Clarus reportStrong New CFO; Reduced Q4 Revenue Guidance Offset by Lower Costs
UrtheCast announced yesterday a sizable reduction in its Q4/16 revenue guidance but it appears that a corresponding reduction in overhead minimized the impact on Adj. EBITDA. Q4 revenue was likely about $17MM ($12MM on a non-IFRS basis that excludes non-cash “barter” revenue related to the ISS camera deal with Russia), versus our $24.4MM estimate ($19.3MM on a “non-IFRS” basis). It appears Deimos content sales were the culprit, which management attributed to a combination of pushed out orders and seasonality. We now estimate $4MM of Deimos content sales in Q4 versus $11MM previously. However, UrtheCast must have ratcheted down spending again in Q4 as the Company still expects to be near the high end of its 2016 Adj. EBITDA guidance of $4.2-6.2MM.
The Company projects Y/o/Y growth of non-IFRS revenue in 2017 but we expect more details when Q4/16 results are reported in mid-March. The engineering services business will likely see only limited growth in 2017 unless new contracts are signed, so we infer that UrtheCast expects Deimos to continue to scale. We note that the Company had a book of €200MM+ of bids outstanding as of mid-November for Deimos and PanGeo Alliance-related content, so we think it is possible that the existing content platform could still grow to over $50MM of annual revenues during the next couple of years.
NEW CFO BRINGS HIGH-GROWTH GLOBAL COMPANY EXPERIENCE
UrtheCast also announced yesterday that Mr. Sai Chu will take over as CFO from Issa Nakhleh in late March. Mr. Chu was previously CFO of Seaspan Corp. (NYSE: SSW, NR), which owns and operates one of the world’s largest container shipping fleets, from 2007 to 2015. He has strong capital markets relationships, and Seaspan’s enterprise value grew 14x during his tenure. UrtheCast recruited Mr. Chu out of retirement to serve as CFO. Mr. Nakhleh has served UrtheCast for 5 years and will remain on board until the 2016 audit is completed.
MDA REPORTED TO BE IN TALKS TO ACQUIRE DIGITALGLOBE; WOULD BE 1ST TAKEOVER OF SATELLITE CONTENT PROVIDER BY A DEFENSE CONTRACTOR
On February 17 multiple financial press outlets reported that MacDonald, Dettwiler & Associates (TSX: MDA, NR) was in talks to acquire DigitalGlobe (NYSE: DGI, NR). DGI is the world’s largest commercial satellite imagery provider. The transaction would greatly increase MDA’s satellite content services business and reduce its exposure to the commercial telecom satellite construction business. The transaction would at least double MDA’s enterprise value.
DGI has struggled to grow revenues due to restrictive content demands of the U.S. NGA combined with uncertain U.S. government budget availability. We have heard from multiple sources that DGI has been looking to sell for at least 2 years, and the importance of its content to the U.S. NGA apparently limited the pool of potential acquirers to U.S. defense contractors.
Such a transaction would confirm that a large-scale satellite content provider can be a target for top-tier U.S. defense and aerospace companies. It would also reaffirm our belief that UrtheCast could become a takeover target once the first phase (4 pairs) of OptiSAR satellites enters the build phase. Several large defense contractors have imaging and telecom/GPS satellite construction business units, but only MDA and Airbus (Paris: AIR, NR) have meaningful satellite imagery services units.
We see a full OptiSAR constellation (8 pairs) potentially generating well over $1 billion of engineering services revenue (and over $250MM of contributory EBITDA) during the 3.5 year build phase and, once in orbit (2021), as much as $400MM/year of content sales and as much as $200MM/year of contributory EBITDA. Given that the U.S. NGA already has a technology transfer agreement in place with UrtheCast related to data optimization, we believe NGA would be one of the most likely customers to purchase OptiSAR data. If UrtheCast can get OptiSAR (and, to a lesser extent, UrtheDaily) on a contractual path to launch, the list of potential acquirers could be robust – including Airbus, MDA, Lockheed Martin (NYSE: LMT, NR) and Harris Corp. (NYSE: HRS, NR).
In the interim, a higher valuation for DGI should provide support for UrtheCast’s valuation. We see minimal effect from an MDA/DGI merger on UrtheCast’s Deimos business unit. UrtheCast’s existing business is heavily weighted to Europe, Asia and Latin America, and little overlap with DGI or MDA’s satellite content. The combined entity would have both SAR radar and high-end optical (as does Airbus) satellites but we do not expect a combined MDA/DGI to build a competing constellation to OptiSAR.
SHAPING A MORE CONSERVATIVE RAMP TO DEIMOS REVENUES BUT LOWER OVERHEAD CUSHIONS EFFECT ON OUR ADJUSTED EBITDA FORECAST
In light of the revised guidance for Q4 Deimos content sales, we are lowering our Q4 revenue forecast and shaping a more conservative ramp to Deimos content revenues through our forecast period. However, it appears that UrtheCast has continued to reduce overhead costs, which cushions most of the effect of our lower revenue outlook on our Adj. EBITDA estimates.
For Q4/16 we now project total revenue of $17.2MM (was $24.4MM) including $3.8MM of content sales (was $11.0MM), and Adj. EBITDA of $2.1MM (was $2.6MM). Our Q4 non-IFRS revenue forecast is $12.1MM, down from $19.3MM previously.
Our 2016 estimates now call for $71.0MM of total revenue ($50.3MM on non-IFRS basis) and $5.9MM of Adj. EBITDA.
We expect the deal with RSC Energia relating to the cameras on the ISS terminated at the end of 2016. Consequently, our 2017 and 2018 estimates assume zero non-cash barter revenue and there will be no difference between IFRS and non-IFRS revenue in 2017 and beyond. We project 2017 revenues of $71.1MM, down from $91.2MM in our prior forecast, and $25.5MM of Adj. EBITDA (was $26.7MM). For 2018 we expect $77.5MM of revenue (was $94.5MM) and $27.7MM of EBITDA (was $30.3MM).
MAINTAINING 12-MONTH TARGET PRICE OF $7.00 AND BUY RATING
Our 12-month target price remains $7.00 per share, based on a sum-of-the-parts valuation analysis:
12-Month Target Value Component 1: $2.50 per Share for Existing Business. Our first target valuation component utilizes a 12-month target valuation of 10x 2018e EV/Adjusted EBITDA, in line with the current consensus 10.1x 2018e EV/Adjusted EBITDA for our tracking group of telecom and Earth observation satellite operators according to FactSet data. DigitalGlobe is currently valued at 7.7x 2018e EV/Adj. EBITDA (reflecting less than 5% consensus Y/o/Y revenue growth for 2018). This target multiple generates a 12-month target value for the existing business of approximately $2.50 per share.
12-Month Target Value Component 2: ~$1.75 per Share for Present Value of EBITDA from First Year (2020) UrtheDaily Data Sales. We generate a present value of the EBITDA generated by the UrtheDaily constellation in its first full year of operation (2020e). We assume 2020 data revenues of $50MM and contributory EBITDA of $25MM (50% margin). We apply a valuation of 10x that $25MM of contributory EBITDA in 2020, and discount it back 2 years at 15% to arrive at a present value of about $1.75 per share.
12-Month Target Value Component 3: ~$2.75 per Share for Present Value of EBITDA from 2019 Build Phase Revenue of 3 OptiSAR Satellite Pairs. Finally we attribute a present value of the EBITDA from engineering services revenue for the construction of the first 3 satellite pairs (the announced deal plus the two announced MOUs) in the first full year of build activity (2019). We assume the 3 OptiSAR pairs (worth a total of US$490MM/C$640MM) are under firm contract by mid-2018. Further, we anticipate about 70% of the total contract value will be recognized as engineering services revenue ratably over a 3.5-year build phase at a 25% EBITDA contributory margin. Our projection is that UrtheCast will generate about C$128MM of build-phase revenue in 2019 and realize about C$32MM of contributory EBITDA. We value this engineering services EBITDA at a 10x multiple, and discount that amount back one year at 15% to arrive at a present value of about $2.75 per share.
We continue to believe the shares remain undervalued even without any contribution from the pending OptiSAR or UrtheDaily constellations, and we expect further contract announcements within the next few months on both of these new constellations. Investors should remember that the Company has “well over” €200MM of outstanding bids for imagery/data contracts for its existing Deimos satellites plus content from the PanGeo multi-national satellite alliance for which UrtheCast serves as prime contractor. We reiterate our Buy rating.
Target Price Calculator: Our twelve-month target price of $7.00 per share reflects a sum-of-the-parts valuation, including $2.50 per share of value from the existing UrtheCast operations (10x EV/2018e Adjusted EBITDA), $1.75 per share of present value from 2020e EBITDA of the pending UrtheDaily satellite constellation, and $2.75 per share of present value from 2019e EBITDA from build-phase activity for the first 3 satellite pairs of the pending OptiSAR satellite constellation as of December 31, 2017.