Description

Summary: Next-gen satellite constellation (LEO) trading at implied value of 1.25x EBITDA with downside protected by existing fleet of contracted geostationary satellites. Stock got hammered ($55->$25) in 1 month on a technical puke from passives when the company converted from LORL -> TSAT and it was booted from Russell 2k & 3k (domicile changed from US to Canada). No buying support to offset the pressure on otherwise low volume since management didn’t do an NDR or raise any equity. TSAT management is meeting with investors now to try and fix the dislocation and share some projections/estimates on the LEO system which management has otherwise played pretty close to the vest.

Telesat Business

Geostationary Satellites (GEO): TSAT has 15 geostationary satellites with customers in broadcasting/DTH and enterprise services (government, corporate, backhaul, maritime, video, etc.). The business is mostly under long-term contracts and quite stable. COVID caused some of the travel related business to fall off but otherwise it’s been resilient throughout COVID. We estimate 2022 GEO revenue at CAD 800mm with 80% EBITDA margins (CAD 640mm EBITDA) and declining from there as satellites age out. You can run a DCF or use a punitive multiple to reflect the melting ice cube, but any way you slice it we think GEO is worth ~2.5bn CAD

Low Earth Orbit Constellation (LEO): TSAT has designed a 298 LEO constellation called Lightspeed, which will provide high-speed internet connection globally. In Feb 2021, TSAT announced that Thales Alenia Space was selected as the prime contractor for the Lightspeed constellation. TSAT will primarily sell wholesale capacity to aeronautical, maritime, enterprise, telecom, and government customers (vs. Starlink which is targeting more retail customers). The system will have ~15Tbps of capacity per management’s latest comments and an independent study by MIT comparing the LEO constellations. We believe Lightspeed could generate up to CAD 6.5bn in EBITDA within 5 years of launch (first planned 2023). Management’s latest presentation cites CAD 4.5bn in EBITDA but we believe this is conservative given indicated pricing and expected utilization. The system will cost ~CAD 6.5bn, of which TSAT has secured 3.5bn (1.44bn Government of Canada, 0.4bn Quebec, 1.7bn cash on hand). The balance will come from Export Credit Agency (ECA) financing which TSAT is working on now. The delay in ECA financing has been caused by supply chain disruptions for Thales Alenia Space, which TSAT/Thales is working through now and will present an updated business plan & timeline to ECA.

Historical context

TSAT used be Loral Space & Communications (LORL), a US-domiciled HoldCo with a 62.6% stake in Telesat controlled by MHR (Mark Rachesky). Through LORL, MHR owned 36.4% of Telesat. The remaining 37.4% interest in Telesat was owned mostly by Canada’s Public Sector Pension Investment Board (PSP). In November 2020, MHR and PSP agreed to collapse the HoldCo and ownership in Telesat into a single listed entity, Telesat Corporation (TSAT). The conversion was completed on November 18, 2021.

The Opportunity

During the conversion from LORL -> TSAT, the domicile changed from US to Canada (MHR controlled HoldCo Loral Space which owned Telesat interest -> Canadian Telesat standalone Corp). As a result, LORL was dropped from US index funds (Russell 2k & 3k) and saw forced selling by any passive fund that tracked those (or derivative) indices. TSAT did not raise any equity as part of the transaction so there were no buyers ready to step up and absorb the selling on an otherwise illiquid stock. From November 5 to December 6, LORL/TSAT moved from $55 -> $25 on a purely technical dislocation. Nothing about the GEO/LEO fundamentals have changed and the collapse in ownership structure should ultimately increase investor accessibility and transparency. Management admitted that Goldman & BMO completely missed the impact that the transition would have on passive ownership and the pressure it would cause given the limited volume. TSAT is now hosting investor meetings to get in front of investors and start sharing details on LEO.

Financials & Valuation

The market is ascribing very little value to LEO at the moment. This constellation is supposed to last ~10 years generating between CAD 4.5-6.5bn in EBITDA per year. Hard to say exactly what this is worth since it’s not operating yet, but we think it’s worth a lot more than 1.25x EBITDA (see Starlink at $30bn+ USD??).

Risks

• Next-gen satellite constellations have a history of being cash incineration exercises. Right now there are 4 announced LEO constellations, Telesat, OneWeb, SpaceX, and Amazon. Canada is investing heavily behind Telesat to ensure they are able to hit national internet connectivity objectives which LEO uniquely enables. TSAT takes a very conservative approach and we believe this prudence coupled with the backing of Canada increase the likelihood that Telesat’s constellation is successful.
• ECA financing is not yet secure, until it is – LEO is not completely funded. We are confident that TSAT and Thales Alenia Space are working hard to ensure the updated business plan for ECA is expeditiously approved, but it’s not done yet.

Catalyst

• NDR or equity offering (2022) with associated LEO projections and details. TSAT doesn’t need to raise equity for LEO, but increasing profile and access with Canadian investors and sell-side would be a good thing
• ECA financing complete (2022)
• Passive funds stop forced selling (may already be done)