While there are a number of moving parts (and hence risks) when it comes to Maxar, I think the possibility of a successful insurance claim should not be overlooked. There are longer term forces at play that will determine future earnings power but in the meantime, a successful insurance claim will be a significant positive in my opinion.
Here’s my logic / assumptions on a successful insurance claim:
- As of current, there is nothing to suggest that the claim is not legitimate.
- The filing and timing of the claim suggest to me that we are right in the midst of it occurring. Not too much time has lapsed to suggest it does not remain a real possible outcome.
- Given the current sentiment and depressed share price, I do not think the share price is pricing in much benefit of the insurance claim. However, I am fairly convinced that should the claim not be successful the market will certainly see it as a negative. How negative will depend on the other moving parts and progress on other fronts. For example, if expense reductions are proving constructive then a failed insurance claim will not be as consequential.
Everything else being equal, I would see a successful insurance claim as a net benefit (cash injection) to the equity value of the company.
Just like the payment of a dividend technically reduces the equity value of a firm at the time of payment, I see the injection of cash into the business as immediately increasing the worth of the equity (shares) of the firm.
The equity value should improve regardless of how the possible insurance claim cash is used.
- Currently the equity value is approx. US $283 million. The insurance claim is for US $183 million. Assuming full value accrues to equity, that would represent an almost immediate 65% increase in the equity value of the firm.
- If it used to immediately pay down debt, I figure net debt levels will reduce by about 6% (assuming successful US $183 million claim). I estimate this should also reduce related interest/servicing costs as a result of debt pay down possibly to the tune of US $7 million to US $17 million on an annualized basis. Assuming the enterprise value remains fixed, then pay down of debt will still accrue to the equity of the firm. In fact, you could argue that the enterprise value should actually increase give the possibility of realizing additional future cash flows have increased.
- If it is not used to pay down debt then it is available to cover capex, money that would have had to come from operational cash flow or from additional debt or equity raise. Such money will go a long way to provide Maxar additional flexibility as it continues to reel from the short attack and negative market sentiment. Many institutions are recommending caution regarding Maxar shares while simultaneously acknowledging enormous possible upside should things go according to plan. Thus, a cash injection can only be seen as improving Maxar’s overall outlook.
Will the share price immediately reflect the full additional amount of the insurance claim? Probably not, but fundamentally it should. And in that regard you can come to your own conclusions based on your own thoughts as to the impact. In that regard, I created a chart to reflect possible realities and consequent impact on the share price. You can interpret this however you want. The claim filed is apparently valued at US $183 million. That may not be what is actually paid. It could be nothing, which at that point I would certainly expect a hit to the shares. If they end up receiving half or 50% of the claim and/or they receive the full 100% but you think the market will only bid up the shares 50% (either immediately or over time) of the benefit, then you could look at it that way.
| Maxar | Impact of Insurance Claim Success |
| US $ Millions | |
| As at April 26, 2019. | |
| Insurance Claim | 183 |
| Market Cap | 283 |
| Enterprise Value | 3,339 |
| $US Stock | | $CAD Stock |
| $US Claim: | 183 | Millions | 4.76 | | | 1.35 | 6.426 | |
| % Impact | $ Impact | Increase | Share | $ Change | | % Impact | $CAD | $CAD |
| | | in Equity | Price | | | | Change | Share |
| | | | | | | | | |
| 10% | 18.3 | 6.5% | 5.07 | 0.31 | | 10% | 0.42 | 6.84 |
| 20% | 36.6 | 12.9% | 5.38 | 0.62 | | 20% | 0.83 | 7.26 |
| 25% | 45.75 | 16.2% | 5.53 | 0.77 | | 25% | 1.04 | 7.46 |
| 30% | 54.9 | 19.4% | 5.68 | 0.92 | | 30% | 1.25 | 7.67 |
| 40% | 73.2 | 25.9% | 5.99 | 1.23 | | 40% | 1.66 | 8.09 |
| 50% | 91.5 | 32.3% | 6.30 | 1.54 | | 50% | 2.08 | 8.50 |
| 60% | 109.8 | 38.8% | 6.61 | 1.85 | | 60% | 2.49 | 8.92 |
| 70% | 128.1 | 45.3% | 6.91 | 2.15 | | 70% | 2.91 | 9.33 |
| 75% | 137.25 | 48.5% | 7.07 | 2.31 | | 75% | 3.12 | 9.54 |
| 80% | 146.4 | 51.7% | 7.22 | 2.46 | | 80% | 3.32 | 9.75 |
| 90% | 164.7 | 58.2% | 7.53 | 2.77 | | 90% | 3.74 | 10.17 |
| 100% | 183 | 64.7% | 7.84 | 3.08 | | 100% | 4.16 | 10.58 |
The valuations IMO are very real, infact there is no return added to claim in terms of what that money will earn in the Maxar system over time. From a debt repayment view, it is clear it would debt levels and reduce servicing costs. But I have not added a multiplier or anyhting else. As Maxar's share price is depressed, full realization by the market of the claim would increase Maxar's valuation to that which is in line with current Morningstar valuations (which remain at a fraction of historical valuations). In others words, I do not see any of the above scenarios as beyond the realm of the possible. Had Maxar been trading at improved valuations, I could apply a similar evaluation, but the starting equity value would just be from a higher level and percentage-wise the possible improvement would not be as high.