After a disappointing start to the year, Avanti Communications’ (LSE: AVN) investors were greeted with some good news yesterday.
The satellite operator revealed that the launch of its next communications satellite, HYLAS 4, will cost 15% to 20% less to build, insure and launch than initially expected. As a result, management expects that after completion of the satellite, the company will be “in a strong financial position”.
HYLAS 4 is the last of Avanti’s HYLAS four-satellite building program and is intended to provide communications coverage to sub-Saharan Africa. Avanti’s first two satellites, HYLAS 1 and HYLAS 2 are already in position and, according to the company’s management, will be “sold out” during 2016 owing to growth in demand. So, there is no denying that the demand for Avanti’s services is high.
What’s more, the HYLAS 3 communications satellite will be live for commercial service in 2016.
Nevertheless, investors remain sceptical. Indeed, there are few signs that Avanti will actually turn a profit any time soon, despite the apparent high demand for its services.
In particular, current City forecasts are predicting a pre-tax loss of just over £60m this year, followed by a pre-tax loss of £43m next year. Unfortunately, these forecasts could be revised lower as Avanti has already warned on profits once this year. During July the company warned that due to bond financing costs, unfavourable exchange rates and large set up costs the company’s first half profit would come in below expectations.
Unfortunately, while there does appear to be a strong demand for Avanti’s services, the company’s financial position is worrying.
Net debt is rising rapidly and is expected to triple over the next few years, from £167m as reported at the end of the company’s fiscal 2013, to £442m by 2016. Figures suggest that net debt to equity will stand at 3.4times by 2016. Although as mentioned above, management does not appear to be worried about this high level of debt.
Then there are interest costs, which are costing Avanti tens of millions. Indeed, while Avanti is currently forecast to turn a profit on an earnings before interest and tax basis by 2016, after deducing interest costs, the company will remain unprofitable unit 2017, or even 2018.
Reasons to be excited
Still, Avanti is providing what could be considered to be an essential service to millions throughout Europe and Asia. Further, the company has few rivals in the sector and over the long term, there’s no denying that Avanti’s services will be in demand.
That being said, Avanti faces multiple risks going forward, rising levels of debt is just one of the risks associated with blasting costly satellites into space. If things go wrong, Avanti could face a huge bill, which would only add to its troubles.
All in all, Avanti could have a bright future but there is plenty of uncertainty ahead.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.