Avanti Communications (LSE: AVN), rated a BUY by Cenkos Securities
In April 2000, the auction of 3G mobile licences raised £22.5bn for the British government. This windfall was achieved during the dotcom boom, yet it illustrates how valuable spectrum is to telecoms firms that need to provide superfast wireless broadband to meet demand from smartphones and tablet computers.
In the satellite world, the equivalent real estate is owning one of the 240 slots that exist for geostationary orbits. In space this is the cheapest way of offering an uninterrupted connection to users on the ground. Here satellites circle the earth at the same speed as the planet rotates, so they are constantly above a specific region, operating 24 hours a day. This is where Avanti Communications comes in. It has secured three slots that together could be worth more than £150m (or 75p a share). Hughes Communications recently paid £59m for one geostationary orbit above Brazil.
But that’s not all. Avanti also has net tangible assets worth 240p a share, derived from its Hylas 1 satellite, which already provides broadband services for Europe, and its Hylas 2 satellite, which is due for launch in the second quarter of 2012 and will cover the Middle East and Africa. Together this should provide a floor for the share price.
The upside could be enormous. Joint house broker Cenkos has a price target of £23. This valuation comes from Avanti’s £171m order book, £473m pipeline, and excellent prospects. The board is confident it can sell out the capacity of these two satellites (and a third that’s in the pipeline) over the next five years. This optimism stems from good progress, with peak demand for Hylas 1 up to 36.7% after only six months. New clients are “seeking significant capacity”, while existing customers are coming back for more.
As for Hylas 2, “pre-launch sales interest has been very strong, with significant deals expected soon in southern and eastern Africa, Iraq and Afghanistan”. One of Avanti’s advantages is that its satellites use gigahertz Ka-band frequencies – these frequencies are much faster than the industry’s older C-band, X-band and Ku-band workhorses. CEO David Williams emphases that the group “is winning business at good prices” and that “there is presently only one Ka-band competitor in each of our geographies”.
However, the company’s losses have elicited a bear raid on the shares. Chairman John Brackenbury has said that these speculative ‘attacks’ may have caused shareholders distress, but adds that “it has not changed our approach at all… It is clear that Avanti owns scarce and valuable resources in one of the few lightly competed sub-sectors of a global telecoms industry…. (This) should see us create very significant value.”
The company could deliver revenues and earnings before interest, tax, depreciation and amortisation (EBITDA) of £150m and £75m respectively by June 2015. I value the stock on a ten-times multiple that, discounting back at 12% and deducting £81m of net debt, gives an intrinsic worth of 465p a share. Although not for widows and orphans, Avanti offers an attractive blend of high growth and limited downside – a point not lost on its three directors, who recently purchased £180,000 shares at 255p-275p.
Rating: BUY at 310p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI , or phone 020-7633 3634 for more information.