Urthecast Corp LFDEF

Salman Partners: Buy rating and $4.00 target for UrtheCast

[shakerman640]

According to Salman Partners:

https://is.gd/hGtQWj

MARCH 24, 2015

URTHECAST CORP.

TSX: UR $1.92

RECOMMENDATION: SPECULATIVE BUY

12-MONTH TARGET: $4.00

Q4 2014: A Pivotal Quarter — First Revenue and First HRC Sample

UrtheCast reported earnings of $0.09/share in the fourth quarter. Excluding an $8.0M insurance payout, adjusted earnings were negative $0.03/share, ahead of our expectations (negative $0.06/share) and better than consensus (negative $0.05/share). Adjusted EBITDA was negative $0.6M, better than our expectations (negative $3.5M) as well as consensus (negative $3.1M). Its $11.4M ending cash balance exceeded our estimate of $10.2M.

First Revenues

More importantly, the company has begun to recognize revenues. Revenue in the fourth quarter was $3.9M, primarily from engineering and value-added services rendered in connection with its previously announced US$65M contract. The company also noted that as of early 2015, it has begun to generate revenue from MRC (medium-resolution camera) data sales.

Sample HRC Video Released

UrtheCast released its first video from the HRC (high-resolution camera). The bad news is that we're not at "first light" yet. Further characterization of the BPP (bi-axial pointing platform) and refinement of processing algorithms will be required to maximize the HRC's image quality. A grand unveiling of its production-quality imagery is about 1.5 months away, and IOC (initial operational capability) is about 3 months away.

Patience is again the name of the game.

The good news is that the HRC works. This really is quite significant — we now have more than just the company's word to go by; we have tangible evidence of what the HRC is capable of, at a minimum. The sample video was taken at 1.5-m resolution (compared to the HRC's expected 1-m resolution capability), yet to our admittedly untrained eyes, it appears comparable to Skybox Imaging's early video footage (December 2013).

Valuation and Recommendation:

Despite an exceptional run over the last month, we still find the shares of UrtheCast attractive. We believe the company is well positioned to capture a 3-6% share of the fast growing commercial Earth Observation (EO) market with its unique high-resolution colour video product. At the same time, we have seen evidence that the company can participate in an even larger market — digital advertising — with its recent Pepsi partnership (see following page). Further upside could come from its plans to launch a social media platform, which if successful, could be UrtheCast's most lucrative opportunity yet.

A number of developments have led us to reconsider the company's risk profile: first images from the HRC, first revenues, and high-profile additions to its board and advisory team. We believe that UrtheCast's biggest risks are behind us and adjust our valuation accordingly.

We are increasing our 12-month target price to $4.00 per share (from $2.75 per share) and maintaining our SPECULATIVE BUY recommendation. Our target price is based on the average value implied by the company’s EO and social media prospects, which we derive from a DCF and venture capital-style model, respectively.