In a research report titled A Spatial Long-Term Growth Story, Scotia Capital analyst Konark Gupta assumed coverage of MDA Ltd. with a “sector outperform” rating on Friday, calling it “arare profitable, well-funded pure-play space company.”
“MDA was founded in 1969 in Canada and has been listed publicly three times in those 54 years (latest IPO was in April 2021), evolving its business model over the decades to now become a fast-growing, pure-play advanced space technology company that is profitable, unlike most of its pure-play space peers,” he said. “The company touches nearly every aspect of the space ecosystem and is benefiting from positive long-term secular tailwinds in the global space market, which has attracted significant public and private capital over the past decade as commercialization increases and investors realize the longterm potential of the industry.”
Mr. Gupta sees the Brampton, Ont.-based company “growing faster than the fast-growing space market” and sees the potential for it to double or triple its organic revenue within the current decade.
“MDA’s revenue has grown at a 10-per-cent CAGR [compound annual growth rate] since 2019 (12 per cent to Q1/23), despite a challenging 2020, and the company expects accelerated growth of 17-25 per cent this year, on top of 34 per cent in 2022,” he said. “We conservatively forecast a 16-per-cent revenue CAGR to $1.2 billion in 2026 from 2023E driven by a solid backlog and a significant revenue pipeline. While the Robotics & Space Operations segment has grown faster than MDA’s two other segments since 2019, we expect its largest segment, Satellite Systems, to be in the driver’s seat with a 24-per-cent CAGR to 2026E versus 2022 due to the proliferation of low Earth orbit (LEO) satellites that play a crucial role in global connectivity. Just a handful of companies (OneWeb, SES, Telesat, SpaceX, and Amazon) are poised to deploy several thousand satellites over the coming years. MDA is currently building 17 LEO satellites for Apple under a contract with Globalstar; it recently supplied a significant number of antennas for OneWeb’s LEO constellation. The company has identified a revenue pipeline worth over $15 billion for the next five years, comprising $10 billion–plus for Satellite Systems, $3 billion–plus for Geointelligence, and $2 billion–plus for Robotics & Space Operations. Euroconsult expects the addressable global space market to grow at a healthy 6.3-per-cent CAGR to US$737 billion by 2031, led by satellite systems, as the average cost of launching a satellite is declining rapidly.”
Seeing its valuation as “attractive,” Mr. Gupta set a target of $12 per share, exceeding the $10.71 average on the Street.
“While MDA’s growth potential is solid, driven by several large programs and a strong opportunity pipeline, the stock’s valuation is deeply discounted as management rebuilds credibility after reducing 2022 guidance twice since the initial public offering (IPO) and given investor concern about ongoing cash burn amid elevated capex from an internal growth project that may complete in 2025/2026,” he said. “We believe the combination of cheap valuation, solid growth outlook, and potential free cash flow (FCF) inflection creates an attractive buying opportunity for medium- and long-term investors. We expect consistent management execution, visibility into the capex peak, and major contract wins to serve as positive catalysts over the next 12 months. The key risks to our thesis are a potential guidance cut (similar to 2022), extended cash burn, or major delays in backlog replenishment. Also, while we believe the mix-driven margin-normalization story is well understood by most investors, the market would be negatively surprised if margins fall below 18 per cent.”