Urthecast Corp T.UR

Sell side research /1

[ice9997]

From Dundee, Jan 17th
UR's Coming Out Party In 2017 - Converts First MOU into Binding Contract!

We are reiterating our BUY recommendation this morning following UrtheCast's long awaited announcement on the successful conversion of its first MOU for the OptiSAR constellation to a US$180mm binding contract. This is the conversion of one of three MOUs (worth a total US$490mm as last reported) that have been in negotiation for well over a year and materially de-risks the probability of UR making this project a reality. We believe that securing this first MOU conversion was the most difficult and as a result will serve as a trigger point to fast track conversion of the remaining two MOUs into binding contracts, thus fully funding the first optical plane of the constellation allowing the company to progress into the build phase. Considering that the market cap of this company is currently sitting <$100mm, which we believe is below the fair value of the base business (and book value), the potential upside from the first optical plane alone is significant. We believe this represents a significant buying opportunity and recommend investors buy shares on this long awaited, materially de-risking event and ahead of conversions of remaining MOUs which we believe are on the near horizon.
Key Highlights:
• US$180mm binding contract, plus $30mm product/services option. This binding agreement with an unnamed government customer is for the sale of one pair of satellites on the first orbital plane of the OptiSAR constellation and includes the potential for an incremental US$30mm in products and services related work. UR remains in advanced talks with the other two MOU parties for the remaining three pairs of satellites, in addition to other potential customers for the second orbital plane of the constellation.
• Anticipated C$45mm/year contribution over build phase. The first three MOUs as previously noted are worth a total of US$490mm over the build phase. Once converted, this would be recognized over a 3.5 year build timeframe, with an average revenue/year of approximately C$185mm, at a 25% contribution margin, or about C$45mm/year.
• Launch of OptiSAR's 1st orbital plane targeted for 2022. The 4 satellite pairs of the first orbital plane are scheduled for launch in late 2021, with operations expected to commence in 2022, subject to financing of the build and launch for the remaining satellite pairs.
 
Reiterating BUY recommendation and $4.00 per share price target:

 

Our $4.00/share target price is based on 14x our F17E adj. EPS, a discount to EO peers trading at 17x, further supported by our DCF analyses.