Avanti Communications — Update 9 May 2016

Avanti Communications — Update 9 May 2016

Avanti Communications

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Avanti Communications

Major contract win

EE backhaul contract

Aerospace & defence

9 May 2016

Price

93p

Market cap

£137m

US$1.45/£

Net debt ($m) at 31 December 2015

481

Shares in issue

147.4m

Free float

100%

Code

AVN

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.8)

(28.3)

(61.2)

Rel (local)

(6.1)

(31.5)

(56.8)

52-week high/low

259p

88.5p

Business description

Avanti Communications is a London-based fixed satellite services (FSS) provider. It sells satellite data communications services to service providers in its key markets of enterprise, broadband, carrier services and government. It has Ka-band capacity on four satellites, with two launches due in 2017.

Next events

Q3 results

16 May 2016

Analysts

Andy Chambers

+44 (0)20 3681 2525

Roger Johnston

+44 (0)20 3077 5722

Avanti Communications is a research client of Edison Investment Research Limited

Avanti has announced a major new cellular backhaul contract with EE in the UK, demonstrating continued growth in this important segment of demand. The upcoming Q3 trading statement will provide an opportunity for Avanti to update and reassure the market that it remains on track to deliver on its plans. As this becomes increasingly evident, we would expect the shares to progressively reflect the potential of the cash-flow based valuations, which suggest substantial current undervaluation, with further upside potential as risk retires over time.

Year end

Revenue ($m)

PBT*
($m)

EPS*
(c)

DPS
(c
)

P/E
(x)

Yield
(%)

06/14

65.6

(93.0)

(85.2)

0.0

N/A

N/A

06/15

85.2

(73.3)

(61.4)

0.0

N/A

N/A

06/16e

86.7

(77.8)

(52.8)

0.0

N/A

N/A

06/17e

126.3

(39.6)

(26.7)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding exceptional items.

$29m UK cellular backhaul contract win with EE

Avanti has announced that it has won a major cellular backhaul contract with EE worth an initial $29m, with options to double the capacity. Cellular backhaul provides connectivity and network resilience to remote locations. Under the contract, Avanti will connect a large number of static and mobile sites to the EE network in the UK, using capacity on HYLAS 1 and HYLAS 2. The contract is multiyear and provides validation for the use of Avanti’s Ka-band network for the provision of cellular backhaul services, and the growth of the backhaul segment. The first backhaul contract with Vodafone was signed in February 2014, and EE now adds to a growing list of high-quality customers with increasing backhaul demand driven by 4G network investments.

Q3 trading statement

The Q3 trading comment is to be released on 16 May and should address some of the issues that have continued to constrain the share price performance. We expect guidance to be confirmed and more detail on securing the additional $71m financing capacity facilities announced at the half year. Following on from a recent trip for investors to Orbital Sciences in the US where HYLAS 4 is being built, further reassurance is likely to be given that the satellite remains on track for launch in Q1 2017. When deployed, HYLAS 4 will triple Avanti’s revenue-generating potential against its predominantly fixed cost base, substantially improving cash generation.

Valuation: Cash-generative phase attainable

Ahead of the Q3 figures, there is no change to our estimates, which remain in line with guidance for the current year for a 50% increase in recurring revenues (before FX effects). As the revenue growth continues and we pass the cash consuming build and launch phase of HYLAS 4, cash generation should reverse to a substantial inflow. This underpins our DCF-based valuation, which currently stands at 427p, with significant upside potential as risk retires.

Contract flows demonstrating progress

The latest contract from EE is one of a series in recent months that have suggested the momentum is moving in Avanti’s direction. The wins would appear to reflect the positive development of new business following the recent appointment of the new sales director. Other notable contract wins in Q3 included:

The first presale of capacity on HYLAS 4 to Bentley Walker, an existing customer, worth more than $1m to provide capacity for sub-Saharan Africa. Further presale wins are to be expected ahead of launch next year and this is very distinct from the launches of HYLAS 1 and 2 where no wholesale presale existed due to the pioneering nature of the Ka-band network offering. It is clearly now verified as evidenced by an existing customer extending its demand.

Melcom Electronics signed a multiyear deal to provide high-speed satellite broadband to its SME customers in defence, aerospace and satcom across EMEA using HYLAS 1 and 2.

Intersat Ltd, a supplier of VSAT service equipment, will extend broadband connectivity across East Africa for defence, enterprise and government customers, as well as GSM operators.

SuperUydu will use HYLAS 2 to gain 100% coverage in Turkey for the delivery of broadband communications services to SMEs, large enterprises and consumers nationally.

İşNet, a leading provider of telecom services in Turkey, also signed as a new customer in February (see our previous note).

As announced on 24 March, Avanti has also now entered the marketing phase of the UK government subsidised programme for the provision of high-speed satellite broadband into remote locations of the UK. This follows the pilot schemes in January with Broadband Delivery UK now leafleting the 300k eligible households in the UK about the free installation scheme. Using reasonable share assumptions, the UK government scheme alone could add $20m per annum of revenues for Avanti.

Q3 trading statement

The Q3 trading comment is to be released on 16 May and should address some of the issues that have continued to constrain the share price performance. We expect the following elements to be addressed in the statement:

Avanti to report sequential growth in Q3 sales, reaffirming guidance for a 50% (pre-FX) rise in FY16 recurring revenues, meeting our estimate.

Material new contract wins during the period to be highlighted, including the EE contract and the first presale contract for HYLAS 4 and, as above.

Within H1 results the company highlighted $71m of permitted additional finance capacity, and we would expect to have confirmation that facilities are being secured in this regard. This should provide more than sufficient liquidity to commission the new satellites (HYLAS 3 and HYLAS 4) and move Avanti into a significantly stronger cash generative phase.

Exhibit 1: Financial summary

$m

2014

2015

2016e

2017e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

65.6

85.2

86.7

126.3

Cost of Sales

(86.7)

(83.8)

(82.1)

(81.9)

Gross Profit

(21.1)

1.4

4.6

44.4

EBITDA

 

 

(5.8)

13.9

17.8

56.1

Operating Profit (before amort. and except.)

 

 

(53.9)

(32.6)

(28.2)

10.1

Intangible Amortisation

(0.2)

(0.2)

(0.2)

(0.2)

Exceptionals

5.3

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Operating Profit

(48.7)

(32.8)

(28.4)

10.0

Net Interest

(38.9)

(40.5)

(49.4)

(49.5)

Profit Before Tax (norm)

 

 

(93.0)

(73.3)

(77.8)

(39.6)

Profit Before Tax (FRS 3)

 

 

(87.7)

(73.3)

(77.8)

(39.6)

Tax

0.0

0.0

0.0

0.0

Profit After Tax (norm)

(92.0)

(73.3)

(77.8)

(39.6)

Profit After Tax (FRS 3)

(87.7)

(73.3)

(77.8)

(39.6)

Average Number of Shares Outstanding (m)

107.4

119.0

146.9

147.4

EPS - normalised (c)

 

 

(85.2)

(61.4)

(52.8)

(26.7)

EPS - normalised fully diluted (c)

 

 

(85.2)

(61.4)

(52.8)

(26.7)

EPS - (IFRS) (c)

 

 

(81.2)

(61.4)

(52.8)

(26.7)

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

-32.1

1.6

5.3

35.2

EBITDA Margin (%)

-8.8

16.3

20.6

44.4

Operating Margin (before GW and except.) (%)

-82.1

-38.2

-32.5

8.0

BALANCE SHEET

Fixed Assets

 

 

645.9

721.5

790.0

833.4

Intangible Assets

14.0

11.0

10.8

10.6

Tangible Assets

610.9

691.0

759.7

803.2

Investments

21.1

19.5

19.5

19.5

Current Assets

 

 

235.7

160.3

135.8

57.3

Stocks

1.7

2.6

2.5

3.5

Debtors

21.0

17.8

13.9

15.2

Cash

195.3

122.2

105.5

22.5

Other

17.6

17.7

13.9

16.2

Current Liabilities

 

 

(44.4)

(36.6)

(25.5)

(29.4)

Creditors

(39.9)

(31.9)

(25.5)

(29.4)

Short term borrowings

(4.5)

(4.7)

0.0

0.0

Long Term Liabilities

 

 

(527.7)

(540.5)

(662.1)

(662.5)

Long term borrowings

(512.4)

(523.7)

(645.3)

(645.7)

Other long term liabilities

(15.3)

(16.8)

(16.8)

(16.8)

Net Assets

 

 

309.4

304.7

238.2

198.7

CASH FLOW

Operating Cash Flow

 

 

5.1

(8.1)

19.2

55.6

Net Interest

(39.0)

(54.4)

(64.4)

(64.5)

Tax

0.0

0.0

0.0

0.0

Capex

(25.8)

(102.0)

(99.7)

(74.5)

Acquisitions/disposals

0.0

0.0

0.0

0.0

Financing

(7.6)

80.0

11.3

0.0

Dividends

0.0

0.0

0.0

0.0

Net Cash Flow

(67.3)

(84.5)

(133.6)

(83.5)

Opening net debt/(cash)

 

 

254.4

321.7

406.2

539.8

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

(0.0)

0.0

0.0

0.0

Closing net debt/(cash)

 

 

321.7

406.2

539.8

623.2

Source: Avanti Communications reports, Edison Investment Research estimates

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

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Wellington 6011

New Zealand

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