Maxar Technologies Ltd.
(MAXR-N, MAXR-T) US$24.48 | C$31.32
NRO Awards Maxar 10-Year Contract Under the EOCL Acquisition Event
This morning, Maxar has announced that the National Reconnaissance Office (NRO) has awarded the company a 10-year contract worth up to $3.24 billion as part of the Electro-Optical Commercial Layer program ("EOCL Contract").
Impact: POSITIVE
We are maintaining our BUY recommendation and increasing our target to $45.00 from $43.00. The increase to our target is due to higher forecasts which are the result of Maxar tightening its guidance range for 2022, updating our more conservative previous earnings assumptions for 2022, and the impact of carrying forward the slightly stronger 2022 earnings and FCF into our valuation period. The $300 million per year EOCL contract value aligns with our existing assumptions and is not a contributing factor to changes in our forecasts.
We view the contract value, terms of the deal, and duration of the contract as being positive for Maxar shareholders. Although the value is in-line with the existing EVFO contract that is being replaced and the revenue is already reflected in our forecasts, we believe that the equity market was increasingly discounting a risk that Maxar's value from a new contract would be significantly less than the existing contract value. The contract is equal to approximately 17% of our 2022 consolidated revenue forecast and we believe a much greater portion of adjusted EBITDA.
The EOCL contract has an initial five-year contract value of $1.5 billion. This implies revenue of approximately $300 million per year over the first five years. Beginning in year five, Maxar has the opportunity to generate an additional $40 million of revenue, if the NRO decides to exercise its option to utilize increased capabilities. For years six through ten, the NRO has five one-year options worth up to $1.7 billion, implying potential revenue contributions of up to $340 million/year if exercised.
TD Investment Conclusion
We believe that investors who appreciate a turnaround story with limited pandemic and economic exposure, and space-investment-driven growth potential should increase their exposure to Maxar. Although we acknowledge the risks, which are dissipating, in our view, we believe that investors are compensated for the risk by the current valuation and other positive investment attributes of Maxar.