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Why ‘Risky’ Glencore PLC Is A Much Safer Buy Than Avanti Communications Group PLC

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Shares in satellite broadband provider Avanti Communications Group (LSE: AVN) fell by 10% on Thursday, after the group said it lost $45m during the second half of 2015. Although the group said it has a “fully funded business plan” through to the launch of its next two satellites, investors appear to be concerned that Avanti is not making sufficient progress.

Revenue of $31m was unchanged from the same period last year. The group did not even manage a gross profit, instead reporting a gross loss of $10.2m for the period. This dreadful performance is probably the result of very low capacity utilisation on its network. Although the group said that fleet utilisation rose above 25% during the second quarter, this still seems very low to me.

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Avanti also has a lot of expensive debt. The group paid interest of $27m during the last six months. This mainly relates to $627m of high yield bonds, all of which carry a 10% coupon (interest rate).

Burning through cash

Avanti reported a cash balance of $162m at the end of 2015, but the group is constantly burning through cash. During the last six months, Avanti reported a total cash outflow of $82.3m. Over the last twelve months, the business burned through $137m of cash. At this rate, the group’s cash balance and its $71m undrawn facility could be used up in less than two years.

Although Avanti has been able to issue bonds in each of the last three years, servicing this debt is becoming a costly burden. Debt market conditions also appear to be tightening, so new bonds could be hard to sell.

The problem is that while Avanti may have a great product, shareholders are vulnerable if the firm runs out of cash or is forced into an emergency fundraising. If a cash flow crisis causes Avanti to default on its debts and have its assets placed under the control of its lenders, then shareholders will probably be wiped out. This isn’t certain to happen, but it is a real risk, in my view.

Fears overblown

You may remember that back in September, shares in FTSE 100 commodity firm Glencore (LSE: GLEN) — which is profitable — fell by 29% in one day after a City analyst suggested that Glencore’s debt levels mean that “the equity value [of Glencore] could evaporate”.

So far, that fear seems to have been overblown. Glencore has raised fresh cash from shareholders and taken concrete measures to reduce debt and cash outgoings. The group has been able to convince the market that it can remain profitable at current commodity prices.

Avanti does not have these options. The firm’s debt is very expensive and because it has never reported a profit, shareholders might be reluctant to provide fresh cash. Avanti’s share price has fallen by 50% over the last three months. In my view, the market is gradually pricing in the possibility of serious financial problems.

I’d much rather own shares in Glencore. Despite all the problems facing the commodity market, Glencore is expected to generate almost $1bn of profit this year. It may even pay a dividend.

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Roland Head has no position in any shares mentioned. The Motley Fool UK 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.

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