Urthecast Corp T.UR

Canaccord comments

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CFO Transition is Positive; Guidance Mixed Investment Recommendation UrtheCast this morning announced the appointment of Sai Chu as its new CFO and updated its guidance metrics. We view the new CFO appointment positively. The updated guidance is more mixed. Generally UrtheCast’s existing business is moving in the right direction. We note that at this point only half of our $3.50 target price is derived from our value of the existing business while the remainder stems from the optionality of the transformational OptiSAR and UrtheDaily proposed constellations. Recent activity suggests a lot of interest in the earth observation market (Planet/Terra Bella deal and news articles suggesting DigitalGlobe could be evaluating a sale). We maintain a SPECULATIVE BUY rating with $3.50 target price. Investment Highlights • New CFO brings a strong pedigree. UrtheCast has appointed Sai Chu, from Seaspan which is a $7B EV NYSE-listed container ship lessor, as the new CFO. Mr. Chu is expected to take over the role from the current CFO, Issa Nakhleh in late March. Mr. Nakhleh will remain available as a consultant to the company to assist in the transition and with certain projects. • Updated 2016 guidance is mixed. The company took the opportunity to pre-release its Q4 estimates with revenue below the prior guidance (equates to ~$12M or $5 - 10M below the prior range) and EBITDA at the high-end (~$2.4M vs. Street $2.2M). The revenue shortfall we understand to be seasonality-related. UrtheCast confirmed that it expects to grow revenue and expand EBITDA margins next year. We expect more detailed guidance with the full Q4 results in late March. • Balance sheet we think improves from here. UrtheCast said it closed Q4 with $8M in cash (excluding restricted cash) compared to $11.4M as of Q3. The small Q/Q decline reflects a large debt-related payment which occurs in Q4 (~EUR 4M). We think implied CFO was positive. We believe the company should transition to a more sustainably positive FCF profile in 2017, which could remove one criticism of the existing business. Note UrtheCast also elected to write-down another $3.1M of its ISS sensors (non-cash and, in our view, not material). • The upside here is tied to the constellations. See our recent note “Attempting to Quantify the Blue Sky” where we attempt to quantify the upside scenarios from executing against the proposed satellite constellations. We believe these constellations could be worth $4/share in discounted value to UrtheCast (beyond our $1.73/share value for the existing business but use probability weightings to reduce our current valuation to $1.75/share. Valuation Our $3.50 target is derived from sum-of-the-parts method based on 8x EV/EBITDA on the current business plus a discounted, probability weighted value of the proposed constellation projects.