Shares in satellite broadband group Avanti Communications Group (LSE: AVN) opened down slightly today, despite the group reporting a 29.9% hike in full-year revenue, which rose to $85m last year.
The firm claims it is within a couple of years of completing its growth plan and moving into profit. In this article I’ll ask whether Avanti now has the potential to outperform its larger rival Inmarsat (LSE: ISAT) and satellite television giant SKY (LSE: SKY).
Good news and bad
The good news was that Avanti’s fleet utilisation rose to 20-25%, up from 10-15% during the previous year. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose tenfold to $16.0m, up from just $1.7m the previous year.
The bad news is that these EBITDA and utilisation figures remain very low, and Avanti is losing serious amounts of money.
Last year’s post-tax loss was $73.1m and the firm’s accounts show that Avanti experienced a net cash outflow of$164.5m during the year. Interest payments alone totalled $52.3m.
As a result, Avanti’s net cash balance fell from $195m to $122m, despite a one-off $25.1m gain from the sale of some unwanted spectrum rights.
Inmarsat vs Avanti
Avanti is planning to build a satellite fleet with the potential to generate EBITDA of $500m. To put this into context, Inmarsat, a much older rival with a more mature business, reported revenue of $1,285m and EBITDA of $701m last year.
If we assume that Avanti’s reading of potential market demand is correct, Inmarsat’s figures suggest that Avanti could deliver impressive growth once its network of satellites is complete.
My concern is that Avanti has already invested $1.2bn in its network. Further investment is needed. I suspect that it will take the firm much longer to generate a profit from this investment than the market is expecting.
In the meantime, more cash may be required.
On this basis, I’m not sure buying Avanti makes sense in today’s market.
What about Inmarsat and Sky?
In my view, Inmarsat is a high-quality business. Earnings grew by 8% last year and the firm maintained its long-term average operating margin of 31%.
Inmarsat shares currently offer a reasonable forecast yield of 3.3%, but they are expensive. Earnings per share are expected to fall this year before recovering next year. Today’s 1,014p share price equates to a 2015 forecast P/E of 34, falling to 29 in 2016.
I’m more tempted by satellite broadcaster Sky. The firm’s shares currently trade on around 16 times forecast profits and offer a similar 3.5% yield.
Sky’s ability to generate free cash flow and audience loyalty with exclusive content are impressive. The firm’s recent acquisition of Sky Italia and Sky Deutschland could generate further growth using the formula that’s been so successful in the UK.
Sky remains a buy, in my view.
