Mixed messages for Avanti

The past week has seen London-based speciality satellite operator Avanti Communications have something of a roller-coaster in terms of its share price, and market reception. Last week saw Avanti announce a contract win from mobile telco giant Vodafone, which immediately propelled Avanti’s share price from the previous week’s miserable £1.95 (€2.29) to a much healthier £2.40 on February 25th.

Avanti’s capacity covers the Ka-band section of radio spectrum, of which there is already considerable competition from operators such as Eutelsat, and fresh players coming into the market such as Intelsat’s EPIC craft (launching in 2015) and the SES-backed O3b Networks constellation going live later this year. Avanti operates a pair of Ka-band satellites (Hylas-1 and Hylas-2) and has a third satellite on order.

Avanti’s low share price reflected the market’s sentiment following the company’s February 12th results (for the year to December 31st). At first blush the satellite operator’s numbers looked perfectly respectable, even praiseworthy, with revenues up a decent 81 per cent, and talk of 40 new contracts and a seemingly improved contract backlog of $455 million (up from 2011’s £181 million and 2012’s much lauded £290 million).

Revenues for the half-year were $25 million, up 81 per cent y-o-y, and 36 per cent better than the half year to June 30th. A new contract to supply backhaul services for an unnamed European division of Vodafone (for 3G IP) can only help this year’s numbers, and steady the nerves of some investors.

However, a closer look at the reported backlog (and even assuming a $/£ exchange rate of about $1.60=£1) would mean the backlog of $455 million would equate to about £284 million. Of course the company may have all sorts of hedging instruments which might help soften the impact of currency fluctuations, and a $1.50=£1 rate would add another £10m to the total, but however you measure the exchange rate the backlog is more or less constant since mid-2013. Importantly, it seems not to have grown. The company quotes a $/£ exchange rate range of between $1.52 and $1.65 between “June and December” and an average of $1.598 for the six months to December 31st, which would equate to £284 million which would be a decline over 2012’s £290 million.

Looking at the backlog in further detail, Avanti made a considerable song and dance last year (within its 2013 Annual Report & Ac’s) of its backlog and provided a detailed analysis of the £290 million structure. Avanti broke down the £290 million as follows:

FYE June 2014: £42 million
FYE June 2015: £46 million
FYE June 2016: £40 million
2017 Onwards: £162 million

Avanti stated (in its 2013 Report & Accounts): “We expect orders under framework contracts (not included in backlog), new contracts (pipeline) and expected renewals (of contracts expiring between 2014 and 2016) to increase these numbers.”  As mentioned, one of those contracts emerged February 19th in a 3-year deal with Vodafone, and which represents excellent news.

But this good news does not entirely mitigate against past statements which seem to be wildly optimistic, as by any measure the forward bookings have increased only by a small margin – if at all. The 2013 statement also said that Avanti was adding contracts at a rate of an average £7 million a month (or £84 million/$126 million in a full year). That run rate seems to have largely evaporated unless now resurrected by the Vodafone contract.

CEO David Williams admitted that predicting monthly or quarterly figures is a challenge (“difficult” he said) but believes “capacity will be filled at reasonable prices by 2016”. And those 26 new customers mean utilisation should “spike quite nicely over the next 12 months”.   Overheads grew from $14.3 million to $16.6 million y-o-y which the company blamed on £sterling-denominated salaries and other fixed costs.

AS mentioned, the market didn’t take too kindly to the initial financial news, and left the company’s share price of £2.21, and down 1.34 per cent on the day. By February 13th something of a stampede had set in with widespread selling and an 8 per cent fall (to £1.95) although there was some recovery later. However, on February 13th the London Daily Mail’s popular ‘This is Money’ financial web-site carried a highly negative report quoting private (and bear raider) investor Simon Cawkwell saying: “Basically, Avanti is phony. It is massively loss-making. Its reported loss of £25 million would have been far worse if it were not for a one-off gain on a procurement settlement for a satellite.  Also, foreign exchange gains were a major one-off benefit factor and costs were up again. Inventories were higher and there is no proof or reasonable expectations that things are going to get better.”

His doom-laden comments continued: “The group’s debt burden is by now probably insurmountable and a heavily discounted rights issue will be required in short order. Joe and Joan Public were sucked into the stock after respected former Diageo boss Paul Walsh became chairman and then bought a shed load of stock. They all followed him in but will rue the day.”  His comments did little for Avanti’s share price!

Investors – and the Stock Exchange – might also wonder why Avanti persists in telling the market (formal ‘Interim Results Presentation’, Feb 14 2014, Slide 18) “As the first operator outside the US to embrace Ka‐band satellites, Avanti is well positioned to take advantage of the attractive growth dynamics.” This claim, as readers might recognise, is hardly correct and seems to ignore the debut Ka-band services carried by Eutelsat, SES and others.

The ‘glass half full’ brigade will look to Avanti’s “peak” fill rates which are: Hylas-1 49 per cent up from June’s 45 per cent; Hylas-2 at 21 per cent, up from June’s 13.15 per cent. However, the use of the word “peak” suggests that past averages were below this.

Avanti reported that its SNG product was used by “many of the world’s largest broadcasters” and included use from South Africa for the Mandela funeral in December, and the Sochi Games at the moment.  The half-glass empty observers might justifiably suggest that the Mandela funeral as well as the Sochi games saw a huge uptick in capacity demand, and few operators would have suffered. Quite how much capacity Avanti sold for either of these one-offs is hard to measure.   “We expect to see growth from substitution in this SNG market as the move to Ultra HD favours our very high capacity low cost up links,” said Avanti.

Perhaps more tangibly, Avanti adds that in many respects its services over Africa are growing, and with “little competitive pressure” as far as broadband is concerned.   The Vodafone news gave investors some heart and by late on February 19th Avanti’s share price had risen to £2.18 as part of a recovery to nearer £2.40 by February 25th. However, one source, an extremely close observer of Avanti’s business activity, said: “They just pulled in some extra business, but only by offering v short term contracts which is the opposite of what the investors / analysts want to see of a satellite operator. It’s all sales based on redundancy for terrestrial, so value wise, quite low.”

The company’s end-2013 acquisition (at zero cost) of the remaining few years of life of ESA’s Artemis craft (at 21.5 E) means the business now has three orbital filings in the ITU register. Quite how well Avanti will market the S-band and L-band spectrum is to be seen. But there’s little doubt that the remaining Ka-band and 8 MHz of Ku will have a value, as will the orbital slot provided Avanti can fund a follow-on satellite.

Overall, it must be worrying to investors that optimistic statements made two years ago where the company said that Hylas-1 would be filled in “four years” and Hylas-2 was on track “to hit a 3-year target” (one supposes to be filled, or at least 80+ per cent filled) to be misguided.

Unfortunately, this is not the first occasion when optimistic statements have been made which seem to have been lost in translation by the business. For example, the original Hylas-1 documentation (and still in place on Wikipedia) stresses Avanti’s commitment (“intended mainly”) to HDTV. CEO Williams was very happy to talk up his company’s commitment to HDTV as long ago as November 2005.  The article states: Avanti bosses believe that the satellite launch will address the “shortage of suitable satellite capacity, given the pending upgrade of digital television services to the HDTV format, which consumes four times as much bandwidth as ordinary digital TV.”

In a November 2005 interview with a respected trade mag (C21 Media) Avanti was happy to be quoted as saying that Hylas-1 carried “40 transponders, together capable of carrying around 1,000 European digital TV channels”.  Avanti’s Williams is quoted saying: “HD picture quality is four times better than that of TV currently but to achieve that it uses four times as much bandwidth, which means there needs to be 400 per cent more capacity in space to deal with that. It is a finite resource,” said Williams. “We think there will be a shortage of capacity for broadcast.”

Williams was also happy to be quoted as enthusiastically saying that Avanti could enter into a joint-venture to launch its own HDTV channels!

One could perhaps excuse these somewhat premature statements if they weren’t repeated so frequently. As recently as Sept 2011 Avanti was happy to again push its merits – “joining forces with Hughes Europe” – of using its Hylas-1 in a twin HDTV role with broadband.

Which brings us to the current position: The loss for the half-year period is expressed at $41.789 million, and almost double that of $22 million a year ago. CEO Williams thinks operating costs have peaked, and while a new $370 million bond has increased interest costs, less cash will leave the business over the next three years.

Broker Cenkos Securities expects a full-year adjusted pre-tax loss of -$58.8 million (from -$59.8 million in 2013, narrowing to -$30.3 million in 2015).  Another broker, Beaufort Securities, set a “speculative buy” rating on the company. A long-term supporter of Avanti, Jefferies Group, reiterated its ‘BUY’ rating with a target of £5.80 on the stock.

Williams drew £446,697 in salary and other benefits in the trading year to June 2013, although without a bonus. The previous year he received £314,000 in bonus and a total package of £749,693. He is also awash with all manner of Long Term Incentive Plans relating to share awards, not all of which have done well in terms of share price!

This latest news from Vodafone will, no doubt, put him back into bonus territory. The Vodafone contract helped drive Avanti’s share price up 20p, some 10 per cent improvement on the day, and ending February 19th at £2.25. By February 25th the price had further risen to £2.39.

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