Clarus reportOptiSAR Gets More R&D Funding, and Ukraine Signs up for Deimos-2
March 23rd
KEY POINTS:
• Canada will provide up to $17.6MM of repayable R&D funding for development of the OptiSAR constellation and image processing capabilities. Canada’s total funding support for OptiSAR R&D is now over $27MM. The OptiSAR project now has received well over $100MM of R&D funding from the Canada and Saudi Arabia plus ongoing technology support from the U.S. NGA. On top of that, UrtheCast has one firm OptiSAR satellite pair purchase contract, one contract awaiting final approval (Kazakhstan) plus a purchase MOU from Saudi Arabia. That level of support gives us high confidence that the OptiSAR program will come to fruition.
• Ukraine has signed a multi-year contract to purchase Deimos-2 content from UrtheCast through the sales effort of UrtheCast’s engineering partner and data reseller Elecnor.
• Estimates largely unchanged post the recent $19.6MM bought deal and ahead of Q4/16 results being released after the close on March 28. Maintaining target price of $7.00 per share and Buy rating.
CANADA TO PROVIDE $17.6MM OF OPTISAR R&D FUNDING; ARE SAR SATELLITE/PAYLOAD ORDERS NEXT ON THE AGENDA?
We are exiting research restriction after UrtheCast’s recent bought deal for gross proceeds of $19.6MM. The Company has continued to build its support from governments at home and abroad for the pending OptiSAR constellation. On March 14 Innovation, Science and Economic Development Canada announced that UrtheCast would receive up to $17.6MM of reimbursable R&D funding to support development of the OptiSAR constellation “to expand Canada’s leadership in radar and optical satellite technologies.” The funding will be disbursed quarterly after an initial $3.2MM catch-up payment. The funding is repayable between 2023 and 2037.
The Canadian government has now provided UrtheCast with at least $27MM of funding (past grants plus this R&D funding deal). Following on 20 years of SAR service by RADARSAT-1 and -2, Canada now has new C-band SAR satellites (comprising the RADARSAT Constellation Mission, or RCM) under construction at MDA (TSX: MDA, NR) at a cost of $1 billion that are set to launch in 2018. The federal government has started exploring mission capabilities for a further 3 SAR satellites (nicknamed RCM Next). UrtheCast will be the largest Canadian public space tech company once MDA completes its shift to a U.S. domicile, and the healthy funding stream suggests that UrtheCast is very well-placed to compete for RCM Next as well as the RCM commercial data service contract.
UrtheCast’s OptiSAR initiative appears to be convincing governments the world over - $27MM in funding from Canada, a cooperative R&D agreement with the U.S. NGA, US$65MM in funding (plus an MOU for an OptiSAR pair) from Saudi Arabia, a firm OptiSAR pair contract from an unnamed government recently announced and another with Kazakhstan now awaiting final approval. We note that the U.S., Canada, Saudi Arabia and Kazakhstan have some of the largest remote sensing satellite programs in the world, and they have all chosen to support UrtheCast. Consequently, that global government support gives us high confidence that the OptiSAR program will enter the build phase in the near future.
We continue to believe UrtheCast’s SAR technology and knowledge base are important business differentiators. A large portion of UrtheCast’s scientific and engineering team (as well as CEO Wade Larson) previously served at MDA, where they led the conception, design and construction of RADARSAT-2 and the early stages of RCM design and construction.
Our baseline outlook assumes that the U.S. and Canadian governments will be purchasers of OptiSAR and UrtheDaily constellation data once the satellites are operational (~2022). However, it appears the U.S. Department of Defense (presumably via the National Reconnaissance Office or the U.S. Air Force) and the Canadian government are considering outright purchases of next-generation SAR satellites for their own use. UrtheCast therefore could be well-positioned to sell SAR payloads for satellites built by established government satellite contractors (i.e. MDA, Lockheed Martin (NYSE: LMT, NR) or Ball Aerospace), build versions of its OptiSAR SAR satellites for at least the Canadian government (RCM Next), and even sell one or more OptiSAR pairs to the Canadian government or (via a prime contractor) to the U.S. government.
UKRAINE SIGNS MULTI-YEAR DEAL FOR DEIMOS-2 CONTENT
In 2015, UrtheCast bought the Deimos Imaging business unit (including the Deimos-1 and -2 satellites, fully-staffed mission control operations in Spain and imaging processing software) from Elecnor S.A. (Madrid: ENO, NR). Elecnor continues to have a “Deimos Space” technology division and serves as an engineering partner for UrtheCast as well as a seller of compatible ground receiver stations and a reseller of UrtheCast content that can be received via the ground stations.
Yesterday Elecnor announced that it had signed an agreement with the State Space Agency of Ukraine (SSAU) to upgrade a ground station and for UrtheCast (via Elecnor) to provide high-resolution Deimos-2 imagery over an initial multi-year contract term. We understand SSAU will be able to directly receive content from Deimos-2 but will have to send tasking requests to UrtheCast’s mission control in Spain. This is similar to DigitalGlobe’s (NYSE: DGI, NR) “Direct Access Program” that sells ground stations (made by MDA (TSX: MDA, NR)) to large government and commercial customers.
Typically customers with ground stations are larger purchasers of content, but UrtheCast declined to provide us with specifics of the content deal. In any case, we expect it to be meaningful given that the much larger company Elecnor issued its own press release on the transaction and should provide additional support to our outlook for significant growth in UrtheCast content sales in 2017 ($35MM expected for 2017 versus our 2016 estimate of about $15MM).
In addition, given the timing of the Ukraine announcement and UrtheCast’s previously-announced efforts to sell its Space Station assets to a Russian buyer, we wonder if the Space Station asset sale (which would likely be for a relatively modest amount of consideration) already has been completed or shelved.
Q4/16 EARNINGS TO BE ANNOUNCED MARCH 28
UrtheCast is scheduled to release its Q4/16 and full-year 2016 financial results after the close on March 28. The Company adjusted its 2016 guidance on February 21, which effectively preannounced Q4 revenue and Adjusted EBITDA. We expect $17.2MM of revenue ($12.1MM of “non-IFRS” revenue that excludes Russia-related non-cash revenue) and Adjusted EBITDA of $2.1MM. We believe it would be very beneficial for UrtheCast to issue some level of 2017 guidance as well as a sense of the contract backlog and sales pipeline for content sales and engineering services in the “existing” business.
2017-2018 ESTIMATES BASICALLY UNCHANGED POST-DEAL AND PRE-EARNINGS
We have incorporated the recent bought deal and initial Canadian government R&D funding agreement into our forecast model. Our outlook for capitalized R&D increases about $4MM per year in 2017 and 2018 as we expect UrtheCast to modestly accelerate OptiSAR development efforts, but our 2017-2018 estimates for revenue, Adjusted EBITDA and diluted EPS remain basically unchanged.
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 10.4x 2018e EV/Adjusted EBITDA for our tracking group of telecom and Earth observation satellite operators according to FactSet data. Closest comp DigitalGlobe is in the midst of being acquired by MDA and is currently valued at 7.6x 2018e EV/Adj. EBITDA. This target multiple generates a 12-month target value for UrtheCast’s 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 ~$28MM (55% margin). We apply a valuation of 10x 2020 contributory EBITDA 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 80% 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$146MM of build-phase revenue in 2019 and realize about C$37MM 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.
Potential near-term catalysts include the conversion of outstanding OptiSAR satellite pair MOUs with Kazakhstan and Saudi Arabia, and UrtheDaily constellation announcements for data contracts or the sourcing of associated construction financing (which we believe would require at least US$30MM/year of firm, long-term, take-or-pay data contracts). 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.
Key Risk to Target Price: Please refer to the risks disclosed in the initiating report dated April 21, 2015.