Urthecast Corp T.UR

Sell side research /2

[ice9997]

From Canaccord , Jan 17th.
OptiSAR Gets First Firm Customer
Investment Recommendation
UrtheCast announced it has converted the first of three active MoUs for its OptiSAR
constellation into a binding agreement worth US$180M. This positive development
firms up the value customers place on this solution, demonstrates UrtheCast’s ability
to convert existing MoUs and serves as a catalyst to prod other potential customers
to action. The existing MoU agreements, if all converted, would be sufficient to begin
construction on the first 8 satellites targeted for a 2021 launch (~3.5 year build). Our
current valuation of C$2.25/share reflects $1.75 for the existing operations and a
$0.50 option value for the constellation build phase. As we illustrate below, this option
value is far below what we believe the value of a fully contracted and funded OptiSAR
constellation would be. There is in our view significant upside to the shares from further
announcements to this end.
Investment Highlights
• One down… This first agreement for US$180M (+$30M in related services) comes
from the most recent MoU customer announced (remains confidential). While each
agreement will likely be different, we understand customers get access to all the data
for a paired set of satellites for a particular geography plus a proportion of the data
from the remaining constellation. The contract is contingent on UrtheCast securing
additional agreements to fund the first 8 satellites (i.e. half the proposed system).
• …Two to go to fund the first build phase. This initial agreement could serve as a
catalyst for the other two existing MoU customers (there were US$490M in MoUs
signed as of November) to firm up their own commitments, presenting additional nearterm
catalysts. These three customers alone are expected to be sufficient to build the
first half of the constellation. This presents further near-term catalysts for UR shares.
• A reminder of the transformational nature of this project. While our existing
valuation includes only a $0.50/sh option value for the OptiSAR build phase, we admit
this is heavily discounted. A fully contracted and funded constellation should be worth
significantly more. Consider the build phase alone of a ~US$1B in value spread over 4
years (discounted at 15% and assuming 20% EBITDA margins) is $1.50 per share and
this does not reflect the substantial potential value of selling the remaining capacity
(expected to be ~70%) after the constellation is operational. This also does not reflect
the value of the proposed UrtheDaily constellation which the company is looking to firm
up in the near-term as well.
Valuation
We have not at this point included the constellations in our estimates pending final
contract terms and timing. Based on our 2017 estimates, the stock trades at 7x EV/
EBITDA. Our target price of C$2.25 reflects 8x EV/EBITDA on our forward estimates, one
year out, plus the $0.50 DCF-based value for the OptiSAR constellation potential. We
believe that further announcements like today should mean that the value assigned to
OptiSAR increases substantially and is better reflected in the shares.