Urthecast Corp T.UR

Canaccord

[Empkj58]

UR-TSX | Price C$1.10 | Market Cap  C$133M

SPECULATIVE BUY Unchanged

PRICE TARGET C$2.00 Unchanged

Investment recommendation
UrtheCast this morning provided an update on its key growth initiatives and updated its full-year guidance to the bottom-end of the prior range. The stock is trading down ~14% today, retracing some recent gains. Timing on the start and completion of the transformational UrtheDaily and SAR XL programs remains one of the more challenging attributes of the UR story. The company still expects to secure the final items required to move ahead with these projects in the near term; however, we have trimmed our expectations for 2018 to reflect a more conservative timeline. There is no change to our SPECULATIVE BUY rating and C$2.00 one-year target, which is largely DCF-based and not materially impacted by small timing delays. We still believe the stock has significant upside as some or all of the multiple near-term catalysts come to pass.
Investment highlights
·       UrtheDaily investor selected; final financing expected to be secured in January. UrtheCast entered into an exclusivity agreement with an institutional investor on December 15th for the US$175M financing package for UrtheDaily construction phase. The completion of this financing is now expected by the end of January (previously December), subject to final documentation, due diligence and Board approval. With that said, there is no change to the target launch date for the program, which is expected to commence operations in 2020. Recall, UrtheCast now has long-term revenue commitments of C$100M+ and a build contract with a UK- based satellite company, SSTL.
·       SAR XL still awaits final regulatory approvals.The SAR XL contract is still subject to the final appropriation approval and technology transfer permits, though management has not changed its timeline of the 2020 launch. In our model, we have delayed the assumed start of the build phase until Q2 which drives a reduction in our 2018 estimates. Unsurprisingly, the company also mentioned that its OptiSAR agreement with a confidential government customer announced in early 2017 will expire given unsatisfied conditions. We have little value ascribed to the OptiSAR program as our valuation assigns only a 10% probability that the first half of the program is built.
·       Full-year financial targets now at low-end of the range. UrtheCast provided updated 2017 guidance that calls for revenue of ~$40M and an EBITDA loss $5M, which is at the low end of the previously guided range and implies that the company has not yet secured the contract that caused the guidance reduction originally. We understand the company still hopes to secure this annual agreement in the near term. The updated guidance implies Q4 revenue of $8.5M and an EBITDA loss of $4.2M, which is below consensus of $10.4M and -$0.9M, respectively (CG $10.5M and a loss of $1.3M, previously). We have adjusted our model lower to reflect the updated Q4 outlook and lower SAR XL build phase revenue in 2018, as previously mentioned. We now model 2018 EBITDA of $17.1M (from $19.6M; consensus $10.9M may not reflect SAR XL build for all models). The company also noted it has received a waiver on certain covenants related to its €25M term loan with Sabadell and a six-month deferment of the required principal repayment of €4M.