Urthecast Corp T.UR

Eight Capital report : Conversion of Second MoU Coming Down

[ice9997]

Conversion of Second MoU Coming Down The Pipe
UrtheCast is up +10% on the day following a press release today by Kazakhstan Gharysh Sapary confirming that the state-owned entity has agreed to terms with UrtheCast on its participation in the OptiSAR constellation project (source: https://gharysh.kz/en/news/1428.html). Kazakhstan was the first of the three MoUs secured for the OptiSAR project and the final signing of this contract would represent the second MOU conversion into a binding contract to-date. At the time this MOU was originally disclosed in mid-2015 it represented a ~US$195mm contract. This would follow the recent, first MOU conversion into a binding contract announced back on January 17, 2017 with an unknown government for US$180mm plus a US$30mm option for product and services related work. We believe this development is yet another validation that UrtheCast is moving forward in getting the required work completed to make OptiSAR a reality.
Key points:
• Press release suggests imminent signing of agreement. The press release by Kazakhstan Gharysh Sapary suggests that all terms have been agreed to and the contract is now being submitted first for approval with the board of directors, then second, with the sole shareholder represented by Kazkosmos, Kazakhstan's national space agency. We believe that once both approvals are given, UrtheCast will be in position to make an official announcement. The agency traditionally supplies earth observation imagery to a number of Kazakhstani government agencies including Ministry of Defense, the Ministry of Internal Affairs, and National Security of the Republic of Kazakhstan.
• Last remaining MOU conversion to be the least risky. Once the Kazakhstan deal is confirmed, the only outstanding MOU that requires conversion into a binding contract for the company to move forward on its plan to build the first plane of the constellation is with Saudi Arabia, which represents approximately ~US$175mm (we believe this is inclusive of UrtheCast's prior $65mm services contract that is being recognized today), hence this would represent an incremental $110mm. We believe that this contract is the least risky of the three because the Saudi government space agency has been supporting UrtheCast the longest as an existing customer and has already been paying to be an R&D partner in the creation of the constellation's SAR technology and is thus named in respective patent filings.

Target Price Valuation Methodology:
Our $4.00/share target price is based on 14x our F17E adj. EPS, a discount to EO peers trading near 19x, further supported by our DCF analyses.