Avanti Communications Group — Return to base

Avanti Communications Group — Return to base

The company has announced a proposed financial restructuring that should clear the way to resume more normal operations. FY17 results are still to be released, and are expected in January 2018. Until we have a more current financial base to work from, we are withdrawing our forecasts. That is not to say that existing shareholders may not finally benefit from the restructuring. In our opinion, greater risk lies with the proposals not proceeding. The debt for equity swap, interest savings and discount being assumed by the bondholders should provide a solid foundation for Avanti to execute its strategy, with an improved prospect for equity holders.

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Avanti Communications

Return to base

Financial restructuring

Fixed satellite services

15 December 2017

Price

8.12p

Market cap

£13m

US$/£1.34

Net debt ($m) at 31 March 2017

751.1

Shares in issue

162.1m

Free float

100%

Code

AVN

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.2

(12.5)

(64.7)

Rel (local)

4.0

(14.0)

(67.5)

52-week high/low

26.5p

6.3p

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, with two launches due in 2018.

Next events

FY17 results

January 2018

HYLAS 4 launch

March 2018

Analysts

Andy Chambers

+44 (0)20 3681 2525

Annabel Hewson

+44 (0)20 3077 5700

Avanti Communications is a research client of Edison Investment Research Limited

The company has announced a proposed financial restructuring that should clear the way to resume more normal operations. FY17 results are still to be released, and are expected in January 2018. Until we have a more current financial base to work from, we are withdrawing our forecasts. That is not to say that existing shareholders may not finally benefit from the restructuring. In our opinion, greater risk lies with the proposals not proceeding. The debt for equity swap, interest savings and discount being assumed by the bondholders should provide a solid foundation for Avanti to execute its strategy, with an improved prospect for equity holders.

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

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

Debt reduction removes operational barriers

If accepted, the proposed financial restructuring has two main elements, one for each of the main bond classes. The primary element is the issue of around 2bn new 1p shares, compared to the current 162m, to retire the entire $557m 2023 Note issue. The note holders thus crystallise a significant write-down against the nominal value of their holdings, with the bonds trading at a substantial discount (c 75%) in the market due to risk and uncertainty over the future. The risk reduction this implies facilitates the second element of the restructuring relating to the 2021 Notes, the ‘90% Proposed Amendments’. The term will be extended by a year and the rates for both cash and PIK interest will fall to just 9%. The revised model transforms the capital allocation outlook, retaining annual interest savings from the debt elimination and coupon reduction, which should total around $92m for the benefit of the company and its equity holders, with improved security for the 2021 bonds.

Outlook to be rebased and reset

We suspect that the trading situation has remained problematic while the current restructuring package has been put together. Until we have better insight on these factors we are withdrawing our estimates, which we will rebase and reset. In our opinion, the restructuring proposals leave a more positive future for equity holders, although this will depend on the future revenues and cash flows generated. The proposals should pave the way for hiring a new CEO, who will be joining when the company is in a far more satisfactory financial position. The launch of HYLAS 4 in March 2018 should mark the end of the investment phase.

Valuation: Bondholders’ interest in equity

While the debt for equity swap does dilute existing shareholders’ prospects, in our view the outcome is better than might have been expected. In return, the restructuring reduces the operational risk, securing upside value potential for equity as business develops and cash flows grow, which clearly has attractions for the bondholders swapping into shares.

Financial restructuring

In consultation with and supported by shareholders owning 34% of the equity and bondholders owning 62% of the 2021 Notes and 55% of the 2023 Notes, Avanti is proposing two separate financial restructuring measures to reduce the huge debt burden that has weighed on the company’s prospects.

A debt for equity swap is being proposed for the c $557m of outstanding 2023 Notes, which currently trade at around 25% of par. These will convert into around 2bn (2,000m) of new 1p shares. Essentially, the nominal value is being converted to equity at c 21p a share, although the value being accepted is more like c 7p per share. The reduction in debt burden this implies may provide a boost to existing shareholders as the equity value is higher than the current market price. In effect, the bondholders appear to be accepting the potential gearing of equity stakes over the greater security of interest payments, which threaten maintenance of the operations, hugely increasing risk. The $81m annual interest savings will be retained for the benefit of the company and its owners, including equity holders.

In addition, the outstanding 2021 bondholders are being asked to accept a reduction in the coupons paid, as well as an extension to the term and changes to covenants and restrictions.

In aggregate, the package should reduce the annual interest burden from $128.7m to just $36.6m. Details are provided in Exhibit 1 below.

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

0

36.6

Source: Avanti Communications

Exhibit 2: Financial summary

$m

2014

2015

2016

Year end 30 June

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

65.6

85.2

82.8

Cost of Sales

(86.7)

(83.8)

(86.0)

Gross Profit

(21.1)

1.4

(3.2)

EBITDA

 

 

(7.7)

12.5

4.6

Operating Profit (before amort. and except.)

 

 

(53.9)

(32.6)

(39.8)

Intangible Amortisation

(0.2)

(0.2)

(0.2)

Exceptionals

5.3

0.0

0.0

Other

0.0

0.0

0.0

Operating Profit

(48.7)

(32.8)

(40.0)

Net Interest

(38.9)

(40.5)

(27.0)

Profit Before Tax (norm)

 

 

(93.0)

(73.3)

(67.0)

Profit Before Tax (FRS 3)

 

 

(87.7)

(73.3)

(67.0)

Tax

0.0

0.0

(2.2)

Profit After Tax (norm)

(92.0)

(73.3)

(69.2)

Profit After Tax (FRS 3)

(87.7)

(73.3)

(69.2)

Average Number of Shares Outstanding (m)

107.4

119.0

139.4

EPS - normalised (c)

 

 

(85.2)

(61.4)

(49.3)

EPS - normalised fully diluted (c)

 

 

(85.2)

(61.4)

(49.3)

EPS - (IFRS) (c)

 

 

(81.2)

(61.4)

(49.3)

Dividend per share (c)

0.0

0.0

0.0

Gross Margin (%)

-32.1

1.6

-3.9

EBITDA Margin (%)

-11.7

14.7

5.6

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

-82.1

-38.2

-48.1

BALANCE SHEET

Fixed Assets

 

 

645.9

721.5

804.5

Intangible Assets

14.0

11.0

10.8

Tangible Assets

610.9

691.0

775.1

Investments

21.1

19.5

18.6

Current Assets

 

 

235.7

160.3

137.8

Stocks

1.7

2.6

1.9

Debtors

21.0

17.8

39.3

Cash

195.3

122.2

56.4

Other

17.6

17.7

40.2

Current Liabilities

 

 

(44.4)

(36.6)

(86.1)

Creditors

(39.9)

(31.9)

(82.8)

Short term borrowings

(4.5)

(4.7)

(3.3)

Long Term Liabilities

 

 

(527.7)

(540.5)

(654.7)

Long term borrowings

(512.4)

(523.7)

(642.0)

Other long term liabilities

(15.3)

(16.8)

(12.7)

Net Assets

 

 

309.4

304.7

201.5

CASH FLOW

Operating Cash Flow

 

 

5.1

(8.1)

(22.7)

Net Interest

(39.0)

(54.4)

(67.4)

Tax

0.0

0.0

(2.2)

Capex

(25.8)

(102.0)

(95.7)

Acquisitions/disposals

0.0

0.0

0.0

Financing

(7.6)

80.0

5.3

Dividends

0.0

0.0

0.0

Net Cash Flow

(67.3)

(84.5)

(182.7)

Opening net debt/(cash)

 

 

254.4

321.7

406.2

HP finance leases initiated

0.0

0.0

0.0

Other

(0.0)

0.0

0.0

Closing net debt/(cash)

 

 

321.7

406.2

588.9

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 2017 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 Limited (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.
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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 12, 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 2017 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 Limited (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 2017. “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 12, 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 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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