(AVN.L) Avanti Communications Group PLC Buy/Sell

Avanti did commission this report so it isn,t unbiased. I haven,t pasted the full report as it was so big, but well worth a read.

Analyst: Steven Moore
steven.moore@t1ps.com
020 7562 3392

On 26th October 2009 AIM-listed Avanti Communications Group announced a £7.5 million contract win and important strategic deal with Hughes Network Systems, the world's leading supplier of satellite network services and equipment. This sees Hughes become the latest in a long line of companies to purchase capacity and managed services from the leading-edge ‘Ka band’ satellite (called Hylas) Avanti, is fully-funded to, and has made arrangements for, launch in the second quarter of 2010. This is to be the first Ka band broadband satellite launched outside America.

The major focus of the Hylas satellite is the vast, emerging market for satellite broadband in Europe which has traditionally been neglected as uneconomical. However, technological advancements mean that Hylas is strongly cost competitive and Avanti now looks ideally positioned to benefit from the, particularly significant rural, segment of the European broadband market which is presently poorly or un-served. Satellite broadband appears to be the only technically proven and, now, economically viable solution to the problem of rural broadband provision and the significance with which this issue is considered can be seen in the €2.8 billion of funding which the European Commission has set aside for rural broadband projects in 79 regions across Europe over the next five years – funding which Avanti has already shown an ability to access.

In a results statement released on 22nd September, the company affirmed that “the sales pipeline is strong” and our discounted cash flow model suggests Hylas alone has a net present value (at a 10% discount rate) of £235.66 million – equating to 525p per diluted Avanti share. We then assume the launch of a further two, larger, satellites in a two year time-frame, the estimated cash flows of which we apply risk weightings of 85% and 90% to respectively, in addition to a 10% discount rate, in order to reflect their stage of development (e.g. no procurement having taken place or forward sales achieved). Avanti has, however, announced that it has been offered financing by government sponsors for at least one new satellite – with an investment bank retained to help it close this - and the slight difference in risk weightings is reflective of this situation. Under our model, these then add 116p an d 77p to the valuation respectively but as development progress is made, our heavy risk weightings will be reduced and our valuation is thereby likely to increase significantly during the next 24 months.

It is worth noting that the resultant 718p per share valuation includes nothing for the company’s orbital licences, which have a clear value to industry competitors. Indeed, Avanti’s attractiveness was highlighted in February when the company confirmed it had received an unsolicited preliminary approach regarding a possible offer for the company. This was rejected, with the board stating they believe Avanti “has excellent prospects as an independent group”. With the shares at 385p we agree and, with a current target price of 718p, our stance is buy.