Avanti - a tale of two halves

Its been around four months since Avanti Screenmedia (tipped at 246p back in late 2005) completed the demerger of its retail and satellite businesses. Back in March this year I said it would be worth waiting until the demerger was complete before assessing the two legally separate entities, and over the past few months the picture has become remarkably clear.

The bad news is that the original retail/shopping mall advertising business, Avanti Screenmedia, is having a torrid time, most recently flagging up to shareholders that trading has been challenging and that the full-year results for the 12 months to June would be ‘significantly behind expectations’. The shares are bombed out at 3.25p and their prospects are now dependent on the new management reinvigorating this arm.

The good news is that the most important (and significantly larger) arm, Avanti Communications, while affected by the general market turbulence, is entering an exciting phase.

To recap, 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 television.

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 technology that is new for the satellite industry but 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.

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 the 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 €1 million (£680,000) per year in order to encourage pre-sales. In reality, proposals are being sent to potential buyers in the range of €1.2 million to €1.4 million. Because Avanti’s satellite costs less than those of its rivals, margins are still high. Williams believes that he could get as much as €2 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 the capacity by the time of 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 (where Williams has just returned from a business trip), 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 2005/06 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. Sit tight.