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I first tipped, Avanti Communications (LSE:AVN), the AIM listed satellite operator years ago on www.t1ps.com at 116p. Its share price almost hit £9 ahead of the launch of its first HYLAS satellite the year before last. The shares have since slumped back to a low of c240p but are now back at 351p (valuing Avanti at £390 million) as we await the launch of HYLAS 2 on August 2nd. So time to buy more or to sell? What is the investment case?
Avanti is already operating at a cashflow breakeven or better position thanks to revenues from HYLAS 1. And those revenues continue to build on a month by month basis as capacity increases reaching target rates in 2014. HYLAS 2 is much bigger than HYLAS 1 and has already pre-sold a good chunk of its capacity but do not expect it to reach plateau revenues for 2 to 3 years. Avanti is, incidentally, fully funded to launch its biggest lump of metal, HYLAS 3 in 2015. All launches are fully insured and if there is a glitch it merely delays the rollout by 6-9 months.
Why did the shares slump after HYLAS 1? The Directors sold shares. That spooked some. With hindsight, doing intensive PR/IR and then selling shares was not such a coup. To be fair they have bought back far more shares in the market since then. The company has suffered like many not yet profitable smaller companies from a general market malaise.
And it was the subject of a sustained bear raid in which my friend Evil Knievil played his part. The core thesis of that raid which started almost 16 months ago was that Avanti would miss all its forecasts. As it happens since then Avanti has met/beaten forecasts at all stages. To say that you think a company will miss forecasts is one thing. But what Evil said was that he knew it would miss and then shorted. Clearly that was an untruth and one of many spread about this company and I used to think there were rules about that sort of thing. Whatever… the past is the past.
Avanti is now clearly on a path to a sustained ramp up in cashflow generation. Assuming that HYLAS 3 launches in 2015 by 2018 I would expect this company to be chucking off £240 million a year in free cashflow. Even by 2016 HYLAS 1 and 2 (by then almost up at plateau rates) plus advance bookings on HYLAS 3 should see cashflow generation of, perhaps £80 million. And of course satellites have a 15-20 year life so with long term contracts in place and ever more demand for capacity there is both visibility of earnings and reasons to believe that the 2018 number will grow.
So what is this worth? Well who knows? Price targets based on future DCF models are art (should that be guesswork) not science. Some folks reckon the shares could be worth £25 each. That would, after all be not a lot more than 11 times 2018 cashflows. I suspect we will not see £25 a share until closer to 2018. However, a valuation of ten times free cashflow for this company is not perhaps ludicrous given the growth potential and ever increasing visibility of revenues (note recent RNS statements on forward orders). As such discounting back my 2016 forecasts by 10% per annum and adding in the net cash position (£75 million) still gives a price target of £11.49 per share.
I would not assume that the shares will necessarily rush up in the prelude to the launch of HYLAS 2. They may, they may not. I have no idea on trying to time a purchase. However the shares are fundamentally very cheap if one is prepared to take a medium term view. I hope folks took advantage of the bear raid shenanigans to add to their holdings. Even at 351p I would far rather be a buyer than a seller.
the problem with the stock when Evil shorted was that it was not cheap at that time.
it´s all very well saying that ´in 5 yrs it will be making ……….´ but that´s a long, long way out.
having said that, barriers to entry are huge, directors have bought many times and we are close to having 2 satellites up there.
Larissa
It was not “cheap” at £9 but it was not overvalued based on NPV etc.
As EK carried on shorting down to £3 it certainly was cheap.
But as a company then not generating cash it was vulnerable to a bear raid which EK exploited to the full. That he told deliberate falsehoods is less certain. But i agree it was very vulnerable. The LT investor tjhough surely has reall comfort at this level?
Thank you for your comment
Tom
Yes, I do.
Larissa,
A wise call I think. Thank you again for reading this blog.
Tom
When was it ever £9?
Circa £7.60 intra-day (end of November 2010) was as high as the price got.
ok – got close to £8. I stand corrected.
Thank you for pointing out the eror and for reading the blog
Best wishes
Tom Winnifrith
How can you be friends with a person who personfies what is very wrong with the city. I am against shorting but if people are allowed to do this well that I guess is their perogative. To tell lies in order to make money this way is the action of a low life and this should be investigated by the FSA. Having said this over the last week the FSA and the BofE have also shown themselves to be just as corrupt
Dave
Evil read the lesson at my daughter’s christening. He is an entertaining old fellow. He knows that I disapprove of some of what he does & I know that he has strong disapproving views on my personal life. It is perhaps better not to discuss some issues. Life is short, if you find that someone makes you laugh or smile now and again you should not turn them away.
I pass no judgement on the FSA/Bof E over LIBOR as at this point I am not sure we know all the facts.
Sorry for my unwillingness to pass damning judgement on anyone. I understand what you say and thank you for your participation in this debate.
Best wishes
Tom Winnifrith
Well Tom I suppose one day EK will stand and have the lesson read to him either above or below. Madoff and Stanford would have had and may be still have “Friends” who knew what they were up to.
Dave
We will all face that day in the end. With that in mind there are others far better placed to pass judgement on EK ( or anyone else) than myself. Thank you for your comments
Tom Winnifrith