TSX: MDA | CAD 10.91 | Outperform | Price Target CAD 15.00
Sentiment: Positive
Today, MDA Ltd. (MDA) announced that it has received an Authorization to Proceed (ATP) contract for work on a new non-geostationary orbit (NGSO) satellite constellation. The ATP is valued at approximately $180M with the engineering and programmatic activities, including the procurement of long-lead time materials, to begin immediately. The contract for the full constellation is valued at a minimum of $750M, and MDA expects it to include a minimum of 36 software-defined satellites. The company expects the ATP contract award to be added to its 4Q23 backlog. Given the procurement of the long lead-time materials, we do not expect the contract to have a significant impact on 4Q23 or FY24 revenue, as the labor or engineering work aspect of the contract will be minimal in the near-term, according to the company. However, we view the contract as very positive for the company and its investment in digital satellite technology. If awarded the full value of the constellation as a prime, we believe the $750M contract would have a significant impact on future revenues in the out years.
Although the final contract still needs to be signed, we expect a similar margin profile for the NGSO constellation relative to other recent wins. We believe MDA has a lot of confidence in being able to win the full $750M award. The current $180M award for the ATP work does come with a make-whole provision for MDA if they are unable to win the larger contract as the prime. We expect the margin impact to be similar to their current expectations around Telesat. The $750M award for 36 satellites implies about ~$20M/satellite; however, the company is not yet able to identify how much the ~20% of customization could cost MDA in additional engineering work.
The NGSO satellite contract expands upon MDA's technology on the Telesat Lightspeed constellation. The contract applies the same 80% commonality/20% customization concept to the satellite constellation that the company has within their Telesat Lightspeed contract. We view this model as very positive for MDA's prospects for customer acquisition. MDA no longer needs to design a clean-sheet constellation, and can instead focus on a smaller aspect of customization for the customer. We believe this is likely to help MDA receive additional awards as it provides a further proof of concept for new customers and cuts down on the time required to design and build the satellites, and should eventually be a tailwind for margins. While MDA has not announced the contract's customer, we view the announcement as positive, and it should help reverse some recent under-performance for the stock.