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Avanti Communications Group — HYLAS 4 signals a boost to financials

Avanti Communications Group — HYLAS 4 signals a boost to financials

Avanti made good progress in the second six months of the current extended financial period. In addition, HYLAS 4 became commercially operational this month and there have been significant contract awards since launch, encouraging the belief that it should improve the financial outlook. The last reporting period reflected some uncertainty around the financial restructuring; however, this has been completed successfully. Avanti also received $20m cash from the Indonesian arbitration settlement in August. We await guidance for FY19 trading, including possible modest financing needs, before restoring forecasts.

Analyst avatar placeholder

Written by

Avanti Communications

HYLAS 4 signals a boost to financials

Second interim results

Aerospace & defence

1 October 2018

Price

5.10p

Market cap

£110m

US$1.30/£1

Net debt ($m) at 30 June 2018

398.1m

Shares in issue

2,163.3m

Free float

100%

Code

AVN

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.9)

(1.7)

(37.2)

Rel (local)

(3.3)

(0.3)

(38.8)

52-week high/low

13.5p

4.8p

Business description

Avanti Communications is a London-based, fixed satellite services 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 in GEO slots.

Next events

FY18 prelims

March 2019

Analysts

Andy Chambers

+44 (0)20 3077 5700

Annabel Hewson

+44 (0)20 3077 5700

Avanti Communications is a research client of Edison Investment Research Limited

Avanti made good progress in the second six months of the current extended financial period. In addition, HYLAS 4 became commercially operational this month and there have been significant contract awards since launch, encouraging the belief that it should improve the financial outlook. The last reporting period reflected some uncertainty around the financial restructuring; however, this has been completed successfully. Avanti also received $20m cash from the Indonesian arbitration settlement in August. We await guidance for FY19 trading, including possible modest financing needs, before restoring forecasts.

Year end

Revenue ($m)

PBT*
($m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/15

85.2

(73.3)

(61.4)

0.0

N/A

N/A

06/16

82.8

(67.0)

(49.3)

0.0

N/A

N/A

06/17

56.6

(172.9)

(104.5)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Positive shift in momentum

Avanti has released results for the second interim period of the current 18-month financial period ending 31 December 2018. Sales were up 23% in the six months to 30 June at $29.9m (6M to June 2017: $24.3m) and reported EBITDA was $4.7m (6M to June 2017: loss $26.2m) after the release of the $12.5m bad debt provision for the now settled Government of Indonesia arbitration. Adjusted EBITDA loss was significantly improved at $7.8m (6M to June 2017 loss: $12.3m) after reversing out the accounting treatment of the dispute from both periods. Gross cash at the end of June stood at $11.0m before receipt of the $20.1m cash settlement post the period end. Unaudited 12-month results met company guidance for the period, with sales declining 11.7% to $50.0m (FY17: $56.6m). Adjusted EBITDA for the 12-month period was almost unchanged at $19.3m (FY17: $19.0m).

HYLAS 4 bolsters commercial impetus

HYLAS 4 has been positioned at 33.50W and entered into commercial operation in September. Avanti has signed significant contracts with Comsat and Viasat since 30 June 2018, as well as a seven-year wholesale capacity agreement worth $84m. These contracts progress the revised strategy, which includes engaging with other operators, and significantly develop the governmental market. We feel this reflects the rehabilitation of Avanti following the financial restructuring under the new management team led by CEO Kyle Whitehill (joined 3 April 2018). Management indicates that while the future looks brighter, modest additional funding sources are likely to be required over the next 18 months. Cash flow and profits should start to improve as HYLAS 4 grows revenues across the relatively fixed cost base.

Valuation: Cash flow development remains key

The successful debt for equity swap and HYLAS 4 provide potential for equity upside, albeit heavily diluted. FY19 should indicate how rapidly cash generation can improve and what value to attribute to the $1.2bn network investment.

Second interim period results

The key highlights of the six months to 30 June 2018 were as follows:

■

Revenues rose 23.3% to $29.9m (H217: $24.3m).

■

Reported EBITDA of $4.7m (H217 EBITDA loss: $26.2m).

■

Adjusted EBITDA loss of $7.8m (H217 EBITDA loss: $12.3m) following settlement of the Government of Indonesia arbitration in Avanti’s favour, leading to a $12.5m reversal of a bad debt provision.

■

Period-end gross cash of $11.0m (H217: $32.7m). $20.1m was subsequently received on 13 August 2018 from the arbitration settlement.

■

Net debt of $398.1m following completion of the financial restructuring.

Significant recent contract awards

At the end of June 2018 the order backlog stood at $87m (FY17: $104m), reflecting the commercial inertia during the refinancing uncertainty. Since the period end, and following the successful launch and entry into commercial operation of HYLAS 4, this subsequently increased to $165m on 24 September 2018. Avanti has also established a strategic presence in Washington to focus on selling Mil-Ka capacity. The improvement in order backlog reflects recent contract wins including:

■

A unique seven-year Master Distribution Agreement with Comsat across Avanti’s satellite fleet, allowing a leader in satellite connectivity to the US DoD to offer advanced complete service packages to its customers focused on the Middle East and Africa.

■

A capacity lease contract worth $10m with global communications company Viasat for global government applications, providing access to HYLAS 4’s steerable Ka-band beams.

■

A wholesale capacity lease deal received earlier this week with a major international satellite service provider. The deal is worth $84m over its term and Avanti will receive $12m per annum.

Financial restructuring completed

During Q318, the company obtained a commitment for a new $34.5m debt facility, which is expected to close before the end of October 2018. The report makes it clear that Avanti may require modest additional funding over the next 18 months, which could include additional second lien debt or equity finance. In our view, HYLAS 3 could be a significant source of additional finance.

As a reminder, the financial restructuring reduced the interest burden on existing debt lines substantially by $92.1m, to $36.6m.

Exhibit 1: Positive impact of Avanti Communications debt restructuring

$m

Super senior facility

2021 notes

2023 notes

Total

Pre-restructuring debt

100.0

323.3

557.0

980.3

Debt for equity

(557.0)

(557.0)

Post-restructuring debt

100.0

323.3

0.0

423.3

Previous cash interest rate

7.5%

12.5%

14.5%

New cash interest rate

7.5%

9.0%

-

Previous cash annual interest

7.5

40.4

80.8

128.7

New cash annual interest

7.5

29.1

-

36.6

Source: Avanti Communications

The high levels of network capital investment should complete in 2019, and coincide with improving operational cash flow as capacity fills, especially on HYLAS 4. Assuming the ongoing financing programme is achieved, it is the progress of the operational performance of the network that will determine the equity fair value.

Exhibit 2: Financial summary

$m

2015

2016

2017

Year end 30 June

IFRS

IFRS

IFRS

PROFIT & LOSS

 

Revenue

 

 

85.2

82.8

56.6

Cost of Sales

(83.8)

(86.0)

(104.7)

Gross Profit

1.4

(3.2)

(48.1)

EBITDA

 

 

12.5

4.6

(34.5)

Operating Profit (before amort. and except.)

 

 

(32.6)

(39.8)

(78.5)

Intangible Amortisation

(0.2)

(0.2)

(1.2)

Exceptionals

0.0

0.0

95.2

Other

0.0

0.0

0.0

Operating Profit

(32.8)

(40.0)

15.5

Net Interest

(40.5)

(27.0)

(93.2)

Profit Before Tax (norm)

 

 

(73.3)

(67.0)

(172.9)

Profit Before Tax (FRS 3)

 

 

(73.3)

(67.0)

(77.7)

Tax

0.0

(2.2)

12.0

Profit After Tax (norm)

(73.3)

(69.2)

(160.9)

Profit After Tax (FRS 3)

(73.3)

(69.2)

(65.7)

Average Number of Shares Outstanding (m)

119.0

139.4

153.5

EPS - normalised (c)

 

 

(61.4)

(49.3)

(104.5)

EPS - normalised fully diluted (c)

 

 

(61.4)

(49.3)

(104.5)

EPS - (IFRS) (c)

 

 

(61.4)

(49.3)

(42.5)

Dividend per share (c)

0.0

0.0

0.0

Gross Margin (%)

1.6

-3.9

-85.0

EBITDA Margin (%)

14.7

5.6

-61.0

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

-38.2

-48.1

-138.7

BALANCE SHEET

Fixed Assets

 

 

721.5

804.5

711.9

Intangible Assets

11.0

10.8

9.3

Tangible Assets

691.0

775.1

671.8

Investments

19.5

18.6

30.8

Current Assets

 

 

160.3

137.8

95.9

Stocks

2.6

1.9

2.6

Debtors

17.8

39.3

22.8

Cash

122.2

56.4

32.7

Other

17.7

40.2

37.8

Current Liabilities

 

 

(36.6)

(86.1)

(72.4)

Creditors

(31.9)

(82.8)

(70.3)

Short term borrowings

(4.7)

(3.3)

(2.1)

Long Term Liabilities

 

 

(540.5)

(654.7)

(601.7)

Long term borrowings

(523.7)

(642.0)

(592.6)

Other long term liabilities

(16.8)

(12.7)

(9.1)

Net Assets

 

 

304.7

201.5

133.7

CASH FLOW

Operating Cash Flow

 

 

(8.1)

(22.7)

136.5

Net Interest

(54.4)

(67.4)

(156.1)

Tax

0.0

(2.2)

12.0

Capex

(102.0)

(95.7)

(66.5)

Acquisitions/disposals

0.0

0.0

0.0

Financing

80.0

5.3

101.0

Dividends

0.0

0.0

0.0

Net Cash Flow

(84.5)

(182.7)

26.9

Opening net debt/(cash)

 

 

321.7

406.2

588.9

HP finance leases initiated

0.0

0.0

0.0

Other

0.0

0.0

(0.0)

Closing net debt/(cash)

 

 

406.2

588.9

562.0

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Avanti Communications and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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London +44 (0)20 3077 5700

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United Kingdom

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295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Avanti Communications and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

7digital Group — Broadening the base

7digital’s interims show good progress in developing its B2B offering, with revenues up by 52% on H117 (including acquisitions). This reflects strong demand from brands for music as an adjunct to other products and services, as a differentiator and in order to improve brand loyalty. With an expanding portfolio of commercial content and the brand relationships, 7digital is well placed to exploit its independence and build a sizeable business. With management reiterating its expectations of the group moving into profit in H218, our revenue and EBTIDA forecasts are unchanged. We expect EBITDA to move ahead strongly in FY19e, given growing revenues on a lower fixed cost base. This puts the shares on a rating well below software peers, currently valued on a P/E of 21.6x.

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