Avanti has won a two-year deal worth “up to €10.7m” to provide broadband in rural Africa. This could add up to $6m per year to Avanti’s revenue. However, given that the company’s operations generated a cash loss of $45.9m during the first half of this year, I’m not sure this contract win is big enough to be worth celebrating.

Indeed, today’s update suggests to me that Avanti has serious financial problems. The group’s cash balance has fallen from $162m at the end of December 2015 to just $57m.

Avanti announced today that to address “near-term liquidity needs” it will use $32.25m of new three-year bonds to make the October interest payment on its existing bonds, instead of using cash. So far, 60% of the firm’s bondholders have agreed to this measure. In my view they would only do so if they though that forcing Avanti to pay in cash would lead to a default or prevent the firm from operating normally.

Lossmaking Avanti says it’s now working on “a long-term funding solution”. Shareholders are hoping for a takeover offer, but in my view this is unlikely before a refinancing deal is agreed.

Investors looking for a bargain shouldn’t be tempted by the shares’ discount to book value. This is based on Avanti’s interim accounts, since when cash has fallen dramatically. Taking into account today’s announcement, I suspect that Avanti’s next accounts will show that the value of the firm’s assets is almost completely wiped out by its borrowings.

What’s more, any refinancing solution may well involve giving bondholders a big slice of equity in Avanti. In my view, Avanti’s financial distress means that the shares are a strong sell. I’d certainly use today’s gains as a selling opportunity.

This firm has lots of cash

Watchstone Group (LSE: WTG) — the company formerly known as Quindell — reported its interim results today. Underlying revenue rose by 10.7% to £31.9m, while the group’s underlying EBITDA loss was reduced from £13.8m to £6.9m.

The group’s cash balance at the end of August was £89.3m, or about 191p per share. Watchstone also has a further £50m of cash in escrow that relates to the sale of its professional services business to Australian firm Slater & Gordon. Watchstone hopes this will be released at the end of the warranty period in November. If it’s released, then Watchstone plans another £1 per share return to shareholders.

That’s the good news.

The bad news is that the firm’s cash balance is gradually being eroded by the poor performance of its operating businesses. Today’s results show that Watchstone’s four businesses are all either lossmaking or only marginally profitable. Growth appears uncertain too.

Watchstone’s share price is being supported by the firm’s large cash balance. But what this tells me is that the market thinks the group’s underlying businesses aren’t worth much. Watchstone is also the subject of a Quindell-era Serious Fraud Office investigation, which could lead to cash penalties.

In my view, Watchstone shares carry a lot of risk. I think there are far better growth opportunities elsewhere in today’s market.

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The news outlet reported that: “The approach from Inmarsat was a preliminary one and talks between the two companies remain at an early stage, according to people close to the situation”.

Inmarsat scotched the story in a regulatory news release at 07:00 this morning, stating it had “no intention to make an offer for Avanti”. Furthermore, it seems Inmarsat didn’t approach Avanti, but “was contacted by Avanti’s advisers”.

I’ll come on to look at Avanti’s prospects shortly, but first what of Inmarsat, whose shares moved higher when the market opened.

One to watch

Inmarsat’s shares had seen a strong multi-year rise up until the end of 2015, but have fallen 31% this year. Oversupply in the industry, weakening demand and intense pricing pressure have been behind Inmarsat’s disappointing performance. But has the market over-reacted?

It doesn’t seem so, because at a current share price of 781p, Inmarsat is trading on a forward price-to-earnings (P/E) ratio of over 22 and with a dividend uncovered by earnings. Furthermore, with some analysts suggesting — based on commentary from other operators — that the industry outlook is tougher than Inmarsat’s board seems to have indicated, I believe this is a stock to watch rather than buy for the time being.

A risk too far

I’ve been bearish on Avanti Communications since first writing about the company in 2014 when the shares were trading at 230p. They’re now at 25p, valuing the lossmaking and cash-burning firm at £37m.

Avanti has gross debt of over $640m in junk bonds, needs to raise $50m of equity to secure additional debt facilities, and has also put itself up for sale. Inmarsat’s disinterest seems telling, as do downgrades from major credit rating agencies. Moody’s, for example, sees “a default by Avanti over the next 6-12 months as almost inevitable” and deems the likely recovery rate for bondholders to be “in the 35%-65% range in an event of default”.

In such circumstances, the equity would be worthless. In my opinion, the risk here is so high that the only course for a prudent investor is to sell the shares.

Demanding valuation

I’m not sure why oil services company Northbridge Industrial Services (LSE: NBI) was “pleased” to announce its half-year trading update this morning, because it warned on profits and its shares dived 11% to 75.5p, extending a 12-month decline to over 60%.

The company, which is valued at £20m, has a reasonable balance sheet and reckons it can “continue to ‘ride out’ the current turbulence in the market with confidence”. Looking forward to 2017 and 2018, it sees some “reassuring announcements from the oil service majors”. However, with the 2017 forecast P/E standing at 47, I don’t see a great deal of value at this stage.

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Since disposing of Verizon Wireless, Vodafone’s bottom line has fallen and the decision has appeared to have been a mistake. Now, though, Vodafone’s investment in Europe could be about to start paying off, with the company forecast to increase its bottom line by 24% in the current year and by a further 19% next year.

This has the potential to dramatically improve investor sentiment in the stock, although Vodafone’s near-term outlook remains uncertain due to the EU referendum. As such, for long-term investors who can live with a degree of volatility for now, Vodafone could prove to be a sound buy – especially with it yielding 5.4%.

What’s the alternative?

Also offering upbeat growth forecasts is Alternative Networks (LSE: AN), with the IT solutions provider expected to return to growth next year following a difficult 2016 financial year. As stated in its interim results release earlier this month, Alternative Networks is seeing a mixed trading performance, with continued good growth being reported in its Advanced Solutions segment. However, Mobile performance has been negatively impacted by challenging market conditions and a reduction in roaming tariffs implemented by the carriers.

Due to this mixed trading, Alternative Networks is expected to deliver a fall in earnings of 7% in the current year, but is due to bounce back with growth of 13% next year. And with it trading on a price-to-earnings growth (PEG) ratio of just 0.8, its improved performance doesn’t yet appear to have been priced-in by the market. Furthermore, with Alternative Networks yielding 6.3% from a dividend covered 1.4 times by profit, it remains a top-notch income play, too.

One to watch for now

Meanwhile, 2016 has also been a challenging year for investors in Avanti (LSE: AVN). The satellite communication services provider’s share price has slumped by 61% since the turn of the year and short-term jumps in its valuation aside, it has shown little sign of mounting a sustained recovery over a prolonged period.

With Avanti forecast to remain in the red in each of the next two financial years, investor sentiment could continue to weaken. As such, its shares appear to be worth watching, but not buying at the present time. That’s despite the company reporting progress in its most recent update, with it recording a rise in sales of almost 15% in its third quarter. With other technology and telecoms companies offering strong profit growth at a reasonable price, there seem to be a number of better options on offer elsewhere at the present time.

The post Are Vodafone Group plc, Avanti Communications Group plc and Alternative Networks plc 3 super growth stocks? appeared first on The Motley Fool UK.

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Avanti’s management also announced today that demand for its High Throughput Ka band satellite capacity in Europe, the Middle East, and Africa has been strong, particularly in the large telecommunications and government sectors. With demand for its services robust, Avanti is confident that it will be able to hit its revenue growth target of 50% year-on-year for the year to the end of June, some much-needed good news for the company’s shareholders.

Rocky period 

Over the past 12 months, Avanti’s investors have been taken on a wild ride as the company’s share price has collapsed by around 60% since mid-May last year. And year-to-date, shares in Avanti have lost around 50% of their value as investors have become concerned about the company’s financial position and its ability to hit growth targets. Indeed, City analysts expect the company to report substantial losses for the next two years, and it remains to be seen if Avanti can survive long enough to book a profit eventually. 

Analysts expect the company to report a pre-tax loss of £51m for the year ending 30 June and a pre-tax loss of £33m for the following year.

Speculative pick 

Shares in Amur Minerals (LSE: AMC) had a rough start to the year but have begun to make back some of their losses in recent trading days. Year-to-date the company’s shares have lost around 36% of their value and since the beginning of June last year, the shares have lost a staggering 90% of their value. However, in the last week, the company’s shares have started to recover some lost ground and are up around 16% since Monday.

Amur is still in the early stages of exploring its flagship Kun Manie nickel copper sulphide project located in the far east of Russia and it will be several years before this asset starts production and generates a return for shareholders. 

With this being the case, Amur is a high-risk opportunity. The company still has a whole mine to build and finance. If you’re going to buy into Amur’s nickel copper sulphide project, it’s best to do so as part of a well-diversified portfolio so if the company fails, you don’t lose your shirt.

The post Is the reward worth the risk with Avanti Communications Group plc and Amur Minerals Corporation? appeared first on The Motley Fool UK.

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Avanti shares have fallen by more than 40% so far in 2016. Today’s headline figure of $29m sounds impressive relative to last year’s total revenue of $85m, but the amount will be spread over a “multiyear” period.

Avanti didn’t say how many years, but given that this deal is to support a major mobile network, it could well be a long-term contract. In my view, Avanti’s EE contract is unlikely to be enough rescue its disastrous cash flow situation.

Last year, the firm generated a cash loss of $62.5m on turnover of $85m. That’s terrible. The firm’s recent interim results were no better, and capital expenditure also remains high.

One reason Avanti’s cash flow is so poor is that utilisation of its satellite network is only 25%-30%. The second reason cash is so tight is because of the amount being spent on interest payments, which are running at about $57m per year.

Avanti is expected to report a loss this year and next year. Interest payments currently absorb more than half of total revenue. In my view, these shares are likely to fall further.

An uncertain future

Despite a five-year run of worsening results, Imagination Technologies Group (LSE: IMG) still trades on 25 times 2017 forecast earnings. Investors must be very confident that the firm’s turnaround plans will deliver a profit in 2016/17, after three years of losses.

I’m not sure I share this confidence. Falling iPhone sales won’t be helping Imagination, which supplies a key graphics chip for the premium smartphone. Apple recently considered buying Imagination, but decided against it.

The company’s recent results said that royalty payments had been lower than expected and mentioned delays to new licensing deals. Although Imagination is cutting jobs and expects to sell its lossmaking Pure digital radio business this year, I think that the shares are a risky buy at the current price.

Shareholders could lose everything

Few companies are as close to the edge as Gulf Keystone Petroleum (LSE: GKP). The Kurdistan oil producer’s lenders have agreed that Gulf can delay interest payments while it tries to negotiate a new financing deal.

Gulf’s latest update makes it clear that the firm is now in default on its bond repayments. This means that the company’s lenders will have to approve any refinancing deal and are likely to be heavily involved.

To add to its problems, Gulf needs to spend a minimum of $71m just to maintain its production at current levels. The firm doesn’t have this cash. So what happens now?

The fact that Gulf is in default means that unless shareholders are able to take part in the refinancing of the firm, they’re likely to be left with almost nothing. A debt-for-equity swap — where Gulf’s bonds are exchanged for new shares and fresh cash — is now likely. Existing shareholders’ would see their stake in the company diluted, probably by 90% or more.

I believe Gulf’s current 4.8p share price is a good selling opportunity.

The post Investors could face big losses at Avanti Communications Group plc, Imagination Technologies Group plc and Gulf Keystone Petroleum Limited appeared first on The Motley Fool UK.

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Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK owns shares of Imagination Technologies. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Today, I’m looking at whether the glory days could be over for premium spirits giant Diageo (LSE: DGE), high street favourite Next (LSE: NXT) and satellite operator Avanti Communications (LSE: AVN).

Attractive buying opportunity

Diageo’s share price climbed from £5 at the turn of the millennium to over £21 by summer 2013, with investors also enjoying a tremendous run of rising dividends. However, over the last couple years, while the dividend has continued to tick up, earnings growth has stalled and the share price has edged lower.

In my view, the really important bottom line with Diageo is its truly rare and valuable world-class brands, which — if well-managed — should be capable of delivering the kind of returns investors have seen in the past.

As fund manager Nick Train (a.k.a. Britain’s Warren Buffett) said: “For companies of Diageo’s calibre … prolonged business and share underperformance is untenable,” and “if the incumbents can’t get adequate returns on the brands and their cash flows, there are plenty of other management teams who would fancy a go.”

I believe the global strength of Diageo’s brands means the company has a bright future — whether it be achieved by current or new management — and I reckon today’s depressed share price represents an attractive buying opportunity.

Structurally challenged?

Next isn’t an elite global brand but is an extremely well-run company, with an experienced and high-calibre management team, resolutely focused on running the business for the benefit of shareholders.

This focus has seen the shares rise from less than £6 at the turn of the millennium to near £60 today . Buying Next’s shares on a dip — after a poor quarter due to unseasonable weather or suchlike — has proved a profitable strategy over the years.

With the shares currently well down from a record high of over £80 as recently as December, is this another great opportunity to buy on a dip? The wrong seasonal weather played a part in the drop, but analysts at Exane Paribas have been taking a close look at the important Directory business, and reckon a “potential fall from grace as a best-in-class retailer potentially transforms into a structurally challenged one”.

I would rather pay a bit more for Next’s shares when there’s greater visibility on this issue than buy now, and see a long and painful derating if a major structural problem with the company’s Directory growth engine is indeed emerging.

Less than a quid, but…

Avanti’s shares closed at £2.35 on its market bow in April 2007 and powered up to over £7 by the end of 2010. However, the gains came not on the back of rising cash flows and dividends, but on the hope that the satellite broadband services company might deliver in the future.

That future has been pushed further and further out with Avanti repeatedly missing targets. This has been a story of unerringly bullish director-speak, selectively highlighted numbers and flattering accounting, versus ongoing cash burn, shareholder dilution and rising borrowings.

Avanti has yet to demonstrate it can break even, far less deliver the kind of cash flows and dividends that have rewarded investors in Diageo and Next. As such, although Avanti’s shares are now trading at under £1, I’m not tempted.

The post Are Diageo plc, NEXT plc And Avanti Communications Group PLC On The Brink Of Failure? appeared first on The Motley Fool UK.

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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.

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.

The post Why ‘Risky’ Glencore PLC Is A Much Safer Buy Than Avanti Communications Group PLC appeared first on The Motley Fool UK.

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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.

Serco

Shares in outsourcing specialist Serco Group (LSE: SRP) fell by nearly 10% this morning, despite the group upgrading its profit guidance for 2015.

The group said that underlying trading profit will be around £95m in 2015, but is likely to fall to around £50m in 2016. This is mainly due to the loss of revenue and profit from the firm’s Business Process Outsourcing (BPO) unit, which is being sold.

However, the BPO sale should bring in £250m. It should also help to reduce net debt from nearly £300m to a more manageable £100m. Serco’s balance sheet is getting stronger and cash flow should also improve next year, although a net outflow is still expected.

The challenge for the firm now is to build up a pipeline of profitable new work to replace the unprofitable contracts which Serco is terminating early. Until we see evidence of this, I don’t think there’s any rush to buy Serco shares.

Avanti Communications

Satellite broadband provider Avanti Communications (LSE: AVN) edged higher this morning on news of a deal with BT Group to provide satellite broadband to UK customers in rural areas.

According to Avanti, up to 300,000 homes with ADSL speeds of under 2Mbps will qualify for this scheme. Installation costs will be subsidised by a government grant, but customers will have to pay the normal monthly service charge.

Although positive, I’m not sure this will be enough to turnaround Avanti’s fortunes. The group’s recent first-quarter trading update was dismal. Revenue was unchanged from the same quarter one year ago and earnings before interest, tax, depreciation and amortisation (EBITDA) were -$2.9m.

Worryingly, average utilisation of the firm’s satellite fleet was less than 25%. The firm continue to promise that its fleet will generate a lot of cash flow as utilisation rises, but seems to be struggling to deliver this. The latest broker forecasts suggest Avanti will report post-tax losses totalling $104m over the next two years.

Interest payments totalled $52m last year and the firm has added $115m of new debt to its previous total of $528m so far this year. With cash standing at $219m, much of which is already committed, I think further fundraising is likely to be necessary before Avanti turns a profit.

In my view, Avanti remains a sell.

Glencore

A story in the FT today suggests that mining and trading firm Glencore (LSE: GLEN) may complete its debt reduction programme ahead of schedule.

The company is due to update the market on Thursday, but I’m beginning to think Glencore shares are now quite reasonably priced. The firm is expected to report a net profit of $1,320m for 2015, rising to $1,777m in 2016.

That leaves Glencore shares trading on a 2015 forecast P/E of 14, falling to 12 in 2016. A dividend yield of 4.3% is expected for 2016. Glencore’s valuation may now reflect much of the risk facing the firm.

Glencore is starting to look like a potential recovery buy to me. However, commodity prices remain weak. Until prices start to firm up, I suspect Glencore’s earnings and share price will remain subdued.

The post Is It Time For A Fresh Look At Serco Group plc, Avanti Communications Group PLC & Glencore PLC? appeared first on The Motley Fool UK.

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Should follow the lead of the directors, and load up on shares of these three companies?

Morrisons

Half-year results from Morrisons last week didn’t make for pretty reading. Turnover at the troubled supermarket was down 5% to £8.1bn, while net profit plunged 42% to £107m. Management said: “the turnaround will take time and require sustained investment in the proposition”.

Finance director Trevor Stain immediately bought 58,453 shares at 169.8p a pop, for a total outlay of just shy of £100,000. He’s been followed this week by chief executive David Potts, who invested £500,000 in 314,881 shares at 158.79p — adding to a cool £1 million he invested at 205.85p three days after joining the company in March this year.

Clearly, Mr Potts (who was previously with Tesco for 39 years) and Mr Stain (another former Tesco man) reckon Morrisons can be a successful player in the UK groceries market. The company is already ahead of its three-year cash-flow target, and the business could come to be valued significantly higher in due course than it is today with the shares at 158p.

International Consolidated Airlines

In contrast to Morrisons, International Consolidated Airlines (IAG) is in a purple patch of growth, driven by more travellers, operating improvements and low fuel costs. The holding company of British Airways and Spanish flag carrier Iberia has also recently acquired Irish flag carrier Aer Lingus, and looks set for continuing strong top-line and bottom-line growth for the foreseeable future.

Last week, long-time non-executive director James Lawrence decided the time was ripe to open his wallet and buy more shares in the company. He purchased 22,000 IAG American Depository Receipts (ADRs) at $45.50 a time. Each ADR is equivalent to five ordinary shares, so Mr Lawrence in effect bought 110,000 shares at around 585p a share, for a total outlay of £643,500.

IAG’s shares are trading at about 600p, as I write, so just a tad higher than the price Mr Lawrence paid. With strong earnings growth forecast, the shares could continue to fly higher, though investors should bear in mind this is a cyclical industry.

Avanti Communications

Satellite operator Avanti Communications released its annual results on Wednesday this week. On the same day, non-executive director Andrew Green bought 21,888 shares at 218p a share, for a total outlay of £47,716. That may not sound such a big deal, but it’s Mr Green’s maiden purchase since joining the company in November 2014. It’s also the first purchase by any Avanti director in almost a year, while you have to back nearly two years to find a bigger buy!

Avanti highlighted revenue up 30% to $85m for its financial year ended 30 June. However, the cash-flow statement is less impressive: outflows of $10m from operations, $102m on investment and $52m interest on loans and other borrowings (which stood at $528m at the year end).

Chief executive David Williams said: “the achievement of our long term plan is now a matter of continued execution of the same performance, with cash flows expected to build as customer growth compounds”. However, I’d want to see more serious and numerous director share buys before being convinced that this business can reward investors as handsomely as the Board, whose current annual salaries and cash bonuses are running at $3.4m.

The post Should You Follow Director Buying At WM Morrison Supermarkets PLC, International Consolidated Airlns Grp SA And Avanti Communications Group PLC? appeared first on The Motley Fool UK.

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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.

The post Could Small-Cap Avanti Communications Group PLC Outperform Inmarsat Plc And SKY PLC? appeared first on The Motley Fool UK.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Sky. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.