Since Avanti
Communications* announced a £70 million
placing at 430p per share on 12th July
to enable it to initiate the
procurement of a third satellite and
re-domicile the assets of its second satellite,
Hylas 2, offshore, shares in the satellite
broadband company have fallen from in excess of
490p to 476p. Whilst still above the placing
price, we believe this decline fails to recognise
the benefits in terms of taxation and additional
earnings potential, the announced moves should
yield. With a share price of £13+
potentially justifiable an increase on a prior
valuation of 1125p), at 476p we continue to view
shares in Avanti Communications as a
compelling
buy.
To recap the story,
Avanti’s Hylas 1 satellite is set to be
ready to be launched by the end of September.
However, the company’s placing announcement
included a note that “uncertainty
surrounding the readiness of the new Soyuz launch
pad in French Guyana has led to a scheduling
risk” and that, with Avanti in
discussions about the use of another launch
vehicle instead, the company estimated
“a
risk of schedule delay of up to six weeks from
the proposed end September launch” -
promising to update the market as soon as there
is further concrete information. The update did
re-emphasise that “the Hylas 2
satellite is on schedule for a launch in the
first half of 2012” and that
“following
the recently announced contract wins in the
institutional and enterprise market segments,
and positive developments in the pipeline of
potential new business, Avanti is confident
that it will be able to sell HYLAS 2 capacity
within the expected timetable”. On
Hylas 3 Avanti noted its move was “in order
to take advantage of possible new business
development opportunities”. It added
it was implementing a “relatively
low cost strategy to begin the procurement with
a relatively small cost commitment with the aim
of negotiating sufficient customer commitments
to support long term
financing”.
Our modelling of the
company’s satellites assumes first year of
operation capacity utilisation of 30%, ramping up
to 90% from the third year on the smaller (3,000
MegaHertz capacity) Hylas 1 satellite and from
the sixth year on the expected larger Hylas 2 and
3 satellites (8,280 MHz capacity). We have
assumed leasing rates of £1,500 per MHz per
month across the satellites’ 15 year design
lives. Various factors mean these parameters look
cautious – with the demand-supply dynamics
of the industry (economic development, and the
desire for it, feeding increased demand and
considerable barriers to entry – e.g.
scarce, finite and highly regulated satellite
spectrum & high capital intensiveness -
restricting supply) suggesting Avanti should be
able to more fully utilise capacity – and,
more significantly, sell it at a materially
higher price than we assume. Indeed, the company
has already demonstrated an ability to negotiate
higher prices than we assume despite still being
in the pre-launch stage – one announced
contract, for example, equates to £2,315
per MHz per month. There are equally downside
considerations – costs rising above those
assumed in our model for example – but on
balance we consider our assumptions to be, if
anything, overly conservative.
Using a 10% discount
rate and including the 16,279,070 placing shares
(which are conditional, amongst other things,
upon the passing of certain resolutions to be
proposed at a 28th July General
Meeting), we derive a net present value of 296p
per share for Hylas 1 (just over £250
million). On the same basis, Hylas 2 then adds
551p per share but tax-free this increases to
804p – emphasising the potential
significance of the company’s Hylas 2 move.
Assuming Hylas 3 as per Hylas 2 and even
including an additional 75% risk weighting for
its early stage, adds a further 137.75p per share
(taxed) or 201p (untaxed). There is a degree of
risk – particularly with the company not
yet having launched its first (though fully
insured) satellite. However, the suggested values
indicate a share price clearly in excess of the
current level and there is evident upside, both
from our model parameters and as the heavy risk
weighting on Hylas 3 is reduced as development
progress is made. We remain of the view that the
present, pre-Hylas 1 launch, share price
represents a most attractive opportunity to get
on board what is a fast emerging intercontinental
satellite player. The shares are up more than
100% since our initiation of coverage of Avanti
Communications in 2007 at 215.5p but, with our
numbers suggesting a share price of £13+ is
potentially justifiable, at 476p we continue to
view shares in the company as a
compelling
buy.
