Wednesday 12 February 2014

Avanti (AVN) ... slim to none

Wednesday 12th February 2014

Avanti has reported its interims this morning. On the basis of the detail provided, I reckon the chances of AVN achieving its FY 2014 consensus forecasts are slim to none.

The group reported $24.961 million in revenue for the half year to 31 December 2013 (Jun year-end); AVN now reports in USD. In old money terms, this is c. £15.620 million of revenue for H1 2014 (the group highlights an average USD:GBP rate of 1.598 for the six months to 31 December 2013). This is 81% YOY growth on its £8.626 million in revenue reported for H1 2013 and 30% HOH growth on its £11.974 million in revenue for H2 2013. Consensus has £48.4 million in revenue pencilled in for FY 2014. This implies that £32.780 million in revenue will be required for H2 2014. That suggests growth of 174% YOY as against H2 2013, or 110% HOH as against H1 2014. I find this prospect extremely unlikely.

Avanti: Semi-annual revenue and implied H2 2014E revenue from consensus forecast
Source: Bloomberg consensus and AVN interim and annual reports
Receivables have climbed yet again, to $28.582 million (H1 2013: $22.003 million) and now represent 115% of H1 revenue. Further, I have highlighted prior how poor the quality of these receivables appears to be: receivables looking a bit 50/50. This is somewhat acknowledged by management indicating that collection of receivables was “... also slightly slower than expected collections from some customers who are growing, and to whom we give credit terms rather than price reductions.” 

Avanti's percentage of trade receivables either impaired or 60+ days past due
Source: Annual reports
Inventories also rose during the period.

It would appear that while the group was still majorly loss making, that the losses would have been far worse were it not for a one-off gain of $5.342 million from “a commercial settlement in relation to the Hylas 2 procurement” as well as $463,000 in currency gains on receivables and working capital.

The interest cash cost on its recent bond instrument was a whopping $9.250 million in H1 2014.
It is unclear to me whether the backlog grew in constant currency terms or due to the translation into USD. The group reports that “Backlog grew to $455m” during H1 2014 to 31 December 2013. Backlog was prior reported to be £290 million as at 30 June 2013. On the basis that the group states a period end USD:GBP rate of 1.657 to 31 December 2013, then the $455m in backlog equates to £275 million, i.e. down from £290 million reported  prior. On the basis that the group states an average USD:GBP rate of 1.598 in the six months to 31 December 2013, then the $455m in backlog equates to £285 million in backlog. Either way, it appears to me that the backlog actually fell. I would welcome it if anyone can provide some clarity on this.

I remain short.

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  1. Of the £48m forecast revenues how much is from the bolt-on deal from the Artemis satellite acquired on 31 December. That will make the revenue numbers much easier to hit.

    Furthermore there was the $15m African Govt project contract with more strong business forthcoming shortly. How much will be booked this year I don't know. That's a pretty chunky contribution towards the forecast.

    With regard to the backlog, they said they took some of the backlog out due to one failed customer. They would have taken the hit to the numbers via bad debts I guess in the period and resulted in them taking down the backlog.

    1. I noticed that the brokers have now cut their 2014 and 15 sales forecasts on the back of the interims. In the case of 2014 projected revenue, this falls from £48.4 million to £43.65 million (10% lower). For 2015 forecast revenue, this has been cut from £77.0 million to £70.55 million (8% lower), although one broker has cut to £67.4 million.

      This is not surprising as the revenue forecasts have a long history of being cut. For example, just two years ago, the 2014 revenue prospect was thought to be c. £150 million, while 2015 revenue was forecast at £265 million.

      So I stand by my original assessment that the chances of AVN meeting its 2014 sales forecasts are slim to none. More likely the latter now.

      In terms of the backlog, I also notice that the 2015 backlog is flat. In the interims it was reported to be $76 million as at 31 December 2013. Using the exchange rate AVN has provided (1.657) this equates to a Sterling value of £45.9 million. The 2015 backlog was reported to be £46 million as at 30 June 2013. So it would appear that despite targeting long term contracts, they do not seem to have won any more business for next year. Note also that the whole idea of providing three years' forward guidance has also been swept under the carpet. I guess that's what happens when you have to acknowledge that "Predicting growth in new markets is an imprecise science."


      Ps. of course what ever revenue is eventually reported should be carefully considered against what is a high level of receivables and a poor record of collection.

  2. If you believe that the market is valuing the stock based on forecast earnings, then yes it looks like they will not meet their forecasted figures and a short position is a good idea. However i don't believe this is the case. I think your articles on AVN would be better if you provided a valuation based on your assumptions and compare it to the current market value and hence your case for a short position. I share your concern with the financing of the debt and also the fact that $25m revenues vs $30m costs in the first 6 months isn't the goal of a business, but i don't think the company is currently overvalued so i don't really get your constant call to short the stock. Price to book is around 1.17. If you strip out the depreciation charge (which i'm sure you are aware is just a way to spread the cost of an asset purchase over a number of years, hence spreading the loss instead of having a whopping big loss in the year of purchase), it doesn't look too bad. There are plenty other companies out there with inflated valuations based on hype or other that would make more sense to short than AVN. I'm just saying your short call doesn't really make any sense from a valuation perspective but good luck to you.

    1. Who knows what the market is valuing AVN on? Looks like a wing and a prayer to me.

      Positive earnings are now not predicted to appear until 2016, when the market hopes them to be a pretty paltry 6p/shr. Although it's worth bearing in mind that in early 2012, the 2014 EPS forecast was at 112p/shr, as compared to a 33p/shr loss currently. So I wouldn't value the business on earnings projections. They have a history of disappointing.

      Maybe cash flow is a good approach but as the company continues to haemorrhage cash, that doesn't look so smart either. So much for the fleeting moment AVN highlighted last year when it was cash flow positive.

      Price to book is unwise in my view, as the bond holders get the assets in the event the group cannot meet its onerous debt service costs.

      So do you have a valuation metric in mind?


    2. Fair points Matt, i agree it's a difficult one to value but i tend to have the view of only shorting a stock when its massively overvalued. If you were to liquidate/sell the company today, i don't think it would be too far off the current valuation. Remember the spectrum slots have an intangible value which is often overlooked here i feel. I think the the changes to the earnings from a few years ago is down to the change in the accounting treatment, ie. spreading the revenues? Short term maybe a short position would work as the downgrades to forecasts occur, the share price will fall? Looking at past revenue performance since the results to 30/06/11, revenues have been doubling, but have been crippled by the costs involved of putting their sat's in space and financing the borrowings. Williams stated he thought costs have peaked now and if this is the case, the company should start to perform better from now on. So i guess i'm still on the fence. Short term = short position, Long term = long position. Who knows, we'll see i guess. FYI i'm not long or short AVN :) Good luck!

  3. Looking at price to book ratios makes the assumption that the effort of turning that cash into assets was not wasted, which sort of assumes the conclusion.

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