Urthecast Corp T.UR

Canaccord Genuity: Buy rating and $6.00 target for UrtheCast

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According to Canaccord Genuity:

https://is.gd/Z24JIM

UrtheCast Corporation

June 21, 2015

RATING: SPECULATIVE BUY (unchanged)

PRICE TARGET: C$6.00↑ (from C$4.50)

Raising Target Price

Night bird flying - launching satellites

Investment recommendation

UrtheCast announced that it plans to launch a 16-satellite constellation with Synthetic Aperture Radar (SAR) and dual mode optical sensors. The eight pairs of satellites (SAR+ Optical) will travel in two orbital paths providing revisit rates of roughly 4-10x daily. The satellites are expected to be deployed in 2019E and 2020E, though we caution that delays in space are common. In our view, this is a transformational announcement as it repositions the company as an operator of complex satellites rather than a tenant in space operating complicated sensors. We regard this constellation as having significant potential though it is not without risk, as space is a difficult environment to operate in. We continue to look for near-term sales execution with the HRC data which delivered "first-light" images on 16 June 2015. We note that very large MOUs related to the SAR constellation may point to customer confidence that UrtheCast can deliver on its promise of a unique satellite constellation.

Investment highlights

• Transformational announcement. We view the announcement to enter satellite deployment and operation as a significant shift in the company's strategy. The company indicates that it will offer the world's first fully-integrated, multispectral optical and Synthetic Aperture Radar (SAR) commercial constellation of Earth Observation satellites. This will pit it against large players already delivering SAR data.

• Large MOU announced. UrtheCast indicated that it has multiple customers and partners that have signed MOUs including one valued at US$195 million; this may be the first of many this size. In our view, the conversion to binding contracts would be viewed as a positive development, though we believe that this could take 12 months or longer in some cases.

• Bench strength attracted from competitors. We estimate that UrtheCast has roughly 120 employees with no less than 18 garnering experience with MDA, including Peter Fox, George Tyc, Keith Beckett, and Peter Duggan. In our view, while UrtheCast has not launched satellites, the company appears to have hired expertise that has.

• Sales of HRC data a near-term catalyst. We regard the announcement of HRC data sales to government customers as a potential near-term positive catalyst because it further validates that the company can execute amid the harsh environment of space. We believe that this is the most likely near-term driver of new revenue for the company.

Valuation

We continue to rate UrtheCast as a SPECULATIVE BUY and have raised our target to C$6.00 based on DCF (WACC 12.0%, beta 1.20, terminal growth rate 3.0%) to reflect the long-term revenue opportunity from "anchor tenants" willing to sign MOUs and binding contracts but also to reflect the higher risk profile as the company moves from a data provider to a satellite operator. We consider a +38% return to be a meaningful return, though we also believe that a move into launching satellites is a riskier enterprise than mounting cameras on the space station.