2013, and a consensus expectation of 17.4% YOY in 2014, its EBITDA margin has fallen sharply. DIA's EBITDA margin was 19.5% in 2012, and fell to 13.6% in 2013. It fell further in H1 2014, to 11.8% as compared to 12% in H1 2013. And yet despite this continued decline in EBITDA margin, full year consensus revenue and EBITDA forecasts imply an improvement in H2 2014, to 15.6% from 15.0% in H2 2013.  

I reckon a year on year margin improvement in H2 2014, to be very unlikely. So I sold short and will await a trading statement in early January 2015. One's thing's for sure. If DIA disappoints for a second consecutive year, then its 21x P/E rating is toast. 

Dialight consensus sales forecasts
Source: Bloomberg
Dialight consensus EBITDA forecasts
Source: Bloomberg
Dialight consensus EPS forecasts
Source: Bloomberg
Dialight consensus net debt forecasts
Source: Bloomberg
Dialight share price
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. 

Tuesday 9 December 2014

Aberdeen Asset Management (ADN) ... taking the low road

Tuesday 9th December 2014

On the basis of a cursory glance of the price chart, you may reckon on Aberdeen Asset Management (ADN, mkt cap £6bn), having a third pop at 500p/shr. 

Aberdeen Asset Management share price
Source: Bloomberg
However, ADN's management can't put too much faith in this. They lobbed out over 3 million shares between them early last week. 

ADN Director sales after update
Source: Bloomberg
Indeed, approaching 500p/shr appears to have been the magic number to exit stage left over recent years. 

ADN director sales/purchases over recent years
Source: Bloomberg
Lastly, I'm minded to observe the CitiFX Emerging Market Carry Beta Index (CAFZBET4 Index). This leads me to believe that ADN is only going one way; perhaps 400p/shr for starters. So I sold short at 452p/shr.  

ADN as compared to CitiFX Emerging Market Beta Index
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. 

Tuesday 11 November 2014

Barclays (BARC) ... stars aligning?

Tuesday 11th November 2014

Pursuant to an inspection of the Barclays (BARC LN) share chart, I bought a few November 245p calls for a penny. 

Over in the US, JP Morgan (JPM US), Goldman Sachs (GS US), Citigroup (C US) et al have rallied sharply over recent weeks. By contrast, the UK/Euro names remain in a funk. Relative valuations may pave the way for a sharp bounce in BARC. That said, this may have to wait for the forthcoming regulatory assault on December 16th 2014 when the Bank of England publishes the results of its stress test of the British banking system.   

Nonetheless, chart wise, I reckon this to be an interesting level on BARC; with the stars beginning to align. 

It's currently sat on its 200 day moving average, teasing to potentially break above this and out of its down channel; prevalent since July 2013. The nearer term moving averages are also beginning to turn up, with the prospect of a Golden Cross coming into play. 260p near term looks likely.  

While the UK banking scene continues to go through its trials and tribulations, in terms of current valuations, BARC is certainly the cheapest amongst its peers. It trades on a price to book value of 0.64x as compared to peers ranging from 0.82x (Citigroup) to 1.26x (Goldman Sachs & Lloyds). 

Similarly on a forward P/E basis, it's also the cheapest of the bunch. 

By contrast, it currently yields the highest dividend, whilst offering one of the highest prospective yields during the next few years.

Overall, any break higher may not come in time for November 21st, but November 245 calls at a penny were enticing enough to place a small wager on the technicals prompting a run up.   

BARC - share price
Source: Bloomberg
Barclays relative to Goldman Sachs
Source: Bloomberg
Barclays price to book relative to peers
Source: Bloomberg
Barclays forward P/E relative to peers
Source: Bloomberg
Barclays prospective dividend yield relative to peers
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. 

Wednesday 5 November 2014

Avanti (AVN) ... questionable quality of sales

Wednesday, 5th November 2014


  • 2014 revenue rose by $33.5 million. 
  • 37% of this is related to sales of kit.
  • 28% of this is related to sales where the full cash amount will not be recovered for five years.
  • 65% of the 2014 sales increase appears to be related to kit sales and bandwidth or other whereby the full cash amount for the latter is unrecoverable for five years. 
  • 48% of the original current trade receivables balance appears to be either provisioned as impaired or acknowledged to not be fully recoverable. 
  • The group still plans to raise a further $125 million in debt and another $100 million in junior finance.
I remain short Avanti.


Avanti's 2014 accounts were released yesterday and while the group's year end statement (from September 15th 2014) revealed that debt continues to pile up at an alarming rate (the debt rises), the accounts show that the quality of its revenues remains questionable as ever. 

It had already been reported that 2014 revenue rose by $33.5 million (+104% YOY), to $65.6 million. However, the accounts reveal two noteworthy features in the composition of this revenue increase. 

  • From note 2, page 53, it would appear that $12.5 million of the 2014 revenue increase of $33.5 million related to additional sales of terminals and other equipment. Hence, 37% of the increase in sales during 2014 did not relate to bandwidth but was in fact sales of kit.

Avanti revenue
Source: Note 2, 2014 Annual Report
  • From note 16, page 59, it seems that $9.4 million of the group's $21.0 million trade receivables balance relates to a long term receivable, whereby just 10% of the original balance has been paid and the remaining payment cycle runs over the next five years until 2019!

Avanti trade receivables and long term receivable
Source: Note 16, 2014 Annual Report
This is altogether odd.

Firstly, one would assume that this long term receivable probably relates to the sale of bandwidth. If it doesn't then it would suggest that a further $10.4 million of the 2014 sales increase did not relate to bandwidth, which on top of the $12.5 million additional sales in kit would suggest that 68% of the group's 2014 sales increase did not relate to bandwidth. That would be strange for a satellite company.    

However, if it does relate to bandwidth sales, then that suggests that the group has extended a credit of $9.4 million to a customer(s) with a payment term over five years. Why would that be the case, when the company has suggested that capacity should be sold out well before 2019?

Further, this is not the first time that Avanti has extended a loan or in this case a credit to a customer. With this credit the group receives semi-annual instalments of $1.04 million, whereby interest is paid at a rate of 5.25% per annum. Incidentally, why does Avanti borrow its own debt at 10% per annum and then offer credit at 5.25% per annum? If you recall, in 2011, the group extended a £9.1 million loan to a re-seller/customer, or "strategic partner" as Avanti termed it then. That was supposed to accrue interest at a rate of 7% per annum, although within six months, the "strategic partner" had defaulted and Avanti took control of it (still a space oddity).

What this all suggests is that from the $33.5 million in additional sales for 2014, that $12.5 million relates to sales of kit and a further $9.4 million (which may or may not be bandwidth related) is from sales whereby the full cash amount will not be collected for another five years. This equates to 65% of the group's 2014 sales increase. 

In terms of the quality of the group's receivables balance, uncertainty remains. As highlighted above, $9.4 million of the total $21.0 million trade receivables balance is a long term receivable whereby the next instalment is due in June 2015. Why this is held in the current assets section is uncertain. Nonetheless, $9.4 million of the total trade receivable balance is naturally not going to be past due or even 60+ days past due as the first instalment isn't due for collection until June next year. This means that of the remaining $11.6 million in receivables ($21.0 million less $9.4 million in long term receivables) that $3.14 million is 60+ days past due. That is 27% of the current trade receivables balance is 60+ days past due. As Avanti has itself prior acknowledged, "Generally when the balance becomes more than 60 days past its due date it is considered that the amount will not be fully recoverable." 

Avanti - ageing of receivables
Source: Note 21 b, 2014 Annual Report

It is also worth bearing in mind that $4.6 million of the original $25.6 million trade receivables balance was impaired with a provision. So, of the $16.2 million in original current trade receivables, it would appear that $7.7 million has been provisioned for or is unlikely to be fully recoverable. That is 48% of the original current trade receivables balance!!! 

And another thing ...
Avanti paid its auditor, KMPG, an additional $392,000 in "Audit related assurance services" during 2014. Well done KMPG.

Avanti - auditor remuneration
Source: Note 4, 2014 Annual Report
I remain short Avanti.

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. 

Monday 20 October 2014

Avanti (AVN) ... the debt rises

Monday 20th October 2014

I finally got round to reading Avanti's year end results to 30th June 2014 (released on 15th September 2014). And then I shorted some more stock. 

2014 was a major year for Avanti. Its revenue doubled, the net loss nearly doubled, net debt ballooned to $321.7 million, and backlog went nowhere. 


Revenue
Around this time last year, I took a look at the composition of its 2013 revenue, attempting to fathom the revenue level that was related to satellite capacity. A year down the line and revenue discovery remains somewhat opaque: 

  • Q4 2014 revenue was reported as $26.5 million, however, the statement warns that revenues in Q1 2015 "... are expected to be around the average of the last year, with new contracts driving into growth in subsequent quarters." Hence, Q1 2015 revenue is expected to be c. $16 million. This would imply a Q3 2014 to Q1 2015 revenue trend of $14 million, £26.5 million, $16 million. This is not altogether reassuring for a company with an interest bearing bond of $508 million and ambitions to raise a further $125 million in debt and $100 million in junior finance (most likely equity).
  • As compared to 2013, I find it even less clear what makes up this year's group revenue.

    Whereas in 2013 the list of other revenue sources included:
     
    Consulting revenue;
    ESA contract; 
    and kit. 

    This year has seen the following added to the mix:

    Contracting and building several cellular back-haul networks;
    A customer who has initiated an infrastructure project, which is of strategic importance to AVN (this was provided as the main reason for the increased debtors at the year end);
    and revenue where infrastructure has been disrupted by civil unrest.
          
Sticking with revenue, there should be some concern regarding its future:

  • For the first time that I'm aware, the credit quality of the backlog figure has been raised by the group. Within the "Finance and Operating Review", it is highlighted that:

    "Backlog has a mixture of companies with varying credit qualities."

    The company goes on to highlight that:

    "The average credit quality has improved over the last 18 months." 

    However, the fact that the prior backlog revenue declared for 2014 (as reported 10th July 2013) of £42 million or $69.2 (£42 million at $1.65) failed to fully come through, goes against the grain of the latter statement. I note that there was also the expectation that:

    "... orders under framework contracts (not included in backlog), new contracts and possible renewals (of contracts expiring between 2014 and 2016) [would be expected] to increase these numbers."

    This expectation didn't seem to come through as, overall, revenues fell short of what was in backlog last July. The other alternative is that backlog materially under-delivered. This may explain the disappearance of this KPI?!?
  • In the CFO's review, he notes that $26 million of backlog moved to revenue. However, we know that revenue included the construction of cellular backhaul networks, so the construction of networks must be - or have been - in backlog - how much is it? The key question is how much backlog is pure satellite revenue that is expected to earn adequate margins to service and repay the ballooning debt whilst leaving a return for equity holders?
  • Finally, when discussing Cost of Sales, Avanti reveals that 2014 revenue may have been somewhat bolstered by projects where it has acted as the prime contractor, and so taking 100% of the revenues and then paying out the costs of the secondary contractors. How "incremental" these sub contract costs and associated revenue were, would be interesting to know.
The Gross Loss
One would imagine that a satellite company has a significant fixed cost base. And yet Avanti's "Other cost of sales" line (excluding depreciation) has remained stubbornly high at around 60% for the last several quarters, even as sales have risen sharply. The flat margin may suggest that either a lot of the growth in revenue is not bandwidth related sales, or the bandwidth is earning less/costing more to deliver than expected. I would've though that there should have been a ramp up in margin by now if significant satellite capacity was being sold, and yet this has not been the case.

EBITDA
In the third bullet point of the company's "Financial Highlights", it mentions that it was "EBITDA positive for the full year for the first time." This is somewhat misleading and Paul Walsh, AVN's Chairman, should probably know better than to permit the statement as it was. The positive EBITDA was prior to the "non-cash share based payment charge" and after the addition of $5.3 million of an ex-gratia payment relating to HYLAS 2. Incidentally, in a legal sense "ex-gratia" is a payment made without the payer recognising any liability or legal obligation to the payee. Given that the builder of the HYLAS 2 satellite is the payer, and is also the builder of newly ordered HYLAS 4 satellite, perhaps there is some sort of jiggery pokery going on? Either way, it's not an ongoing profit so the company was not EBITDA positive in a prudent understanding. 

Moody's
A review of Moody's analysis of the high yield bond shows that, just 12 months prior, Moody's had been expecting sufficient positive EBITDA for FY 2014 to provide an adjusted leverage multiple of 10x EBITDA. As highlighted below, Moody's most recent report after the additional bond suggests that: 

"The change in outlook from positive to stable reflects our expectation that the additional investment to fund HYLAS 4 will weigh on free cash flow, increase debt levels and increase the time frame for deleveraging. Based on the increased amount of debt, we now estimate that Moody's adjusted leverage as at the year end 2014 will be significantly above 10x-our expectation at the closing of the transaction in October 2013."

Source: Moody's Global Credit Research - 23 June 2014

This is a worrying deterioration from forecast positive EBITDA at the time of the issue of the $370 million High Yield bond, to now actual negative EBITDA with $508 million in High Yielding debt. It may prove difficult to raise further capital at a similar rate of interest in the debt markets. Indeed as the chart below highlights, Avanti's existing debt has already begun to price down over recent months, so that it has dropped below par and is now yielding 10.5%.           


Price of Avanti debt
Source: Bloomberg
Yield on Avanti debt - gone above 10%
Source: Bloomberg

Non-controlling interests
We await the full year accounts, but the reported loss attributable to the non-controlling interest suggests that Filiago made another loss despite its significant valuation held on AVN's balance sheet. More on Filiago here. In the light of the group's enormous debt pile, the condition of Filiago is almost irrelevant, barring the fact that it provides a further example of a lack of transparency. 

Balance sheet
The capital structure of the group and its associated cost changed dramatically during 2014. The group made a noble effort to suggest that the change was due to the prior debt being "... overly restrictive in terms of the Group' growth aspirations." The facts look more to suggest that the replacement of the old loan with a new more punitive loan was essential, and quite possibly to stall the event of a default. 

As it is, gross debt has risen a whopping $204 million during 2014, to $517 million. Meanwhile, net debt now stands at $322 million (2013: $254 million) and the group's interest expense has risen to $39 million (2013: $6.5 million). That is some rise to allow for less restrictive terms to meet growth aspirations! 

*********************************************************************************

There were further red flags I could mention, however, there are already enough here to prompt me to increase my short. So I did.

Avanti's share price
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. 

Thursday 28 August 2014

Walgreen (WAG) ... medicinal grief?

Thursday 28th August 2014


I've bought a few $60 September Puts for 83 cents in the drugstore retailer, Walgreen (WAG, mkt cap $58bn). I reckon this decent value for a stock which looks a bit iffy. 

I happened to notice that WAG's CFO, Mr Wade Miquelon, recently walked, seemingly for over-guiding 2016 prospective EBIT by a hefty $1.1bn or c.16%. How one manages to make an error on that scale I do not know, but it's usually a precursor to matters getting worse before they get better; something is often going on in the background.

My target is $55 on a two to three week basis. Technically that would coincide with down channel support. The fact that WAG has gapped down on a grand scale through its 200 day moving average does also not bode well. Indeed the chart to me looks like it's setting up for a second service roll over.

Valuation wise WAG is still on a punchy 16.3x forward earnings; earnings which are still being downgraded. Indeed, WAG's historical forward P/E rating has typically been sub 14x in the six years prior to Q4 2013.

September $60 Puts at 83 cents ... could be a nice little 9/2 bet.

Walgreen - share price
Source: Bloomberg
Walgreen - longer term share price
Source: Bloomberg
Walgreen - consensus earnings downgraded
Source: Bloomberg
Walgreen - forward P/E and EV/EBITDA multiple
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. 

Monday 21 July 2014

Director purchases and sometimes lazy longs ...

Monday 21st July 2014

A common misconception used by longs against short sellers is that a short argument can be negated by the fact that a shorted company's management may have bought stock (typically subsequent to a short attack). This is not always so and can be a dangerous (and lazy) assumption. One of many instances where it proved a mistake is in the case of Connaught.  

In March 2010, I was four years in to my six year stint in sell side equity research. I'd issued a bearish Sell note on Connaught Plc (CNT). At that time CNT was capitalised at £400 million, having fallen by c. 35% over the prior few months from its all time high market cap of c. £615 million. During the decade leading up to this CNT's share price had risen from 30p in 1999 to north of 400p per share in 2009. CNT was a decent sized, well covered (not to be confused with well researched) company. The group provided repair and maintenance services to the UK's Social Housing market, as well as compliance services, such as health and safety.

The analysis in my sell note principally focused on CNT's woeful record of cash generation in relation to its reported profits, its increasing capitalisation of software related costs, the frequency of 'one-off' restructuring charges, and its rising use of debt for acquisitions. I reckoned CNT was overstating profits by at least 20%, so I set my financial forecasts at around that level below market consensus. In the event, this was far too optimistic. CNT went into administration six months later in September 2010, seemingly on the back of some form of fraud.

Several things surprised me during those six months between March and September 2010.

Firstly I was amazed at the vitriolic response by CNT's management to what I thought was a fairly straight forward note. All I had really highlighted were facts that had led CNT's business and financials to where it was at the time. CNT's CEO, Mark Tincknell, issued a particularly pernicious email to his employees, institutional investors and some press concerning my research note. Further, CNT was so popular amongst institutions, and the sell side, I think there was a general perception that I'd gone mad to have issued a bearish note.

I was also surprised by the market reaction.

CNT's share price fell by 15% in the days following publication of my note. But then the shares staged a strong c. 33% rally in the months to end of June 2010. The rally was seemingly prompted by the arrival of a new Chairman, Sir Roy Gardner, a number of brokers coming to CNT's defence issuing 'strong buy' recommendations, an upbeat set of interims in April 2010 where the CEO commented "there are no big surprises out there", and director purchases.

Director purchases.

In the weeks following April 2010's interims, CNT's directors purchased stock. Robert Alcock bought 10,000 shares at 304p, the CEO, Mark Tincknell purchased 335,399 shares at 309p (on the face of it an impressive £1 million worth), and Sir Roy Gardner picked up 158,808 shares at 315p. Poor Sir Roy. No really, poor Sir Roy. Half a million down the plug hole. Within six weeks of their purchases CNT issued a whopper of a profit warning and the shares fell by 67%. Poorer Sir Roy stepped in again. He bought a further 50,000 shares at 112p.

As fore-mentioned, within another few months or so of the whopping profit warning in late June 2010, CNT was a bust seemingly on the basis of some form of fraud. There is no doubt in my mind that the rally in April and early May was partly attributable to the perception of director purchases.

Given Sir Roy's late arrival to the fiasco, he was unlikely to have been involved in any improprieties. All he seems to have been is a pretty poor judge of character and financials. But why would the CEO have sent a further £1 million down the Swanee? One answer may be that in the year prior, Mark Tincknell (who at that time was the Chairman), dumped 650,000 shares on the market at 355p per share. So in context he bought less than half his holding back when things began to go sour. I also recall that in October 2009, almost at the peak of the share price, the former CEO, Mark Davies, sold close to £7 million in stock, while the former FD, Stephen Hill, sold £3.8 million worth of shares. Talk about timing!

Since then I've been wary of director purchases in situations where a cloud hangs over the underlying business, especially when purchases are in repeated flurries and small beer compared to prior director sales.    

Connaught Plc's share price
Source: Bloomberg

Connaught Plc director purchase and sale of stock
Green = purchase
Red = sale
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. 

Avanti (AVN) ... gravity and reality

Monday 21st July 2014

In light of Avanti's (AVN's) share price move since its trading update from Friday last, there is an element of the horse having bolted. Nonetheless, as I still reckon any would be buyer mad to pay a high two digit penny sum for an AVN share, the following may explain my position. I am short Avanti.

  • Firstly, there is a stark contrast between last year's statement and this year's. Where are the KPIs and the business update that we had last year? Going by previous RNS releases, it's very unlike AVN to miss the opportunity to talk up the business.  
  • "Revenues are expected to be in line with market expectations in the range of $64 - $65m". As the chart below highlights, revenue expectations received their latest cut in May last, and have been on a downward trajectory since 2014 forecasts were anticipated to be over $300 million in late 2011.   
Avanti 2014 consensus revenue expectations
In line with the cut in May 2014, but on a downward trajectory since 2011
Source: Bloomberg
  • What the revenue expectation means is that AVN achieved quarterly revenue in Q4 of c. €25 million, which represents a 79% increase in revenue from Q3. This seems like a great result. However, it would be illustrative to learn how much of this revenue jump relates to the $15 million Government contract announced at the time of the interim results?

    "In Government, the launch of Avanti Government Services has made an impact on our ability to promote ourselves as the high security provider of choice. We were awarded a $15m project to build a high value-added network in one African country and are confident that more strong government business will be forthcoming shortly."
  • The Government contract is certainly revenue but it's not ongoing revenue from the sale of satellite capacity that is repeatable. It's probably also not as profitable as the sale of bandwidth and would certainly help explain why profitability continues to be so slow.  
  • AVN announced that PBT would be lower than consensus with approximately half the variance resulting from bond refinancing costs of $7 million. This suggests that profits will be lower than expected by $14 million. As AVN's joint broker, Jeffries, rightly highlighted in its note from Friday last, the refinancing costs would have been known by management for some time and most likely at the time of the group's $150 million bond placing in early June 2014. 
  • Allthough AVN suggests that its PBT will be lower than expected by $14 million (bond refinancing being half of this at $7 million), Jeffries has cut its 2014 PBT forecast by a whopping $58.5 million, from a previous $22.8 million loss to a $81.3 million loss.
Avanti 2014 consensus PBT expectations
AVN suggested PBT would be lower by c. $14 million but house broker Jeffries cut forecast by $51.5 million
Source: Bloomberg, Jeffries
  • Cash is reported as being a very healthy $195 million. But AVN raised $157.5 million through a bond placing in Q4. So without that, it would appear that AVN would have been close to running out of cash. It also helps to illustrate why very little of the jump in revenue has failed to turn into cash or profit. Without the bond raise, cash would have been:

    $195 million (year end cash figure)
    less $157.5 million (amount received on bond issuance)
    = $37.5 million (cash at 30 June without the bond issuance)

    Hence, cash consumed during the quarter would be:

    $65 million (cash balance at end of Q3)
    less $37.5 million (what cash balance would be without bond issuance)
    = $27.5 million

    $18.5 million of this went on bond interest paid on 1 April
    So
    $9 million of cash was consumed during Q4.
  • Some of the $9 million in cash consumed would have been HYLAS 3 capex related. Brokers forecast $25 million per annum, so say $6.3 million per quarter. This still implies that there was a $2.7 million cash outflow after capex and despite the bumper rise in revenues. As usual, when the accounts come out it will be interesting to observe the quality of those revenues.  
  • Without the fund raise and with the above rate of cash burn, AVN would likely have been down to its last $6 million on 1st October after paying the bond interest (6 months on $370 million and 3 months on $150 million). So the raise looks very much like a rescue raise. 
This all begs further questions ...
  1. How could AVN have told the market that it was trading in line with expectations in the Bond press release announcement? 
  2. What will Moody's do now that an anticipated 10x debt multiple when the bond was issued is now an infinite multiple of that loss?
  3. Will AVN proceed to buy the 4th satellite or just use the extra $150 million to get it through (if that day arrives) to becoming cash flow positive?
  4. What is the Chairman, Paul Walsh, doing these days? How involved is he in all the obfuscation? 
  5. Will the high yield bond market be open to AVN in future years, because it appears that there's a lot of new financing and re-financing to come???   
And another thing ...
No wonder Caledonia (AVN's 2nd largest shareholder) started selling recently and before the update. The question is, having sold c. 2.2 million shares and having around 13 million left, are they done selling?

Avanti share price
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 18 July 2014

The Pig and Pork Scam ...

Friday 18th July 2014

'Pig and pork' is the process whereby Pig Limited buys from Pork Limited, apparently at arm's length when in fact there is undisclosed or unclear common ownership of both companies. The result is that profits emerge in Pork Limited so that Pork Limited's financiers are conned into doling out more cash/finance, in effect to both companies. The auditors cannot systematically pick it up; especially if Pig Limited and Pork Limited appoint separate audit firms. And the only financial cure for both companies is that Pig Limited ultimately disposes of that which it has purchased at a profit after covering the warehousing costs incurred. Needless to add, this cure is not usually to hand in time. The practice is fraudulent. 

The definition above was provided to me by the Varlet, so I thank him for it. 

Now, how might this be applied in practice? Here is a fictitious example ... 

Let us suppose there is a company listed on London's AIM market, called Pork Limited. Pork Ltd has operations across many countries but is head-quartered in that bastion of financial rectitude that is Sofia, Bulgaria. 

Historically, Pork Ltd has reported growing revenue and profits but generated little in the way of cash. The cash was all tied up in debtors. However, debtors were not settling their accounts because the entries related to fake revenue. Fake revenue and profits continued to be reported. Debtors continued to pile up. Cash was still not generated and so Pork Ltd continually tapped the markets for finance. 

As a few years passed, the lack of cash generation and piling up of debtors became embarrassing. Debtors were being shoved in such places as trade receivables, post dated cheques, and amounts recoverable on long term contracts. So a solution had to be found. Amongst no less than say 13 subsidiaries, Pork Ltd had a wholly owned subsidiary called Pig Ltd; also head-quartered in Sofia. Pig Ltd was to be divested and the fake revenue and fake debtors were to go with Pig Ltd. However, Pork Ltd could not find a buyer for Pig Ltd (fake businesses are difficult to sell), so it sold 51% of Pig Ltd to Pig Ltd's management and financed the transaction for them. Strangely, Pork Ltd handed over, let's say €5 million in cash to Pig Ltd's management, and the terms of purchase would be that Pig Ltd's management paid, say, €10 million in instalments over say four years back to Pork Ltd for their purchase.

But Pork Ltd was still largely a fake business and with still largely fake revenues and fake profits tied up in high fake debtors. And with the promise to the market that fake revenue would go higher, real cash was urgently in need. So it tapped the market for its biggest equity raise ever, say for €20 million, with the use of proceeds supposedly for acquisitions, and working capital to support its impressive but fake growth. A little later in the year it took on a further, say €18 million, by way of debt. Nonetheless, Pork Ltd was still committed to demonstrating revenue and profit growth and needed to show cash coming in. 

Meanwhile, Pig Ltd took the opportunity to also raise debt. It raised say €16 million. So with the €5 million received from Pork Ltd, Pig Ltd had around €21 million in cash available. Free from the burden of having to demonstrate fake revenue to the AIM market, Pig Ltd's revenues dropped by say 40% in the year following divestment. This was all largely in one division, Pig Ltd's software butchery products business, where revenue fell by say €15 million or say 75%. Oh yes. €15 million. 

Back at Pork Ltd, it couldn't find any buyers for its butchery products. But it had led the market to believe that it had enough buyers to purchase say €20 million of its butchery products. So Pork Ltd got into contact with its now associate, Pig Ltd.

Pork Ltd highlights to Pig Ltd that as it has cash, why doesn't it buy butchery products from Pork Ltd? After all, Pig Ltd can always capitalise the cost of its purchase of Pork Ltd's useless butchery products on its balance sheet, and still report good fake profits. Pig Ltd's management keen to help out and mindful that they still owe Pork Ltd maybe €8 million, agrees. It might appear strange that Pig Ltd's butchery related revenues have collapsed and that it still spends and capitalises an even greater amount on butchery product development cost, say €12-18 million. Oh yes. €12-18 million. But it is in Sofia, and few will ever look at its accounts. 

To much fanfare, Pork Ltd's butchery product revenues grow by €20 million. Joyfully it collects some cash. Unbeknownst to the market most of the butchery products were purchased by Pig Ltd and the cash received from Pig Ltd. The Pig and Pork Scam continues ...

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 17 July 2014

Volatility looming? ...

Thursday 17th July 2014

I bought the VIX earlier. After all, it's been a while since a decent spike. The mid to high teens looms large ... 

Volatility Index
Source: Bloomberg
It's been longer still since a surge into the 20s ...

Volatility Index
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.

Wednesday 16 July 2014

Globo (GBO) ... a peek at the Greek

Wednesday 16th July 2014
  • Globo (GBO) divested 51% of its Greek operation, Globo Technologies (GT), in Dec 2012.
  • GBO values GT at c. €23.7 million.
  • 57% of GT’s net book value appears to be related to capitalised intangibles/software.
  • 17% of GT’s net book value appears to be trade receivables over one year past due.
  • GT’s revenue declined by 29% in 2013.
  • GT's software related revenue fell by €14.480 million or by 75% in 2013. 
  • GBO's Enterprise and Mobile software project revenues rose by €17.781 million in 2013.
  • GT reported a €12.529 million cash outflow in 2013, largely on intangible/software items. 
  • GT’s net debt has risen to €13.731 million in 2013 (2012: €0.780 million).
  • GT trade receivables and revenue recognised under IAS 11 is 101% of 2013 revenue.
  • 36% of GT’s trade receivables are over one year past due.
  • GT has not reported positive operating cash flow for two consecutive years.
  • GT's 2013 free cash flow was negative c. €12.867 million. 
  • GT is held on GBO’s balance sheet with a value of €11.625 million (2012: €10.464 million).
  • GT's management still owe GBO €9.7 million.
  • I am short GBO.

Globo’s (GBO) 49% stake in Globo Technologies S.A. (GT) is held on Globo’s balance sheet with a value of €11.625 million as “Investments in an Associate”, while €9.700 million is due from GT's management as “Proceeds from disposal of a subsidiary”. A total of €21.325 million is attributable to GT, which is just over 15% of GBO’s net asset value for 2013. Other than an update from September 2013, little has been heard of GT since GBO’s Greek operation was divested on 3 December 2012.

Globo 2013 accounts: Investment in Associate
Globo 2013 accounts: Proceeds due from Globo Technologies
GBO sold 51% of its subsidiary, Globo Technologies (GT), to a company called, Zipersi Consulting, owned by GT’s management team. GT was sold for €11.2 million. This was deferred consideration. In fact the payment schedule seemed particularly favourable, with only €2.0 million of the deferred consideration due over the first two years and €9.2 million due from December 2014, through to a final instalment of €3.7 million due in December 2016.

In addition to the preferential financing terms, according to GBO's 2012 annual report, in note 15, while an initial €400,000 was received by GBO as a first receipt of consideration due from GT's management team, it would also appear that €7,061,000 in cash and cash equivalents went to GT. This resulted in a net cash outflow on disposal of GT, of €6,661,000. This is an altogether odd flow of cash for a disposal. Usually one would imagine that the cash flows from the acquirer to the vendor and not the other way around, albeit with an understanding that it flows back over the years to come.


Net cash outflow upon disposal from Globo to Globo Technologies
Source: Globo 2012 annual report


Flow of cash from Globo to Globo Technologies
and anticipated deferred consideration schedule from GT's management team
Source: Globo 2012 annual report 

One may ask why GBO elected to sell 51% of its stake in GT? If the business was bad, then why not sell all of it? If it was a good business, then why sell it at all, or even as much as 51%? Especially on preferential financing terms to the management team buyers?  

The upshot of all this was partly aesthetic in that a boat load of receivables prior recorded on GBO’s balance sheet, were replaced by a relatively anodyne “Investment in associate” and “Proceeds due”. Indeed this was alluded to in the accompanying divestment announcement:

“In addition, the exclusion of assets and liabilities (including debt) from the Group’s balance sheet will provide significant additional visibility to the investor community on the Group’s international operations and financial performance.”

Globo updated the market on 23 September 2013, as to its own and GT’s performance. At that time, GBO’s CFO, Mr Dimitris Gryparis stated:

“The divested company Globo Technologies S.A. is out-performing expectations and trading ahead of forecasts. For the six months ended 30 June 2013, its revenue increased by 233% to €13.64 million (H1 2012: €4.09 million). It has a pipeline of public and private sector contracts of more than €10 million to the end of the year.

Profit after tax reached €1.49 million, with that attributable to the Globo Group, as a 49% shareholder, being €0.7 million.”

GT’s 2013 full year accounts can be found here. They highlight that revenue in the full 2013 year was €25.224 million, down from €35.701 million in 2012. There are several things to note here:
  1. This is a dramatic year on year decline in revenue. Revenue fell by 29%.
  2. If, as GBO’s CFO highlights, GT achieved €13.64 million of revenue in H1 2013, as against €4.09 million for H1 2012, then this means that GT’s H2 2012 revenue would have been €31.611 million. This would imply that while GT’s H1 2013 revenue may have been 233% higher as compared to H1 2012, that H1 2013 revenue was 57% lower than revenue achieved in H2 2012. Further, at €11.584 million, H2 2013 revenue would be 63% lower than H2 2012 revenue. See GT's revenue trends as implied by Globo statements and GT's 2013 accounts in the chart below.  
  3. GT's revenue decline was attributable in the main to a €14.480 million fall in software applications revenue. This fell from €19.209 million in 2012 to €4.729 million in 2013. A drop of 75%. Incidentally, in the same year, GBO's Enterprise mobility licences & subscriptions and Mobile software projects business lines were going great guns. They grew revenue a combined €17.781 million in 2013. As highlighted further down, while GT's software related revenue plummeted, its cash outflows on capitalised software related items went considerably higher. Why was this when revenues were falling so sharply? 

Revenue of Globo Technologies as implied by Globo statements and Globo Technologies accounts
Source: Globo, Globo Technologies annual reports

The quality of GT’s revenues is also worth considering. GT’s accounts highlight that revenue rose and fell as follows in the chart below during 2010 to 2013:

Globo Technologies revenue: 2010 to 2013
Source: Globo Technologies annual reports
GT’s trade receivables were as follows during 2010 to 2013, highlighted in the chart below:

Globo Technologies trade receivables: 2010 to 2013
Source: Globo Technologies annual reports

GT’s revenue recognised under IAS 11, which is essentially revenue recognised under long-term contracts and the corresponding cash due, was as follows during 2010 to 2013 as highlighted in the chart below:

Globo Technologies revenue recognised under IAS 11: 2010 to 2013
Source: Globo Technologies annual reports

And finally, adding trade receivables and revenue recognised under IAS 11 together and contrasting this with reported revenue during 2010 to 2013 was as highlighted in the chart below:

Globo Technologies revenue, trade receivables and revenue recognised under IAS 11: 2010 to 2013
Source: Globo Technologies annual reports

GT’s 2013 trade receivables and revenue recognised under IAS 11 is equivalent to 101% of revenue in 2013. This was up from 64% in 2012. 

Having established that GT’s revenue was equivalent to 101% of its trade receivables and revenue recognised under IAS 11, now what about the quality of those trade receivables?

Trade receivables were reported as €15.770 million in 2012. Of these, €1.365 million was reported as being above 360 days overdue. Hence in 2012, 9% trade receivables were over a year past due.

By 2013, trade receivables were reported as €12.363 million. Of these, €4.402 million were reported as being above 360 days overdue. Thus in 2013, 36% of trade receivables were over a year past due.

English translation of Globo Technologies ageing of trade receivables
Source: Globo Technologies 2013 annual report
Greek original of Globo Technologies ageing of trade receivables
Source: Globo Technologies 2013 annual report

Percentage of Globo Technologies trade receivables over 360 days past due
Source: Globo Technologies annual report

So we have now established that GT’s trade receivables and revenue recognised under IAS 11 was equivalent to 101% of revenue in 2013 and that 36% of its trade receivables were over a year past due. I reckon this to be an alarming deterioration in the quality of revenue and corresponding cash flows.

Of course in the spirit of openness, it is worth highlighting that:
  1. While 2013 revenue experienced an outright decline of 29% YOY;
  2. and that this (101%) was more than all reflected in trade receivables and revenue recognised under IAS 11;
  3. and that 36% of these trade receivables were more than a year past due;
  4. that GT’s operating profit actually improved (!!!) by 144% to €5.980 million in 2013 from €2.453 million in 2012.

But also worth highlighting is that GT’s net debt increased from €0.780 million in 2012, to €13.731 million in 2013, as illustrated in the chart below, and indicated in the company's balance sheet. This was primarily driven by an increase in long term debt from €0.953 million in 2012 to €15.533 million in 2013. The extra debt was seemingly needed to fund GT's considerable rise in capitalised software related cash outflows.

Globo Technologies net debt
Source: Globo Technologies annual reports


English translation of Globo Technologies 2013 balance sheet
Source: Globo Technologies 2013 annual report
Greek original of Globo Technologies 2013 balance sheet
Source: Globo Technologies 2013 annual report

GT’s cash flow statement highlights that it spent a fair wodge of cash on the purchase of tangible and intangible assets in 2013. GT’s cash flow statement highlights that there was a €12.529 million outflow related to the purchase of tangible and intangible assets in 2013, up from €6.050 million in 2012. The bulk if not all of this appears to have gone on "Δικαιώματα βιομηχανικής ιδιοκτησίας", which is translated as being "Industrial property rights". As this falls in the intangible assets section, I presume this means some sort of software related licensing or development. 

So while GT’s net assets were reported to have risen to €25.853 million in 2013, from €22.617 million in 2012, this was more than driven by an increase in reported intangible/software assets to €14.679 million in 2013, from €3.362 million in 2012. I.e., of GT’s 2013 net assets of €25.853 million, 57% (€14.679 million) is in the main, "Industrial property rights" or software related licensing or development. 

... Oh and whilst on GT's net book value, do not forget that of €12.363 million in trade receivables in GT’s net assets, 36% are over a year past due, hence 17% of GT's net assets is actually trade receivables over a year old.

... And also recall that software application related revenues fell by €14.480 million in 2013, while seemingly c. €11.047 million in software related expenditure was capitalised in 2013.  


English translation of Globo Technologies 2013 cash flow statement
Source: Globo Technologies 2013 annual report

Globo Technologies cash flow statement
Source: Globo Technologies 2013 annual report

Why is this important? It’s important because having been 51% disposed of, seemingly to eradicate unappealing trade receivables, GT is now booked on GBO’s balance sheet with an implied value of €23.7 million. This is almost GT's net book value (NBV), a book value of which 57% (2012: 16%) is comprised of software related development or licensing. A further 17% (2012: 6%) of GT's NBV is attributable to trade receivables which are over a year past due. Further, GBO has marginally increased its valuation on a company where revenue fell by 29% in 2013, and over 100% of that revenue is reflected in trade receivables plus revenue recognised under IAS 11. Further still, while software related revenues plummeted in 2013, software related cash outflows sky-rocketed. In the meantime, GBO's Enterprise and Mobile software business experienced strong revenue growth. In terms of cash flow, GT hasn't generated positive operating cash for two years running. Free cash flow was negative €12.256 million in 2013. GT's net debt has ballooned. And GT's management still owes GBO €9.7 million!

What would Mr Mostafa Khder say about all this?


Mr Mostafa Khder, reviewer of Globo's GO!Enterprise app
Source: Google Play


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.