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City Confidential Newsletter

March 2010

AVANTI COMMUNICATIONS GROUP (AVN) – 485p

Recommendation – BUY 

The nature of the company’s operations may suggest to some that shares in Avanti Communications are highly speculative.  However, recent events, including a major fundraising and the availability of debt facilities on sensible terms should ease those fears somewhat.  Of course, nothing is a one way bet and even if the business plan is executed satisfactorily, the rating the market will place on the business is very much unknown.  There is also plenty of work to be done with regards to selling capacity and technical problems could throw a spanner in the works, meaning that there are real risks involved.  At this stage, it does appear that the huge potential is within touching distance of becoming reality though and on that basis the scope for upside in the share price in the medium term outweighs the risk of failure.  

Avanti Communications is a broadband satellite operator.  It sells satellite broadband services to telecoms companies, which use them to supply homes and businesses.  Its first satellite is HYLAS 1, which is scheduled for launch in Q2 2010 and looks set to be the first superfast broadband satellite launched in Europe.  Satellite broadband services are currently provided using leased satellite capacity, which will transfer to HYLAS 1 on launch.  A second satellite, HYLAS 2, is currently planned to launch in the first half of 2012. 

HYLAS 2 will duplicate HYLAS 1 coverage over Europe.  It will provide a market advantage to Avanti Communications as the company will be the only one in Europe to offer the new ‘Ka band’ satellite technology, which allows transmission at higher speeds and thus the ability to serve more subscribers per satellite.  It will also provide existing European service provider customers with more capacity when HYLAS 1 is fully utilised.  HYLAS 2 will add new coverage in Eastern Europe, the Middle East and parts of Eastern and Southern Africa.  The company expects these new markets to provide strong demand at attractive prices since there is a relative shortage of high quality terrestrial infrastructure.  The HYLAS 2 satellite has the flexibility to move power between Europe and the newer markets to compensate for any fluctuations in market appeal.  It also allows the markets with the highest returns to be addressed. 

The company’s assessment of the overall market in Europe, the Middle East and Africa suggests that there is demand for at least 100 million satellite broadband installations for homes and businesses.  HYLAS 1 offers 3,000 MHz of capacity and HYLAS 2 provides a further 8,280 MHz.  HYLAS 2 will have the capacity to serve up to 1m broadband customers, almost three times the 350,000 which can be served by HYLAS 1. 

Placing  

A placing of 21.5m new ordinary shares at 400p with new and existing institutional investors was announced in December to raise £86m before expenses to fund the procurement, launch and operation of HYLAS 2.  The proceeds of this placing complement debt facilities amounting to £194m in aggregate, which are to be provided by The Export-Import Bank of the United States and COFACE, acting as a guarantor, which are the export credit agencies of the US and France respectively.  The debt is being made available in support of national manufacturers from these countries.  Avanti Communications will procure the HYLAS 2 satellite from Orbital Sciences Corporation of the US and will purchase a Launch Service from Arianespace of France.  

FINANCIAL 

Interim results, covering the six months to 31 December 2009, revealed revenue up marginally to £3.3m (2008: £3.2m), with a loss from operations of £450k being recorded versus £986k a year earlier.  The loss before taxation was £440k (2008: profit £2.76m).    

Normal metrics are somewhat irrelevant given the vast investment being made into the future of the business. In the six months to 31 December 2009, there was extensive budgeted expenditure for HYLAS 1 in property, plant and machinery, which increased to £92.4m (30 June 2009: £51.5m).  There was also £2.8m initial expenditure on HYLAS 2.  It is also worth noting that historical figures are of less relevance given the substantial fundraising completed at the start of 2010.

 

SUMMARY 

The magnitude of the equity and debt recently raised confirms that this is a business with serious potential.  It is clear that a lucrative market has been identified and the fact that important news flow on HYLAS 1 is expected in the near future should see greater focus on the company in the coming months. There are potentially very exciting times ahead and even though the shares have outperformed the broader market there is good reason for this. 

The business is very much in its development phase, although things should move quickly in the build up to the satellite launches.  This places even greater significance on the fact that such heavy financing has been possible even given current circumstances.  With some analysts suggesting that the share price could comfortably reach four figures without the valuation looking stretched, there is room for strong upside from the current level.  There has been major progress with pre-sales on HYLAS 1 and HYLAS 2 orders are already under negotiation, which implies that the plan remains very much on track.  Given that substantial profits could now be just a couple of years away the shares look like a sensible buy. 

Share Price – 485p     Market Capitalisation - £333m

2009/10 Price Range – 540p – 154p    Next Results Due  - September 

 
 

FT Sector: AIM

Address: 74 Rivington Street, London  EC2A 3AY

Telephone: 0207 7491600

Website: www.avantiplc.com

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