Wednesday 20 January 2016

Bears tuck into Avanti but...

Global stock markets have taken a right walloping over the last few months - in some cases indices are down 20pc from last year's highs - but there are a few stocks that are getting hit particularly hard.

One of the companies taking a major pounding is London-listed Avanti Communications, the satellite operator and broadband provider. The stock is down almost 12pc today and has crashed 55pc to 113p in the last three months despite a series of upbeat announcements, including client wins in Africa and a British government contract win to provide around 300,000 UK households who have suffered from rubbish internet from BT Group.

It's always hard to tell why certain shares are underperforming their peers but it does appear the bears (also known as short sellers) have got their teeth stuck into Avanti, with some arguing the company will see a liquidity squeeze as the company runs out of cash this year.

However, stockbroker Cenkos has put its neck on the line to pour cold water on the bears' theories. Indeed yesterday Cenkos published a very optimistic note, some of which I pasted below:
  •   Positive contract momentum. Avanti’s H1 has seen a meaningful expansion of new business. Recently announced wins include Telkom SA, BDUK, and other government business which we believe could be worth more than $20m in the short term. BDUK alone is a £10m recurring revenue opportunity as it rolls out across the UK. Q2E is likely to see the beginning of a positive impact from these.
  •   Favourable capex movements. We believe the timing of capital expenditure on gateways and associated physical equipment at the end of Q1 was sufficiently conservative to support a reduced expectation for this year. Avanti now expects lower capex in 2016E and we are reducing our capex assumption by 8% to $110m. Similarly, the timing of payments on the development Hylas 4 may bridge 2018E and we are reducing our capex expectation for 2017E by 25% to $60m.
  •   Share price. Avanti’s share price has halved since the three month high was reached of 262p towards the end of October. This decline is out of kilter with current trading. The current enterprise value of $791m is trading at a 30% discount to our asset value calculation of $1,126m.
  •   Gross cash is healthy. In our opinion Avanti’s liquidity position is more robust than generally accepted. Gross cash post August’s bond issue amounted to $219m at the end of Q1. By our calculations, gross cash at the end of Q2E is likely to be in a range of $160-180m depending on the timing of payments on HYLAS-3 & 4.
  •   Liquidity position. Avanti’s cash balances are sufficient to support its development programme in our view. On current estimates, we see gross cash falling to $70m when the bulk of the HYLAS-3 and 4 payments will have been made. Avanti does have additional capacity and consent to raise a further $77m in stand-by credit and other short term facilities should it wish. 
Avanti, whose biggest shareholder is M&G with almost 19pc of the stock, is scheduled to provide results on February 4, so those investors bullish on the stock are hopeful for a similar outcome to what happened in Oscar nominated film The Revenant.

If you haven't seen The Revenant, a huge grizzly bear mauls of the film's hero, Leanardo di Caprio, but is then defeated by him.

1 comment:

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