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. 

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