Eight Capital reportUR Provides Guidance Update and Announces CFO Transition
UrtheCast updated its full-year guidance this morning with lower expectations for revenue while maintaining its prior adj. EBITDA outlook and guiding to the higher end of the range. Further, a CFO change was announced highlighting an impressive resume and significant capital-markets experience for the incoming CFO, while the outgoing CFO will remain as a consultant to the company throughout the transition. With the update, we are trimming our estimates slightly to reflect more conservatism on seasonality for imagery sales and revenue recognition impacts, in addition to the company's improved cost-base following operational improvements implemented over the past few quarters which helps offset the weaker revenue expectations. The company's healthy cash balance and improving financial visibility on bottom line provide us with comfort that UR is on a solid financial footing to execute on its ambitious strategy to make OptiSAR and UrtheDaily constellations a reality in 2017. In our opinion, converting contracts and securing clients for these constellations will be catalytic events for the stock throughout the year. We maintain our BUY recommendation and $4 per share target.
Update reinforces earnings outlook but sheds light on seasonality
UrtheCast now expects to report 1) F16 non-IFRS revenue of $50mm, vs. prior guidance range of $55-60mm and our prior $55mm revenue estimate with the Street just above this, and 2) F16 adj. EBITDA of $4.2-6.2mm, now guided to the higher end of the range vs. our prior expectation of $6.5mm and the Street's $6.35mm estimate. For FQ4, this now implies revenue of $11.1m, vs. our prior $16.2mm estimate, and adj. EBITDA near $2.4mm (higher end of the range), vs. our prior $2.7mm and the Street’s implied $2.55mm estimate.
Cash position remains healthy
With the guidance update, UR confirmed a current cash balance of ~$8mm, or closer to the $18mm level when including restricted cash. This follows approximately ~$6mm of cash in Q4 utilized to pay down debt in addition to other payables reduction in the period. Further, UR was set to collect additional cash in January from its US$65mm contract on completing certain milestones. Hence, we believe the company has ample cash to fund ongoing operations.
CFO transition slated for late March
New incoming CFO Sai. W Chu will replace current CFO Issah Nakleh who will be resigning in late March to pursue other interests but will continue to serve UrtheCast under a consulting agreement to assist with the transition and completion of certain projects. Mr. Chu is the former CFO of Vancouver-based Seaspan Corp. (SSW:NYSE), an owner, operator and manager of containership fleets, from June 2007-November 2015. We believe Mr. Chu's resume, which includes strong experience in business development and within the public markets, bodes well for UR's long term ambitions.
Maintaining BUY recommendation and $4.00/share price target:
Our $4.00/share target price is based on 20x (was 14x) our F17E adj. EPS, about in-line with EO peers, further supported by our DCF analyses.
ESTIMATE REVISIONS
We are updating our estimates to reflect the updated guidance provided by the company
and to adjust our F2017 revenues to be more conservative as it relates to earth observation imagery revenues during the year. While we will have a better appreciation for the company's 2017 outlook once the Q4 numbers are fully unveiled in the second half of March, we have decided to make these changes now. We remind readers that our model continues to include approximately $90 million related to OptiSAR build revenue in H2, ofwhich a portion may be at risk only due to timing of the final signings of the binding agreements and timing related to moving the project into the build phase of the first plane. Once the timing is firmed up, we will be able to adjust those metrics and at the same time unveil our F2018 estimates. For Q4/F16, we are lowering our non-IFRS revenue from $16.2 million to $11.6 million, which translates into F2016 revenue of $50.5 million, in line with company’s updated guidance. On the bottom line, we have lowered our adjusted EBITDA from $2.7 million to$1.8 million that provides a FY2016 adjusted EBITDA forecast of $5.6 million, which may have some upside based on the company’s updated commentary that they anticipate guidance at the higher end of the provided range ($4.2-6.2 million). On the bottom line, we now anticipate an adjusted EPS loss of a penny, down from the break-even mark. Looking ahead to F2017, we have cut our estimates by approximately $20 million andnow sit at $167.7 million. This figure includes approximately $90 million of revenue related to OptiSAR, or approximately $78 million when excluding this component. Our
adjusted EBITDA is cut by about $11 million to $34.3 million, while adjusted EPS moves down nine cents to $0.20. Again, these metrics will shift depending on the timing of the OptiSAR contract conversions, but in either case, provides a bullish view of what the year could look like if the first plane moves into the build phase.
VALUATION
Comparable Valuation Analysis
Our $4.00 per share target price implies an F17E EV/Sales multiple of 2.7x (was 2.4x), a
slight discount to peers at 3.2x, and EV/EBITDA of 13x (was 10x), in-line with peers.
On a P/E basis, our target implies 20x (was 14x) F17 adj. EPS, about in-line with earth
observation peers at 19x and comps overall around 21x, with room to expand based on
the company's significant growth potential as their disruptive business model continues
to be de-risked and proven out.