Avanti Communications set to soar

Satellite operator Avanti Communications is being transformed this year and the benefits will show through in the next financial year. During the period the HYLAS 1 satellite was placed in orbit. It is operating at 1db higher power than expected. HYLAS 2 is being built and the financing of HYLAS 3 is being arranged. Revenues fell from £3.26m to £1.28m in the six months to December 2010, while higher costs meant that the loss jumped from £440,000 to £6.31m. Avanti is winding down its older satellite activities and concentrating on the Ka band services of its HYLAS 1 satellite. This will show through in revenues next year. The order book is worth £229m. That is orders for both HYLAS 1 and HYLAS 2. The average length of HYLAS 1 contracts is 7.2 years. HYLAS 2 contracts are shorter but still average 4.3 years. Avanti had $64.9m in the bank at the end of 2010, while debt was £90.9m. Even so, interest costs are low. HYLAS 1 will be highly cash generative once it starts building up its revenues and that debt will come down relatively quickly depending on how much is spent on the other satellites. Broker Daniel Stewart points to EchoStar's $2bn, including debt, purchase of Hughes Communications as giving an indication of Avanti's true value. Hughes is also involved in Ka band and has bought capacity outside of the US from Avanti. Daniel Stewart reckons that a similar valuation to Hughes would underpin its target price of 2525p a share - still four times the current share price. AIM-quoted Avanti is expected to lose money in the year to June 2011 and then move into profit in 2011-12. HYLAS 2 should be launched in the middle of 2012.