Clarus report :This is Getting Real – Kazakhstan Agrees This is Getting Real – Kazakhstan Agrees on Terms for OptiSAR Pair Purchase
March 1, 2017 Kazakhstan Gharysh Sapary (KGS) – the division of that country’s Kazkosmos space agency responsible for creation of a national remote earth sensing space system – announced today that it had agreed on the contract terms to purchase a pair of OptiSAR satellites (one very-high-resolution optical satellite and one Synthetic Aperture Radar (SAR) satellite travelling and working in tandem) from UrtheCast (https://gharysh.kz/en/news/1428.html). The next step is final ratification from the KGS board and from Kazkosmos. We doubt that a national agency in Kazakhstan would issue such an announcement without first receiving approvals all the way to the highest levels of the government, which suggests that the ratification efforts are highly likely to be completed. We spoke with UrtheCast this morning and their comment was that they will not announce a “firm contract” until all required customer ratifications are completed.
KGS and Kazkosmos officials have been publicly discussing their interest in purchasing an OptiSAR pair since at least March 2016, and in November gave a detailed presentation on OptiSAR at their national Space Days industry event (hosted by KazKosmos). We have considered them one of the remaining 2 announced MOUs – along with Saudi Arabia – that need to be converted for build revenue to begin on the first 3 pairs. The announced combined value of the three contracts/MOUs is about US$490MM (~C$640MM), and we estimate that the Kazakh deal would be worth somewhere in the US$150-175MM (C$195-227MM) range before options.
We now believe that the first three OptiSAR satellite pairs could be under firm contract by the end of 2017, and gives us heightened confidence that 2019 (or even 2018) could be the first full year of build revenue. Our current assumption is that UrtheCast will – at minimum – source financing using the profits from the first 3 contracts to fund the fourth pair, and launch the first four pairs in 2021 as currently envisioned. Moreover, it is possible that UrtheCast could sell the fourth pair (or more) prior to launch and capture even more build revenue.
We are highly confident that Saudi Arabia is the third MOU for an OptiSAR pair, given that it is the customer for the US$65MM engineering services contract that has been funding the development of the SAR radar payload for OptiSAR. The Company has announced that the third MOU is with the engineering services contract customer, and a patent search reveals that a recent patent related to SAR systems and methods was co-authored with King Abdulaziz City of Science and Technology, which houses Saudi Arabia’s space systems development effort,
(https://patentscope.wipo.int/search/en/detail.jsf?docId=WO2016205406&recNum=1&office=&queryString=FP%3A%28urthecast%29&prevFilter=&sortOption=Pub+Date+Desc&maxRec=12).
Our target valuation currently assumes that UrtheCast will be able to capture about 70% of the C$640MM of contract value for the first 3 OptiSAR pairs over a 3.5 year build phase, or about C$128MM per year. Given that UrtheCast believes it can fund the fourth pair from the profits from the first three pairs, the first 3 pairs should generate about 25% contributory EBITDA margin during the build phase, or about C$32MM per year. That is more than double our current 2018e Adj. EBITDA estimate for the existing business (Deimos plus announced engineering services contracts) of $27.7MM.
If UrtheCast is able to recognize 100% of the 3 (future) contracts’ revenue (before options) at a 25% contributory EBITDA margin, then the Company could realize more than C$180MM of build revenue and ~$45MM of contributory EBITDA per year during the 2018-2021 build phase.
CONTINUES TO BUILD WORLD-CLASS EXECUTIVE TEAM
The Company has one of the industry’s leading technical and engineering teams and has recently strengthened its executive team significantly. Jamie Ritchie, who was previously head of Product Portfolio and Markets for the GEO Information Services business unit of Airbus (Paris: AIR, NR) and oversaw their satellite imagery sales worldwide, was quietly hired in late 2016 as Business Development Director for content sales. On top of that, Sai Chu, who was previously CFO of global shipping owner/operator Seaspan (NYSE: SSW, NR), will assume the CFO role at the end of March. There will be a large amount of export development bank and commercial bank financing utilized as funding confirmation for the construction phase of both OptiSAR and UrtheDaily, and Mr. Chu oversaw about US$10 billion of capital raising from global sources during his time at Seaspan.
NO CHANGE TO ESTIMATES – YET
We are not making any changes to our estimates on the back of this announcement, but we are moving closer and closer to being able to incorporate $128-$180MM of annual OptiSAR build phase revenue (for the first 3 pairs of a planned 8-pair constellation) into our forecast. UrtheCast effectively pre-announced Q4/16 revenue and Adj. EBITDA on February 21, and we expect the Q4 and full-year financials to be reported in mid-late March.
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.
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