Description

MDA represents a modest risk, modest reward opportunity for investors looking to participate in the space sector. MDA trades at 11.7x FY 2022 EBITDA vs its peer group at 16-17x. MDA’s opportunity is executing on its 3 flagship growth programs plus being a beneficiary of the long-term growth in satellites.

MDA Ltd is a Canadian space technology service provider which operates three business segments:

• Geointelligence (44% of revenues), which sells satellite-generated imagery
• Robotics & space operations (28% of revenues), which manufactures and markets autonomous robots
• Satellite systems (28% of revenues) which provides communication technologies for satellites

The company was part of Maxar Technologies, until late 2020, where they were sold to a consortium of Canadian investors for $1B CAD. In April 2021, MDA raised $400M CAD in an IPO and currently has a market cap of approximately $2B.

Over the past few years, MDA’s revenue has declined as a result of the completion of the RADARSAT Constellation Mission, where revenues went from $58mm to $7mm from 2018 to 2020, as well as a lack of new awards for satellite systems. We believe the company is undervalued and poised for growth for the following reasons:

1. Flagship Programs

MDA currently has three major flagship programs that they believe represent a $3.5B revenue opportunity for the company.

Canadarm3

The first flagship program is the Canadarm3 contract for the US-lunar gateway. Management has estimated that the program will generate $1.4B in revenues for the company, including service and support revenues. Current commitments for the project are much lower at $60mm, however these commitments have only covered the system definition and design phases of the Gateway External Robotics Interface (GERI) which is only part of the overall project. Further contracts should be awarded in late 2021 and MDA plans on completing the Canadarm3 project by 2026.

If we were to take history as an example, the tab for building the Canadarm2 was $1.4B, similar to the projected revenues today. As a result, we believe that management’s target is achievable.

Canadian Surface Combatant

The second flagship program is the Canadian Surface Combatant program, where MDA is responsible for designing the Electronic Warfare Suite. The Canadian Department of National Defense is expected to spend $77B on this project. As a result of the high cost, there has been significant backlash against this expenditure. Other countries, such as the UK, have spent much less on similar programs by purchasing fewer ships (8-9 ships on average). While management expects the overall program to generate roughly $1.5B in revenues over a period of 20 years, we believe that, due to the likelihood of redesign, revenues from the program will be in the $800-900M range.

Telesat Lightspeed

The last program is the Telesat Lightspeed system, where MDA will be developing the direct radiating array for satellite communications. Management expects contracts from this program to generate $800M in revenue for MDA over the next five years. The company has also mentioned further upside beyond $800M given that Telesat has applied for a license to launch an additional 1,300 satellites.

2. Long-term growth drivers in LEO satellite launches and geointelligence revenues

LEO Satellite Launches

The cost to launch satellites has continued to decrease. A study by NASA found that the average launch cost from 1970 to 2009 was $18,500/kg. In 2018, SpaceX’s Falcon 9 boasted a launch cost of $2,720/kg, a reduction of 85%. The decreasing costs have resulted in strong growth in the LEO satellite markets, where companies such as SpaceX, OneWeb or Telesat are launching satellites to bring high speed internet service to every corner of the globe.

Prior to 2012, there were 27 satellites launched for communications purposes. In 2018, there were 82. By 2025, expectations are that 500 communications satellites will launch each year.

The market for the design and manufacturing of LEO satellites is highly competitive. MDA does not have any significant competitive advantages in the market. However, their prior work with OneWeb and current work with Telesat should enable the company to benefit from industry tailwinds as more companies and governments look to launch satellites. As a result of the growth drivers, MDA has seen 31% growth in satellite systems revenues in fiscal 2021.

Geointelligence Revenues

Earth observation is another growth area for MDA, where industry revenues are expected to grow at a 5-6% CAGR for the next 10 years. Over the past few years, MDA’s revenues within this segment have been affected by the completion of the RADARSAT-2 constellation mission. However, MDA is planning on launching another SAR satellite, called SARnext to support their earth observation imagery offering.

The majority of revenues within this segment (74%) are from government entities in Canada. MDA, especially as a Canadian company, is in a preferred position to win contracts from Canadian government entities. For example, recently, the company was awarded a three year contract by the Department of Fisheries to detect vessels engaging in illegal, unreported and unregulated fishing. The company is also working on obtaining contracts from the Department of National Defense and Canadian Space Agencies.

MDA’s preferred position for Canadian government contracts will be the most significant driver of revenue growth within the geointelligence segment moving forward.

3. Financials & Valuation

MDA’s currently projects EBITDA margins to be between 18-20%. Margins were significantly higher in 2020 as the Canadian Emergency Wage Subsidy reduced wage expenses. The company is expected to continue to see higher margins in 2021 as a result of the continuation of the subsidy. After 2021, it is assumed that the benefits from the subsidy end and margins begin to mean revert.

Given that peers trade at 16-17x F2022 EBITDA, there may be some room for multiple upside. If they can execute on initiatives and trade at 15x EBITDA, the stock would trade at $21, which represents 30% upside to the current stock price.

Risks

• Failure of an MDA component in orbit, affecting reputation and future contract awards
• Cancellation of large projects, such as the Lunar Gateway Project
• Lockup expiry may result in short-term downward pressure on the stock price

Catalyst

• Continued execution and contract awards on flagship programs
• NYSE/Nasdaq Listing