Description
UrtheCast Corp. ("Urthecast") is a timely and fascinating investment opportunity that trades for 3x 2016 FCF and 1.5x 2017 FCF (on our estimates).
The company has a strong balance sheet with $30M cash and no debt. The company's business model is highly-disruptive with a product that (i) is in high demand, (ii) delights its customers, and (iii) no other company can offer. Perhaps most importantly, we believe the current share price materially misvalues Urthecast both relative to publicly-traded peers and relative to the company's significant ability to generate free cash flow at high margins.
There is a lot to the story, so we have laid it out in bullet points below. Here's the basic pitch:
- Urthecast is a satellite company with a unique/unreplicable/monopoly business model that means its cost structure is 1/20 that of competitors
- Urthecast is about to "turn on" its cameras - the company announced "First Light" for its high-resolution camera in a media event in NYC today with full commissioning/commercialization expected in July
- Urthecast shares trade at 3x 2016 FCF and 1.5x 2017 FCF (on our estimates) plus a free option on the value of its B2C media platform that has 70 outside app developers on it who have already raised $100M+ of VC funding
Our thesis is that Urthecast will benefit from the pricing umbrella created by its competitors having much higher cost structures...and as a result, the company will produce prodigious free cash flow. The current share price needs to play catch-up to the significant cash flow generating ability the company should have once its cameras are fully live. Our view is that the shares should trade for at least $10 CAD today, that using a 15x "market multiple" on 2016 FCF would value the shares at $15 CAD per share, and that in an upside scenario where the company is valued on 2017 FCF and/or the B2C media platform has real value, the shares could be worth as much as $30-40 CAD per share. The shares currently trade for $3.70 CAD per share.
Investment Description
- Urthecast
- Satellite company with offices in Vancouver (HQ), San Francisco, and St. Louis
- Traded in Toronto, expected dual-listing or re-listing to the NASDAQ in less than 12 months
- 82M shares fully diluted
- Market cap is $303M CAD and $245M USD
- $30M net cash, no debt, so EV is $215M USD
- Industry
- Participates in the "earth observation" ("EO") market - $2B market, growing double-digits per year, demand significantly outstrips supply (and will do so for the foreseeable future)
- Essentially selling images of earth from space to governments, businesses, media organizations, etc.
- Some images can go for $20K+ apiece and can be sold to multiple parties (think pictures of North Korean troop movements)
- Major buyers include agribusiness companies seeking out images to see crop progress and plantings of corn vs. wheat vs. soybeans, etc.
- Media companies want images of current events (natural disasters, Fukushima, etc.)
- #1 player is DigitalGlobe (ticker DGI) with $3.2B enterprise value and $650M revenues / 45% EBITDA margins
- Other competitors include Astrium (a subsidiary of EADS), RapidEye, a number of one or two satellite private and governmental operators, and (potentially) start-ups like PlanetLabs or SkyBox
- History
- Business was born out of MacDonald, Dettwiler and Associates Ltd. ("MDA"), a Canadian company that is one of the world's foremost aerospace engineering firms
- Russians approached MDA about putting EO cameras on the International Space Station ("ISS")
- MDA said no, this isn't what we do - but encouraged a few of its employees to spin out from MDA and start a business to do this
- The spin-out, Urthecast, uses MDA for some engineering support, good relationship
- Urthecast struck a deal with the Russians to put two EO cameras on the Russian side of the ISS
- Urthecast provides the cameras and all technical/engineering support
- Russia gets the cameras to the ISS and installs them on its dime
- In return, Russia gets all images of Russia taken by Urthecast's cameras for free
- Cost to do this
- The two cameras cost Urthecast $30-35M combined
- Urthecast has spent another $30M in operating expenditures building the business and the infrastructure/technology behind it
- Offset by some insurance payments and certain other revenues
- Russia has spent $100M getting the cameras to the ISS and installing them
- Two spacewalks - every spacewalk costs $15M
- This is great value for the Russians as would usually cost $20-30M per year to buy all these photos of Russia that they will now be getting...spending $100M up-front is a bargain to get all these photos in perpetuity (or as long as the ISS remains operational) for free
- Other companies (Boeing, etc.) have spent tens of millions more on various projects to support this
- Total "replacement cost" for what's been done so far is five years and well in excess of $200M, or more than the total EV of the company today
- Advantages
- DGI (and other satellite operators) have a problem - their satellites run out of electricity and need to be replaced every 7-12 years
- DGI has four satellites in operation currently, plus one half-built and expected to launch in mid-2016
- Most recent satellite cost $649.5M
- Demand outstrips supply - so pricing needs to stay high to earn the company a return and incentivize additional future launches that require lots of capital up-front
- To conserve electricity, most satellites are only powered-up for 20 minutes each day - take pictures at 10am and 2pm
- Urthecast has a disruptive model
- Instead of spending almost $700M to put a bird in the air, it cost Urthecast $35M...but Urthecast still gets to benefit from the pricing umbrella of the other satellite companies where prices need to stay high to incentivize additional expensive satellite launches
- And...the ISS has UNLIMITED ELECTRICITY
- The ISS has solar panels
- Can keep the cameras on 24 hours per day, take pictures otherwise would never get
- Plus, Urthecast can do something no other satellite company can do...it can take video
- Video normally would kill satellites because requires lots of electricity
- With essentially unlimited electricity from the ISS, can take ultra-HD color video of earth from space
- Unique product - no one else can do this - that potentially can command a significant premium in the market
- No need to send up additional satellites, can continue operating as long as the ISS is operational
- ISS is most expensive thing ever built by humankind - $150B and counting
- Originally was supposed to be finished by now...but Russia/NASA keep spending $5B+ per year on it
- US has fully funded the ISS through 2024
- If every plank and nail on a boat is replaced over time, is it still the same boat?
- Current expectation is that the ISS will last to 2028 or beyond
- Cameras
- Urthecast has two cameras on the Russian side of the ISS
- MRC
- A medium resolution camera ("MRC") that can take images at a 5-meter ground sample distance ("GSD") - can see objects 5 meters across, like trucks or buildings
- Primarily used to take agriculture images due to wide lens
- HRC
- A high resolution camera ("HRC") that can take pictures at 1-meter GSD - can see objects 1 meter across like motorcycles and even people
- Ultra high-def, color video camera - takes 3 pictures per second which spliced together creates 75-second HD color videos of earth from space
- NASA side
- Plan is to add two more cameras on the NASA side in late-2017
- The NASA cameras will include radar so that they can see through clouds - another unique asset
- Agreements
- Urthecast has a monopoly on the Russian side - no one else can put an EO camera on the Russian side per formal agreement
- Urthecast has an effective monopoly on the NASA side - NASA precedent is "one of everything" because space on the ISS is limited
- Urthecast holds the "key" to the whole project (all the software, algorithms, etc.) so the cameras can't work without Urthecast
- Images can be downloaded either via the Russian side or via the NASA side (via TDRSS - almost instantaneous) so can't be cut off by just one party
- The Urthecast cameras are viewed as a major public relations priority for both NASA and the Russians - a 24/7 camera like the Eagle Cam (http://bit.ly/1JSr4Kj) that can promote interest in space exploration and in the ISS
- Recent History
- Stock has traded publicly for several years
- Difficult 2014
- A cable provided by the ISS didn't work, needed to be replaced
- The platform provided by the ISS had "jitter" which needed to be solved-for
- ISS, unlike other satellites, you can go make repairs
- Urthecast has some of the world's best aerospace engineers, many from MDA
- The MRC is now operational
- The HRC just had its invite-only "First Light" event today (http://blog.urthecast.com/)
- Showed HRC video of London, Sao Paulo, Boston (Fenway Park!), and Barcelona - videos were breathtaking
- Major industry convention GEOINT in Washington, D.C. is June 23-25
- Initial Operating Capability ("IOC") - ie full commissioning/commercialization of the HRC - is five weeks from now, scheduled for July
- In the meantime
- Urthecast is the main partner of Pepsi in this year's Pepsi Challenge (http://bit.ly/1JubeUo) and (http://bit.ly/1Ed2caO)
- At today's First Light event, included a logo of Heineken on a slide listing major partners - perhaps another major announcement coming soon?
- Management also hinted at a number of additional significant announcements/partnerships coming up...for example, could the NGA place a large order with the company? Management commented that now that have begun showing the video to customers, "the market opportunity is far larger than we ever imagined"
- Did a small equity raise a couple months ago to bolster the balance sheet heading into the commissioning and beginning of product sales
- The Numbers (in USD)
- Gross margins are 95% - pay a 10% fee for some distribution, otherwise no COGS (as everything is handled by NASA/Russians and don't need to manage a fleet of satellites)
- Operating expenses fully built-out are estimated at $25M per annum
- No maintenance cap-ex requirements
- So at $50M revenues, it's $23M EBITDA and $15M+ after-tax FCF
- At $100M revenues, it's $70M EBITDA and $50M+ after-tax FCF
- At $200M revenues, it's $170M EBITDA and $115M after-tax FCF
- Revenues
- Have two contracts in hand worth $74M total revenues over next 3-5 years
- Went to distribution partners to ask for indications of interest
- Took over three sales offices of GeoEye (bought by DGI a few years ago) so know who all the buyers are and how to go-to-market
- Got preliminary minimum indications of interest from non-US/EU distributors that could do at least $26M in sales per year
- US/EU represent 70% of the EO market
- Assuming that ratio holds true, plus the contracts in hand, implies $140M minimum annual sales
- These numbers are just for the HRC
- RapidEye
- RapidEye has three satellites that have 5m MRC cameras
- $50M in annual revenues
- The satellites are expected to die within two years
- Can keep alive slightly longer (three years?) by restricting the number of photos taken
- Either way, big reduction in supply of 5m imagery is coming...and RapidEye has no plans to replace its fleet
- MRC should be able to do $25M+ in revenues and as RapidEye falls away, $50M+
- DGI
- DGI recently got rid of all of its 1m cameras and replaced with 30cm cameras
- Tripled the price per image from $25K to $75K
- Some customers NEED these images so are paying the higher price, but lots of others prefer the 1m or can't afford the 30cm - can see in DGI's financials with some attrition in commercial sales as a result of the huge price increase
- Urthecast is stepping in to the position DGI just vacated - lots of potential customers who would still pay $25K per image for 1m
- Means Urthecast is not really competing head-to-head with DGI for a significant number of customers
- B2C Platform
- Because Urthecast will have so many pictures (taking images 24/7), tried to find a way to monetize
- Have created a platform to access EO imagery not just from Urthecast but also from Astrium, DGI, etc.
- Had 100,000+ applications to gain access to the platform, allowed 70 app developers onto it
- Those app developers have raised more than $100M in VC funding
- Only one has been publicly disclosed, OmniEarth (http://www.omniearth.net/)
- Urthecast paid a royalty stream by the app developers
- For example, one app estimates the GDP of China by combining satellite images with tweets, google traffic, etc.
- Can then sell to anyone who wants to try to understand Chinese GDP
- Unknown what this is worth...but first time ever that EO has gone B2C
- Urthecast has dozens of people in SF fully dedicated to this platform
- Can generate traffic with the live 24/7 stream of images from the ISS - amazing, unique product
- This platform alone could be worth a staggering valuation based on recent tech platform valuations
- And this is a library...grows more valuable over time as the library grows
- Tish Long
- Largest buyer in the world of EO imagery is the NGA (the National Geospatial-Intelligence Agency), one of four US spy agencies
- Tish Long was first woman to ever run a US spy agency, ran the NGA
- Supposedly was in the room with President Obama during the raid to get Bin Laden - she was responsible for getting the satellite images to identify him in Pakistan
- As head of the NGA, she signed a $500M purchase agreement with DGI for imagery
- She is a rockstar in the EO world
- The head of the NGA is by far the most powerful/influential person in the world of EO
- As first female head of the NGA in addition to the successful Bin Laden raid, Tish is on another level
- Stepped down as head of the NGA in early-2015, actively pursued by numerous companies (including DGI and Urthecast) to join their boards
- She picked Urthecast over DGI
- Other Board position she picked is Raytheon
- Joined the Urthecast Board in February - a huge coup that sent waves across EO world
- Former long-time head of the Canadian Space Agency also on the Board
- CTO of Google is on the Advisory Board
- So is former President of Lockheed Martin
- Key question has been - will the cameras work?
- Math is straightforward if the cameras work
- All indications are that they do
- The MRC is up-and-running
- Participation at invite-only GEOINT
- Date for the IOC of the HRC targeted
- Now, with today's First Light Event for the HRC, clear evidence the video is real and it is awesome...supposedly will be posted to the company's website tomorrow
- Pepsi Challenge - wouldn't do an agreement with Urthecast unless sure the HRC worked
- If can get comfortable that the cameras are, in fact, operational, then math indicates the shares are substantially misvalued
- Risks
- Could something happen to the ISS?
- $150B investment - will be protected by NASA and the Russians at all costs
- That said, this is space and things can go wrong
- Could Russia reneg on its agreement?
- Possible - but Urthecast controls all data and operations, so if Russia stopped cooperating then Russia would lose all the imagery it's getting for free
- Plus a public relations disaster, especially once the 24/7 ISS feed goes live
- Russia has asked Urthecast if it will install additional cameras in 2020...seems like relationship going well
- Management has worked with Russians for decades at MDA and now at Urthecast, strong relationship
- Could something go wrong with the cameras?
- Always possible
- But the technology in these cameras has been used in space for years
- And can always be repaired on the ISS
- Could other entrants into the EO market collapse the pricing umbrella?
- Lots of discussion about drones, balloons, low-earth orbit mini-satellites
- Most valuable images are in remote places (North Africa, North Korea, Middle East, etc.) so it's difficult to imagine drones or balloons making a big impact on the model
- Mini-satellites are years away...image quality (no color, higher GSD's, certainly no video) and reliability are nowhere close, plus business model has proven problematic
- Google (which bought SkyBox) recently stopped selling to governments, which is largest EO customer
- Supply actually reducing, not increasing, from mini-satellite companies in recent months in the main EO market
- A potential risk beyond 2020?
- Don't think so...demand is growing rapidly for EO, could fill additional niches and expand the market
- That said, if concerned about this risk, possible pair-trade Urthecast vs. DGI
- Capital Markets
- Expect that company will prematurely raise additional capital should the stock go to $5-6 per share
- Management and the board will run this company extremely conservatively
- Even if another 10M shares of dilution, the valuation mismatch based on expected cash flows is substantial
- Valuation and Target Price
- Think this is worth $10 CAD today
- Market needs to catch up in a big way (assuming cameras are good to go - but today's First Light event showed the HRC is working)
- On a reasonable multiple of 2016 FCF, stock should be worth $15 CAD
- In an upside scenario where the B2C platform gets a large valuation or the business scales to $200M+ of revenues, could be worth $30-40 CAD per share
- Another way to think about it
- DGI has a valuation of $3.2B
- 4.5 satellites - implies a valuation of $700M per satellite
- Average remaining life of 6.5 years
- Urthecast
- Effectively "one satellite" - the ISS
- Better than a DGI satellite
- Access to unlimited electricity
- Multiple cameras with optionality to add more
- Unique, highly-valuable product with HD color video and can have cameras on 24/7
- Remaining life is 13+ years (assuming ISS lasts to 2028 or beyond), twice the average DGI satellite's remaining life
- All of this at significantly better EBITDA margins than DGI once fully built-out
- Urthecast should trade for a healthy premium to the average DGI satellite
- Instead, it trades at $200M vs. the average DGI satellite at $700M
- Huge disconnect to fair value
- Urthecast should be worth $1B+
- At a $700M valuation, Urthecast shares are worth $11.25 CAD per share
- At a $1B valuation, Urthecast shares are worth $15.25 CAD per share
- Could be generating more than $100M in after-tax FCF by 2017 (assuming $200M revenues, or <10% of the EO market)
- Plus...get the potentially significant value of the B2C media platform for free
- Additional information
Bottom line is that this is an incredibly valuable, unique asset that we believe is significantly mispriced as it has just transitioned from "start-up" to "real company." As the cameras start pulling in revenues, the B2C platform launches, and investors become more aware of a highly off-the-run company, there is meaningful room for the valuation to catch-up to intrinsic value.
Disclaimer
The author of this posting and related persons or entities ("Author") currently holds a long position in this security. Author may buy additional shares, or sell some or all of Author's shares, at any time. Author has no obligation to inform anyone of any changes to Author's view of UR CN. Please consult your financial, legal, and/or tax advisors before making any investment decisions. While th Author has tried to present facts it believes are accurate, the Author makes no representation as to the accuracy or completeness of any information contained in this note. The reader agrees not to invest based on this note, and to perform his or her own due diligence and research before taking a position in UR CN. READER AGREES TO HOLD AUTHOR HARMLESS AND HEREBY WAIVES ANY CAUSES OF ACTION AGAINST AUTHOR RELATED TO THE NOTE ABOVE. As with all investments, caveat emptor.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
-GEOINT Show June 23-25
-Initial Operating Capability for the HRC in July
-Launch of the B2C media platform late-summer
-Launch of the 24/7 ISS camera to draw traffic and eyeballs to the company
-Potential additional major partnerships - Heineken?
-Potential additional major orders - the NGA?
-NASDAQ Listing
-Revenues and free cash flow start flowing through the financials, demonstrating just how misvalued the company is on both a relative and absolute basis