MDA Ltd. is “quickly transforming into an execution-driven story,” said Citi analyst Jason Gursky following better-than-expected third-quarter results.
“The company has demonstrated that it can chase and win business, so it now needs to also demonstrate that it can profitably execute on that work,” he said. “Others in the industry have struggled of late with firm fixed price development programs, so it’ll be key for investors to closely monitor progress. We maintain our Neutral/H-rating as risk/reward appears balanced at current levels.”
On Wednesday, the Brampton, Ont.-based space technology firm reported revenue of $204.7-million for the quarter, up 19 per cent year-over-year and above the Street’s expectation of $195.2-million driven by gains in its Satellite Systems and Robotics & Space Operations businesses. Adjusted EBITDA of $42.8-million was a gain of 10 per cent and also topped the consensus estimate ($35.7-million) as the company saw higher volumes across its businesses.
MDA also raised its full-year revenue guidance to a midpoint of US$800-million, up from US$798 and representing a gain of 25 per cent year-over-year. Its adjusted EBITDA guidance now has a midpoint of $168-million, rising from $160-million.
“MDA reported 3Q revenue and Adj. EBITDA that was better than consensus expectations driven by the cadence of revenue recognition on ramping programs, while full year guidance moved modestly higher for both metrics,” Mr. Gursky said. “Backlog grew significantly on the recent Telesat award and management continues to reiterate that the pipeline is full. Further, the company completed an acquisition that bolsters its capabilities in technology needed to perform on recently awarded contracts.”
Making “modest” increases to his financial projections, the analyst hiked his target for MDA shares to $12.75 from $11 with a “neutral” recommendation. The average is $13.79.
“We like the company’s positioning as largely a provider of picks and shovels (spacecraft and related components) to a market in which Citi expects mid-to-high single digit growth, and its emphasis on more reliable government customers,” said Mr. Gursky. “However, we are concerned about the timing of the revenue ramp of several key programs, including the Canadian Surface Combatant, Globalstar’s multi-satellite constellation, and the company’s own CHORUS roll-out to provide synthetic aperture radar to both commercial and government customers. Furthermore, we note that Radarsat2, which generates roughly $40-million in revenue, is well beyond its design life and will be operating without contingency until the CHORUS program is fully operational. Importantly, we note that the company recently pulled the slide outlining its 2025 revenue targets from its investor deck, suggesting the outlook is no longer valid. Additionally, we view earnings quality and cash conversion as lower than peers and find that the company’s use of IFRS (vs. US GAAP) makes valuation comps difficult.”
Elsewhere, other changes include:
* BMO’s Thanos Moschopoulos to $13 from $12 with a “market perform” rating.
“We remain Market Perform on MDA and have made minor changes to our FY2024 estimates following strong Q3/23 results,” said Mr. Moschopoulos. “MDA has been executing well in recent quarters, from both a project delivery and bookings perspective, and management continues to see a strong pipeline of opportunities. The capex cycle related to Chorus (slated for a Q4/25 launch) keeps us on the sidelines. However, we believe that MDA should be able to sustain strong revenue/EBITDA growth through the medium term given its backlog and pipeline, and view the stock’s valuation as undemanding.”