Avanti's longer-term launch appeal

Spun out of Avanti Screenmedia in April, Avanti Communications offers investors exposure to increasing demand for satellite capacity. Satellite data services demand is set to grow by 250 per cent by 2015, and HDTV requires ten times the capacity of standard TV. For such a risky venture, the company, which is adding spectrum licences, offers limited downside risk.

Avanti has the licence and enough spectrum to put 15 satellites into space. The first satellite should be in position to cover Europe in the first quarter of 2009 and is expected to cost around £82 million. The group’s satellite, Hylas, uses new technology for the satellite industry but it is already in use in other sectors. That means it will take longer to build and test but it will be able to deliver more data than conventional satellites because it will use Ka band spectrum. This is because it uses small spot beams rather than one large beam for the whole region.

The £32 million debt needed to fund the first satellite is in place and this has been achieved without issuing any dilutive warrants or convertibles to the lenders. Because of this, the interest charge is 10.5 per cent over base rate. The loan is repayable in 30 months and one of the lenders is Avanti’s biggest shareholder, Caledonia Investment. At the same time, Avanti raised £2 million via a share placing at 200p a share.

Chief executive David Williams has decided to initially offer individual transponders on the satellite for as little as e1 million (£672,000) per year in order to encourage pre-sales. In reality, proposals are being sent to potential buyers in the range of e1.2 million and e1.4 million. Because Avanti’s satellite costs less than rivals’, margins are still high. Williams believes that he could get as much as e2 million per transponder but he wants to attract early pre-sales in order to finance more satellites. The current proposals under discussion are already worth £110 million over the 15-year life of the satellite. Avanti wants to pre-sell one-quarter of capacity by the launch.

Williams does not want to issue more shares at what he sees as a low share price. He reckons that once insurance is finalised and other technological and launch milestones are achieved the shares will be worth many times their current price. Instead, Avanti will build up revenues from pre-sales and seek joint venture partners to take advantage of its two new spectrum licences that cover India, the Middle East and Africa. These licences also include military spectrum.

Avanti has revenue-generating network services and consultancy businesses. In the past, these have been profitable – although the 2005/6 profit of £6.26 million was
flattered by a one-off credit of £5 million. The cost base has increased in the past year as Avanti builds up its space expertise, which is why the company is estimated to have lost more than £3 million in the year to June 2007. Unsurprisingly, it is expected to lose money for the next two years.

However, any downside is limited by insurance that is being arranged. If the satellite blows up on the launch pad the insurers will pay £80 million to the company. When the debt is repaid that should leave the shareholders with the equivalent of 170p a share. That’s nearly four-fifths of the current share price.

If the satellite does get off the ground, and there is a 97 per cent chance it will, according to insurance broker Marsh, that alone will make Avanti an attractive investment. Avanti intends to have four satellites in orbit by 2012, if not earlier. Buy.