Monday, 21 July 2014

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. 

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