RBC Dominion Securities analyst Ken Herbert thinks MDA Ltd. is poised for “significant top-line growth” as it “executes on its three flagship programs and pursues material new business opportunities.” Seeing its stock currently presenting an “attractive” entry point, he initiated coverage of Brampton, Ont.-based company, which began trading in early April of 2021 after its $400-million initial public offering following its separation from Maxar Technologies with an “outperform” rating.
“As a leading merchant supplier to the legacy and emerging space ecosystem, we believe MDA is well positioned to benefit from continued market growth,” said Mr. Herbert. “Coming off a 2020 $412-million revenue trough, the company currently projects 50-60-per-cent top-line growth in 2022, with consensus implying another 50-per-cent growth in 2023. Management has provided a revenue forecast of $1.5-billion in 2025 based on upside in its flagship programs ($350-million) and new business ($775-million) relative to the 2020 trough. We fear the 2025 growth expectations may be overly ambitious, but near-term upside should be a positive.”
While MDA recently lowered its 2022 revenue guidance to account for program delays and supply chain issues, the analyst said its three flagship programs - Robotics & Space Ops, Satellite Systems and Geointelligence - “appear well funded and supported even with incremental timing risk.”
“To support the revenue growth, the company is in the early stages of a significant investment cycle,” he noted. “The company plans $650-million in capital investments over the next five years to support primarily its CHORUS earth observation system and expanded satellite manufacturing capacity. The company also plans to hire 600 people and to invest in its program execution and management capabilities. We expect investors to focus on top-line growth and adjusted EBITDA, but eventually FCF will become a bigger focus for investors. The investments and mix are expected to limit margin upside, with adj. EBITDA margins of 21 per cent in 2020 moving to 18-20 per cent in 2025, according to the company.”
With the uncertainty brought by the investment cycle, Mr. Herbert thinks margin assumptions “reflect conservatism,” but he thinks “near-term upside should be a positive even if management walks off its 2025 outlook.”
He set a target of $13 target. The average target on the Street is $17.90.
“The unwinding of the Maxar relationship is a net positive for MDA. We believe the company is now better positioned to pursue a range of space opportunities, and the company has a leadership position as a merchant supplier in a range of space markets. Our valuation multiple represents a discount to defense primes, but is in line with MAXR. The higher top-line growth offsets investment and margin risk, in our view,” said Mr. Herbert.