Description

Quick Summary

KVHI is a provider of connectivity for the marine industry and inertial navigation for  the defense and transportation industries.  The stock is mispriced because investors are underestimating the impact of 4 different inflections in KVHI's businesses which would make long-term results dramatically different that current numbers.  Furthermore, 2019 revenue has been weaker than expected due the shift to AgilePlans that has hurt near-term revenue due to lower initial product sales and a cyclical weakness in inertial navigation sales.  However, long-term revenues could be multiples of current levels if they take advantage of some of these revenue opportunities.  While downside should be somewhat protected near $7.90, upside could exist as high as $22 which makes it an interesting risk-reward at $10.

Capitalization and Valuation

KVHI has ~18.5mln diluted shares for a $185mln market cap at $10.  The company currently has $48mln of cash but will probably burn ~10mln for a future EV of 146mln.  2020 sales are expected to be ~177.5mln (0.8x) and 2020 EBITDA is ~4mln (37x although EBITDA is a bad metric because of the capitalization of equipment under AgilePlans. 

Upside

There are 4 sources of upside for KVHI.

1.  AgilePlans- In 2017, KVHI began offering AgilePlans which are connectivity-as-a service.  Instead of selling the communications equipment upfront and then collecting airtime fees, the company retains the equipment and offers everything on a service package to the shipping customer.  These plans have allowed KVHI to take more market share as the marine industry transitions from L-Band (432kbps) to VSAT (up to 10Mbps).  Analysts estimate there are 30k vessels that currently have VSAT and 35k vessels without VSAT that will be transitioned over the next few years because of the significant advantages for vessel operations and crew communications provided by VSAT.[i] 

There are 30k L-band ships out there.  If the company adds another 5k subs at $1,200/mo ARPU (below expectations), then it would add ~another 70mln of AgilePlans revenue.

2.      KVH Watch- In 2019, KVHI launched KVH Watch, an IoT maintenance service for marine equipment suppliers (engines, scrubbers) that would allow them to remotely monitor and maintain their equipment, saving significant service costs.  The company has just begun a trial with first customer Kongsberg and should begin to roll-out this service in 2020. The goal of the equipment is to have multiple customers per vessel.  If KVHI was able to sign up 1k vessels with 3 tenants at an average of $400 per month, it would be 14mln of incremental revenues.

3.      TACNAV- KVHI has been shortlisted on the US Army A-PNT project for inertial navigation.  The US army is looking to upgrade >140k vehicles with its new A-PNT initiative which could be a >$100mln revenue opportunity.[ii]  The company is also expecting a large order from Saudi Arabia.

4.  Autonomous Vehicles- KVHI has invested in creating photonic Fiber Optic Gyros (FOGs) for autonomous vehicles which are potentially a critical component to help them maintain position.   KVHI's photonic FOGs are important because they help lower the cost of FOGs to where they can be mass produced for automotive and other transportation uses.  The company claims to be in ~80-90% of autonomous prototypes on the road and recently noted that it is on 30-35 different autonomous vehicle platforms.[iii]  These chips will enter into their first production products in March of this year.