Avanti Communications (LSE: AVN) has the usual characteristics displayed by the hottest of AIM stocks: a great ‘story’, the potential for lottery-like winnings, and a large herd of excited private investors posting on financial bulletin boards.
The Avanti Communications story
Avanti Communications joined AIM in April 2007, having been demerged from Avanti Screenmedia (which later collapsed). Avanti Communications came to market as a provider of satellite telecommunications services in Europe using leased satellite capacity, but had plans to launch its own satellite (HYLAS 1).
HYLAS 1 was launched in November 2010. HYLAS 2 was launched in August 2012, extending Avanti’s coverage to Africa, Caucasia and the Middle East. HYLAS 3 and 4 are in the pipeline.
Avanti posted revenue growth of 104% to $66m for the year ended June 2014 — a third successive year of mammoth growth — and management reckons the business can potentially generate over $700m in revenues annually if capacity of the current fleet of satellites is filled.
A story stock gone sour
Avanti’s shares closed at 243p on the first day of trading on AIM, and reached 728p in the weeks following the launch of HYLAS 1. However, despite the soaring revenues, the shares have since been on an erratic downward trajectory, and the price is 230p at the time of writing.
While revenue growth may seem impressive at first sight, brokers have persistently made downward revisions from more stupendous forecasts. Projections have fared even worse at the level of profit — or, loss, to be precise; the company has yet to turn a profit.
Commissioning the building and launch of satellites doesn’t come cheap, and Avanti continues to burn cash like a rocket burning liquid oxygen. The number of shares in issue has increased more than fourfold since the company listed, the last big jump coming as a result of a £75m equity placing to fund HYLAS 3 in 2012.
Furthermore, Avanti has issued high-yield bonds: $370m worth in 2013 to refinance existing borrowings, and $150m in 2014 to commence HYLAS 4. The company is now wallowing in debt. At the last year end (30 June) there was $195m in cash on the balance sheet, but $517m of gross debt.
A history of downgraded profit projections, rising debt and the need for further equity and/or bond fundraisings (on likely increasingly unattractive terms) have made Avanti a progressively less sweet jam-tomorrow stock for many investors.