RBC Dominion Securities Inc. Steve Arthur, CFA (Analyst) Niki Shi (Associate) (416) 842-7844 (416) 842-5338 [email protected] [email protected]
Sector: Industrial Products
October 5, 2017 Outperform MacDonald, Dettwiler & Assoc. TSX: MDA; CAD 68.10 A new era as MDA closes DigitalGlobe merger. Price Target CAD 94.00 Introducing Maxar Technologies WHAT'S INSIDE Rating/Risk Change Price Target Change Our view: We view the MDA-DigitalGlobe combination (now Maxar Technologies) as a strong strategic fit, offering considerable benefits of In-Depth Report Est. Change scale, diversification and vertical integration. We see several drivers of Preview News Analysis EQUITY RESEARCH EQUITY earnings growth, with greater visibility in earnings and cashflow than MDA Scenario Analysis* has seen in recent years. At 11.2x 2018E P/E, or 7.9x EV/EBITDA, valuation Downside Current Price Upside looks compelling and we maintain our Outperform rating and $94 target. Scenario Price Target Scenario
Key points: 62.00 68.10 94.00 105.00 MDA+DigitalGlobe = Maxar Technologies – a strong strategic fit: MDA 7% 40% 56% announced the close of their acquisition of DigitalGlobe (DGI) to form *Implied Total Returns Maxar Technologies. MDA and DGI are leaders in their respective Key Statistics industries, and we see the combination as complementary and a strong Shares O/S (MM): 59.1 Market Cap (MM): 4,025 Dividend: 1.48 Yield: 2.2% strategic fit of technologies, business models and customer bases. We see ROE: 18.6% Enterprise Val. (MM): 7,701 significant benefits from the transaction – a) diversification of the business Float (MM): 57.6 Avg. Daily Volume: 219,185 mix and customer base, b) vertical integration, with SSL capable of building Debt to Cap: 49% 3-Yr. Est. EPS Growth: 1.13% satellites for DGI, c) accelerated reach into the US government, and d) RBC Estimates greater visibility of revenue, earnings and cashflow. FY Dec 2016A 2017E 2018E 2019E Revenue 2,063.8 2,021.5 3,362.2 3,546.3 Growth opportunities and outlook: Looking ahead, we see several EBITDA 354.4 343.3 974.3 1,041.6 drivers of earnings growth for Maxar. In addition to core operations EV/EBITDA NM NM 7.9x 7.4x (DGI – increased customers and imaging product offerings; MDA – EPS, Ops Diluted 5.80 5.08 6.09 6.99 US government programs, GEO & LEO satellites, components, imagery P/E 11.7x 13.4x 11.2x 9.7x and robotics), we see considerable opportunities for revenue and cost Revenue Q1 Q2 Q3 Q4 synergies. Most notably, we expect to see solid opportunities to sell 2016 562.4A 502.5A 495.9A 502.9A Radarsat imagery through current DGI channels, and cost synergies should 2017 494.3A 503.7A 498.9E 524.5E 2018 807.0E 846.3E 839.4E 869.6E be evident as duplication is removed. In total, the company targets ~ EBITDA $150MM in revenue and cost synergies. 2016 93.0A 92.2A 80.4A 88.8A 2017 83.8A 88.7A 82.1E 88.7E Balance Sheet looks comfortable give earnings visibility: With the close 2018 232.2E 245.6E 242.7E 253.7E 2017E forecast reflect MDA revenue, EBITDA and EPS as a standalone of this transaction (paid for half cash, half stock), we see Net Debt/EBITDA entity.2018E forecast assume the consolidation of MDA and DGI revenue, EBITDA and EPS. Shares O/S reflect the planned DGI reaching just over 4x. This is higher than MDA has operated in the past, acquisition. MDA (as a standalone entity) had 36.5MM shares but a level we are comfortable with given a) the high level of earnings and outstanding as of Jun 2017. The transaction has been complete, though our current forecasts reflect a year-end close. cashflow visibility, b) our forecast for deleveraging to under 2.5x by 2020E, All values in CAD unless otherwise noted. and c) the wide buffer evident in our stress-testing work.
Compelling valuation relative to market position, growth outlook and A&D peers: With the deal now closed, and the fundamental outlook summarized above, we see the current share price as very compelling. On our pro forma forecast, MDA shares now trade at 7.9x 2018E EV/EBITDA, or 11.2x 2018E P/E vs. US aerospace and space firms at an average of 21.0x C2018E P/E and 12.2x C2018E EV/EBITDA.
Disseminated: Oct 5, 2017 15:04ET; Produced: Oct 5, 2017 15:04ET Priced as of prior trading day's market close, EST (unless otherwise noted). For Required Non-U.S. Analyst and Conflicts Disclosures, see page 20. Industrial Products MacDonald, Dettwiler and Associates Ltd.
Target/Upside/Downside Scenarios Investment summary Exhibit 1: MacDonald, Dettwiler and Associates Ltd. Maxar Technologies was formed with the merger of MacDonald, Dettwiler & Associates and DigitalGlobe Inc. 125 Weeks 15MAY15 - 04OCT17 in Oct 2017. The combined company is a global leader 110 105 UPSIDE 105.00 in end-to-end space solutions, including high-resolution 100 95 TARGET 94.00 satellite imagery and data analytics, communication satellite 90 85 manufacturing, groundstations, radar satellites and space 80 75 robotics.
70 CURRENT 68.10 65 We see a number of earnings growth drivers, including: DOWNSIDE 62.00 60 6m Growing global need for satellite imagery and data analytics: 4m DGI is a key supplier to the US and other governments of 2m
2015 2016 2017 critical surveillance solutions. M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O Oct 2018 MDA.TO Rel. S&P/TSX COMP IDX MA 40 weeks Source: Bloomberg and RBC Capital Markets estimates for Upside/Downside/Target A steady global market for commercial communications satellites: Expect ~10-15 satellite orders per year on average Target price/base case from commercial satellite operators, with a growing number Our base case price target of $94 reflects the now-complete of these expected to be high value Ultra HTS. Of this, we expect acquisition of DigitalGlobe. We project moderate growth from SSL to maintain its share of roughly 30%. the combined business, with revenue up ~7% over the longer- term. We value the combined MDA/DGI entity on an average US government opportunities appear to be accelerating: of 15x P/E, 9x EV/EBITDA on a rolling 2Y forward basis, and our MDA/SSL has now received security clearances to pursue US DCF analysis. We believe these multiples are appropriate given government business, and seems to be gaining momentum MDA's technology and market positioning, margin profile, with deals with NASA and DARPA. We understand the pipeline robust backlog and growth outlook. Our $94 target supports of activity is robust, and should be accelerated with the our Outperform rating. contacts, scale and infrastructure of the DigitalGlobe business.
Upside scenario Revenue and cost synergies: We expect to see solid Our upside scenario of $105 assumes more robust, yet opportunities to sell Radarsat imagery through current DGI achievable, growth expectations and subsequently higher channels, and cost synergies should be evident as duplication margins from realized synergies. More specifically: (1) is removed. In total, the company targets ~ $150MM in Revenue CAGR approaches ~7-8% through 2016-2018E on revenue and cost synergies. incremental contracts, primarily expected in adjacent satellite markets, as well as additional DGI business wins; and (2) Compelling valuation relative to market position, growth MDA’s communications margins improve to ~13% by 2018E outlook and A&D peers: We see the current share price as (excluding orbital receivables) and S&I margins settle in very compelling. On our pro forma forecast, MDA shares now the 29% range; 3) the market reflects a higher P/E target trade at 7.9x 2018E EV/EBITDA, or 11.2x 2018E P/E vs. US multiple of 16.0x. In the upside scenario, EBITDA margins are aerospace and space firms at an average of 21.0x C2018E P/E forecasted to reach ~31-32% on higher revenues. and 12.2x C2018E EV/EBITDA.
Downside scenario Key considerations Our downside scenario of $62 assumes lower growth We closely monitor a number of factors as potential drivers for expectations from both MDA and DGI businesses, with no MDA shares: (1) integration efforts of the combined business; additional revenue synergies. In particular: (1) Revenue CAGR (2) the order flow of commercial communications satellites; falls to 4-5% on slowing satellite manufacturing demand (3) demand growth for satellite broadband and broadcasting; growth and headwind in the geospatial data market; (2) (4) indications of increased penetration into US government EBITDA margins reach ~27-28% range; (3) with lower growth markets; (5) order flows from developing markets, where we and margins, the market reflects a lower EV/EBITDA multiple have seen a surge in demand in recent years, and (6) renewal of 7x EV/EBITDA and 12x P/E. status and pricing around the DGI's EnhancedView contract.
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 2 Industrial Products MacDonald, Dettwiler and Associates Ltd.
MDA + DigitalGlobe = Maxar Technologies: Merger creates a diversified leader in satellite imagery, manufacturing & space solutions With the merger of MacDonald, Dettwiler & Associates (MDA) and DigitalGlobe (DGI) now complete to create Maxar Technologies, we revisit our views on the strategic and financial fit of the two companies.
MDA and DGI have both successfully built leadership positions in their respective market segments. MDA is a leading player in communication satellite manufacturing, radar satellites, ground stations, space robotics and geospatial services. DigitalGlobe is a leader in high- resolution optical imaging, currently providing over 90% of the US government’s foundational imagery. We see the combination as complementary, and a strong strategic fit of technologies, business models, and their respective customer bases.
The product and solution portfolio for the combined company will include:
Satellite manufacturing Remote sensing and imagery satellites Satellite imagery and data services Ground stations Data analytics Space robotics
Exhibit 2: The merged company will be vertically integrated, with end-to-end capabilities, improved efficiency and cost savings
Source: Company presentations
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 3 Industrial Products MacDonald, Dettwiler and Associates Ltd.
Corporate and structural changes in the new ‘Maxar Technologies’
Changed name to Maxar Technologies, will trade under “MAXR” on TSX and NYSE The Company began trading today on the New York Stock Exchange under the ticker symbol “MDA”. Next week, the symbol on both the New York and Toronto Stock Exchanges will be changed from “MDA” to “MAXR” to reflect the company’s new name. Management again noted that the ultimate parent of DigitalGlobe would be domiciled in the U.S. by the end of 2019, subject to customary approvals.
Four brands in Maxar’s new portfolio As noted in the Oct 5 press release, the combined company’s portfolio will feature the following four key “brands”, uniquely positioned within their respective markets.
SSL: commercial provider / manufacturer of communication and Earth observation satellites; contractor for scientific mission spacecraft for both commercial and government markets; MDA: provider of space robotics, satellite antennas and subsystems, surveillance and intelligent systems, defense and maritime systems, and geospatial radar imagery; DigitalGlobe: provider of high-resolution optical satellite imagery; and Radiant: provider of geospatial data, analytics, software and services to help facilitate data insights and management; will also include old MDA’s information services business
Management changes - several changes were announced with the release: Howard Lance will continue as President and CEO of Maxar Technologies. Bill McCoombe will take over as CFO of Maxar (previously SVC, CFO and treasurer at SSL MDA Holdings, SVP of strategy and finance). Anil Wirasekara will leave the CFO post after 23 years in the role. We congratulate him on his achievements in building the business, and he will continue to work as a senior financial executive with the company. Tim Hascall will become Chief Operations Officer of Maxar (previously EVC responsible for the Imagery business unit at DigitalGlobe). Dr. Walter S. Scott is appointed Chief Technology officer of Maxar (founder of DGI in 1992 as Worldview Imaging Corporation; previously CTO of DigitalGlobe). Dan Jablonsky is appointed President of DigitalGlobe (previously the general manager of the U.S. and International Defense and Intelligence businesses at DigitalGlobe). Tony Frazier is appointed President of Radiant Solutions (previously SVC of Services at DigitalGlobe). Don Schaefer is appointed Chief Strategy Officer at Radiant Solutions (previously President of MDA Information Systems). Bruce Stephenson is appointed senior vice president and chief strategy and corporate development officer. Stephanie Georges is appointed senior vice president and chief marketing officer. Marcy Steinke is appointed senior vice president of government relations, public policy. Jeff Robertson is appointed senior vice president and chief Information officer. Michelle Kley is appointed senior vice president, general counsel and corporate secretary for the Company. Andrea Bortner is appointed senior vice president and chief human resources officer.
Additionally, three members of the DigitalGlobe Board of Directors, Howell M. Estes III, Roger Mason, Jr. and Nick S. Cyprus, have been appointed to the Maxar Board of Directors.
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 4 Industrial Products MacDonald, Dettwiler and Associates Ltd.
Snapshot of the combined entity – $4.3bn revenue by F2022E The 5-year view – longer-term outlook suggests solid growth of revenue, earnings and cash flow: When the transaction was announced, management provided 5-year objectives for:
Revenue (6-8% CAGR) EBITDA (8-10% CAGR) EBITDA margins of 28-30%.
Exhibit 3: We forecast MDA+DGI will deliver a five-year revenue and EBITDA CAGR of ~6.4%, in-line with management guidance
7,000 1,800 5-year CAGR 6.4% 5-year CAGR 7.2% 6,000 1,500 1,231 5,000 1,162 4,315 1,200 1,133 3,869 4,045 1,042 4,000 3,546 974 3,362 872 3,171 900
3,000 Revenue (C$MM) Revenue 600
2,000 Adjusted EBITDA (C$MM) EBITDA Adjusted 1,000 300
0 0 2017E 2018E 2019E 2020E 2021E 2022E 2017E 2018E 2019E 2020E 2021E 2022E
Source: Company reports, RBCCM estimates
Through 2021E, management noted that capex as a percentage of revenue will be between the 10-11% range, and will be around a third of EBITDA generated by the combined company. We do continue to expect annual variability around these “averages”, with elevated capex in 2018E and 2019E to develop the WorldView-Legion constellation.
Exhibit 4: DGI is estimated to contribute ~1/3 of the combined entity’s revenues
2016 Pro Forma Revenue Est. Breakdown 2018E Pro Forma Revenue Est. Breakdown (Management Presentation) (RBC estimate)
DGI Commercial MDA DGI 12% Communications MDA 36% (SSL) Communications 39% (SSL) DGI US Gov 34% 21%
MDA MDA Surveillance & MDA Surveillance & MDA Communications Intelligence Intelligence Communications (Other) 22% 20% 8% (Other) 8%
Source: Company reports, RBCCM estimates
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 5 Industrial Products MacDonald, Dettwiler and Associates Ltd.
Exhibit 5: By 2018E, we estimate SSL will contribute only ~15% of combined EBITDA
2016 Pro Forma EBITDA Est. Breakdown 2018E Pro Forma EBITDA Est. Breakdown (Management Presentation) (RBC estimate)
MDA Communications (SSL) MDA 15% Communications MDA (Other) 37% 4%
DGI DGI 63% 60% MDA Surveillance & Intelligence 21%
Source: Company reports, RBCCM estimates
Anticipate solid free cashflow, even with elevated capex in 2018-19E
Cash flows generated by MDA over the past five years (2011-2016) has been volatile, and a frequent concern of MDA shareholders. Free cash was weighed down by several factors:
Working capital usage related to satellites under development at SSL when it was acquired in 2012; MDA incurred payments totaling US$100MM to ViaSat in 2014-15 related to satellite patent infringement lawsuit; Construction costs related to the Ukraine satellite, for which cash had already been received in 2010; and ‘Vendor financing’ for some satellite construction in recent years, in response to competitive pricing pressures in the market. Financing was allocated to high credit quality customers and resulted in higher earnings and market share, but did weigh on cash through this period.
MDA+DGI – ramp up of cash flows generated beginning in F2019E Looking ahead, we expect MDA should generate substantial and positive cash flows, as: Several of the satellites where MDA structured later payment terms (effectively financed) were launched recently, or are scheduled for launch soon. With this comes further earnings recognition and cash payments; We do not expect further vendor financing arrangements from MDA; and Revenues from US government business begins to ramp at MDA.
With that, we understand that 2018E and 2019E will be heavy Capex years, with early construction and launch payments associated with DigitalGlobe’s next-generation WorldViewLegion program.
2019-2020E and beyond – The combined entity should have solid and growing cash generation
Capex requirements will vary from year to year, but on the larger revenue base we should see strong average performance in 2019-20E and beyond. In 2019/20E, we project FCF yields of ~8%/13% on current share price levels.
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 6 Industrial Products MacDonald, Dettwiler and Associates Ltd.
Exhibit 6: Combined company should see solid and growing cash generation in 2019-20E
700 US$254MM ComSat with Several GEO launches; Ukraine gov't, paid upfront light Capex period for DGI
500 Heavy CapEx at DGI Acquired SSL; usage of working capital for WorldView-Legion ViaSat settlement; ~US $100MM payout 300 Vendor financing of satellite construction
100
(100) 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Source: Company reports, RBCCM estimates
Leverage levels appear manageable, de-levering to under 2.5x by 2020E
The combined entity is more capital intensive than standalone MDA, but the capital needs should be more manageable on the larger business base. Further, the DGI operations bring higher margins and revenue visibility.
MDA management remains comfortable with the planned debt levels post transaction, given the high visibility on EBITDA and cash flow from the combined entity. DGI has previously managed similar debt levels following their GeoEye acquisition; both companies have a solid history of successfully delivering post acquisitions.
Following this transaction, we expect the combined company to have Net Debt / TTM EBITDA of ~4.2x. Given higher, more predictable cash flows projected from the combined business, we see Net Debt / EBITDA being reduced to under 2.5x by 2020E, after interest payments, maintained dividend payments, and capital expenditures invested in both businesses.
Exhibit 7: MDA/DGI should de-lever from 4.2x post acquisition to under 2.5x by 2020E
5.0x 4.2x 4.0x 3.5x 3.0x 3.0x 2.3x 2.0x
1.0x Net Debt / TTM Adj. EBITDA Adj. TTM / Debt Net 0.0x 2017E 2018E 2019E 2020E
Source: Company reports, RBCCM estimates
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 7 Industrial Products MacDonald, Dettwiler and Associates Ltd.
A compelling fundamental story & valuation level: Outperform, $94 target
Global leaders in key technology niches. A strong strategic fit with DGI. Shares attractively valued We have long-seen MDA as a strong, well-run technology franchise with several drivers of long-term earnings growth. With the DigitalGlobe acquisition, we see enhanced scale, diversification, margins and more predictable revenue streams.
On our pro forma forecast, MDA shares now trade at 7.9x 2018E EV/EBITDA, or 11.2x 2018E P/E. This compares to a broad group of US aerospace and space firms which currently trade at an average of 21.0x C2018E P/E and 12.2x C2018E EV/EBITDA.
We see this valuation as attractive in the context of their diversified business mix, technology positioning, margin profile, robust backlog, pipeline, and growth outlook.
We derive our target valuation using an average of our DCF model, 15x P/E and 9x EV/EBITDA applied to one year forward (FQ3/18E-FQ2/19E) estimates.
Exhibit 8: Target valuation– Average of 9x 2018E EV/EBITDA, 15x 2018E P/E, and DCF
PRICE TARGET Target based on P/E Target based on EV/EBITDA Target based on DCF Average Implied Price: $93.62 P/E Multiple: 15.0x EV/EBITDA Multiple: 9.0x WACC: 9.5% FQ3/18E-FQ2/19E EPS: $6.50 FQ3/18E-FQ2/19E EBITDA ($MM): $1,004.8 Terminal Growth: 2.0% RBC Target Price: $94 Implied Price: $98 Implied Price: $92 Implied Price: $92 Discount Rate vs. Terminal Growth on Base Assumptions 2018E P/E vs. EV/EBITDA Multiples on Base Assumptions Discount Rate 2018E P/E Multiple 91.74 8.5% 9.0% 9.5% 10.0% 10.5% $94 13.0x 14.0x 15.0x 16.0x 17.0% 0.5% $88 $79 $71 $64 $58 7.5x $81 $83 $85 $87 $53 1.0% $96 $86 $77 $69 $62 8.0x $84 $86 $88 $90 $56 1.5% $105 $94 $84 $75 $68 8.5x $86 $89 $91 $93 $59 2.0% $116 $103 $92 $82 $74 9.0x $89 $91 $94 $96 $61 2.5% $128 $113 $101 $90 $80 9.5x $92 $94 $96 $99 $64 Terminal Growth Terminal 3.0% $142 $125 $111 $99 $88 10.0x $95 $97 $99 $101 $67
3.5% $160 $140 $123 $109 $97 2018EEV/EBITDA Multiple 10.5x $98 $100 $102 $104 $70 Source: RBC Capital Markets Estimates
Exhibit 9: Industry reference valuation parameters
Shares Aerospace and Space Companies Mkt Cap Total EV P/E EV/EBITDA CAGR 2016-2018E f.d. Company Name Ticker Price US$MM (MM) Cash Debt NCI US$MM 2017E 2018E 2019E 2017E 2018E 2019E Airbus SE AIR-PAR $81.46 $74,220 774 9,596 10,293 (5.0) 75,034 24.7x 18.5x 14.5x 9.8x 8.4x 7.1x Ball Corporation BLL-US $41.76 $14,691 352 433 7,548 106 21,912 20.7x 17.4x 14.7x 12.4x 11.4x 10.7x Boeing Company BA-US $255.76 $151,175 591 10,326 10,775 59 151,683 25.5x 23.7x 20.5x 12.9x 12.6x 11.8x Harris Corporation HRS-US $134.00 $15,961 119 484 4,030 - 19,507 24.2x 22.3x 19.6x 14.1x 13.4x 12.4x HEICO Corporation HEI-US $89.35 $7,546 84 49 435 212 8,143 42.5x 38.0x 34.5x 22.1x 19.8x 18.5x Honeywell International Inc. HON-US $142.55 $108,671 762 9,821 16,510 128 115,488 20.1x 18.4x 16.7x 13.5x 12.4x 11.6x L3 Technologies, Inc. LLL-US $188.62 $14,753 78 385 3,342 71.0 17,781 21.2x 19.9x 18.2x 13.2x 12.5x 12.1x Lockheed Martin Corporation LMT-US $313.02 $90,147 288 2,452 14,283 84 102,062 24.8x 22.1x 19.0x 14.8x 13.7x 12.9x Mitsubishi Electric Corp. 6503-JP ¥1,791 $34,149 2,147 ¥712,900 ¥351,826 ¥102,171 31,850 15.4x 14.5x 13.5x 7.3x 6.8x 6.4x Northrop Grumman Corporation NOC-USA $292.18 $50,883 174 1,383 6,219 - 55,719 23.4x 21.8x 19.3x 14.8x 13.5x 12.4x Orbital ATK, Inc. OA-US $134.57 $7,754 58 74 1,494 11 9,185 21.8x 20.0x 18.3x 12.9x 12.3x 11.6x Rockwell Collins, Inc. COL-US $133.16 $21,678 163 578 7,779 6 28,885 21.9x 18.7x 16.9x 18.4x 13.5x 12.7x Teledyne Technologies Incorporated TDY-USA $162.56 $5,744 35 82 1,256 - 6,918 28.6x 24.6x 23.6x 16.2x 14.7x 14.0x Thales SA HO-PAR $94.53 $23,544 212 3,820 1,550 242.8 21,159 19.7x 17.4x 15.9x 9.4x 8.5x 7.9x United Technologies Corporation UTX-US $117.63 $93,960 799 9,345 26,626 2,119 113,360 17.9x 17.1x 15.6x 10.5x 10.2x 9.4x
Peer Average 23.5x 21.0x 18.7x 13.5x 12.2x 11.4x MacDonald, Dettwiler and Associates Ltd. MDA-CA $68.10 $- 6,135 NMF 11.2x 9.7x NMF 7.9x 7.3x Source: RBC Capital Markets estimates (MDA only), Company reports, FactSet. MDA EV is calculated using figures post-completion of DGI transaction. 2018E and 2019E estimates include full-year DGI impact.
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 8 Industrial Products MacDonald, Dettwiler and Associates Ltd.
Exhibit 10: Overview of key milestones in MDA/SSL and DGI’s operating history
MacDonald, Dettwiler and Associates (MDA), Systems Space Loral (SSL) DigitalGlobe Inc.
Multi-decade history in satellite groundstations, infrastructure Before and space technologies 1992 - Founded as WorldView Imaging Corporation 2000 Entry into National Land Information Service (NLIS) in the UK Launches Quickbird – the world’s highest resolution commercial
2001 imaging satellite
2002
2003
Acquires Marshall & Swift/Boekh for $338MM to bolster Info
Products division 2004
2005
2006
Launches RADARSAT-2, an advanced SAR sat. 2007 Launches WorldView-1
Announces sale of its Info. Systems and Geospatial Services Expands heavily into the commercial space, signing key agreements business to US-based Alliant Techsystems for $1.3B, later 2008 with Google, Microsoft, Nokia, etc blocked by the Canadian government Launches WorldView-2 with multispec. capabilities 2009 DGI begins trading on the NYSE
Divests Property Information Business for $850MM in net
proceeds 2010
2011
Acquires Space Systems Loral for $875MM 2012
2013 Acquires GeoEye (and assets, GeoEye-1 satellite)
Acquires Spatial Energy
2014 Launches WorldView-3
2015
Implements U.S. Access strategy plan. Received US government clearance, brought in US-based 2016 Acquires The Radiant Group executive team. 2017 Launches WorldView-4
MDA/SSL acquires DigitalGlobe Inc. – combined entity named “Maxar Technologies”
Source: Company reports
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 9 Industrial Products MacDonald, Dettwiler and Associates Ltd.
DigitalGlobe earns revenues through five streams:
DigitalGlobe is a critical supplier to the US government (and others): DGI generates ~2/3 of its TTM revenues from US government contracts. The combination should accelerate MDA’s move into the US market, and increase its US government revenue from 7% to approximately 25% of the combined revenue. DGI has high visibility into its future revenue streams, with ~90% being recurring in nature. The combined entity is estimated to generate ~40% of its revenues from recurring, service-based business.
1. EnhancedView SLA (Service Level Agreement)
10-year term, inclusive of nine 1-year renewal options; subject to congress and NGA to terminate or suspend. The SLA totals $2.8bn over 10 years, and provides the US government with capacity to certain satellites within the constellation. The contract paid $250MM for the first four contract years, with $300MM payable for the last six contract years.
This contract (set to run through 2020) provides ~90% of the foundational imagery data used by the US government. DGI appears to be very well-positioned to renew its EnhancedView contracts with the US government. The contract has been in place for ~15 years through 3 previous contract negotiations. The cost and time for a potential competitor to build a similar infrastructure ($billions over several years) makes displacement highly unlikely.
2. EnhancedView VAS (Value Added Services)
VAS includes added products and services, as well as infrastructure enhancements required when NGA needs more advanced imagery using DGI’s production capabilities. DGI is currently under a contract named GEO EGD (Global Enhanced GEOINT Delivery) to deliver certain imagery related services. DGI recognized over $320MM cumulatively since the inception of EnhancedView.
3. NextView:
Under a DGI-NGA agreement signed in Sep 2003, NGA provided the company with $266M to offset the construction costs of WorldView-1. Deferred revenue was recognized on a straight-line basis over its estimated useful life. As at Dec 2016, the company had $58.6M in remaining deferred revenue to be amortized through 2020E (~$15M each year).
4. Direct Access Program (DAP)
A partnership previously established with MDA to provide access of data collected from constellations and RADARSAT-2 to international governments. DAP contribution to revenue should increase as more customers gain access to capacity on the WorldView-4 satellite. As of December 2016, DGI had DAP agreements in ten countries, and signed LOIs with the 11th and 12th DAP customer in 2016.
5. Other Diversified Commercial (ODC)
Use content for mapping, monitoring and analysis for commercial partners, in a range of commercial industries such as agriculture, energy, forestry, mapping. DGI’s shortwave infrared sensing capabilities collect data for a variety of civilian and commercial applications, including mineral exploration, vegetation moisture monitoring and water-resource management.
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 10 Industrial Products MacDonald, Dettwiler and Associates Ltd.
DigitalGlobe’s current satellite fleet Exhibit 11: DGI’s existing fleet of five high-res satellites collects over one billion km2 of high-resolution imagery each year.
WorldView-1 GeoEye-1 WorldView-2 WorldView-3 WorldView-4
Launch Sep 2007 Sep 2008 Oct 2009 Aug 2014 Nov 2016 End of depreciable Q4 2020 Q4 2020 Q1 2018 Q1 2026 Q4 2026 life (extd to 2022) Original cost $473MM $212MM $463MM $650MM Est. $700MM+ Net book value (as $103MM $46MM $192MM $522MM n/a at end of 2016) Altitude 496 km 681 km 770 km 617 km 617 km Panchromatic Panchromatic Panchromatic Multispectral Panchromatic Sensor Bands Panchromatic Multispectral Multispectral 4-Add’l bands Multispectral 4-Add’l bands SWIR Panchromatic 0.50m 0.41m 0.46m 0.31m 0.31m resolution Multispectral - 1.64m 1.85m 1.24m 1.24m resolution Average revisit at 1.7 days < 3 days 1.1 days 1.0 day 1.0 day 40°N latitude Onboard storage 2199 Gbits 1000 Gbits 2199 Gbits 2199 Gbits 3200 Gbits
Sample imagery
Source: DigitalGlobe. DGI’s IKONOS satellite was launched in 1999, and retired in 2015. DGI’s Quickbird satellite was launched in 2001, and retired in 2014. The multispectral 4-band includes Red, Green, Blue and Near Infrared bands, which approximate the colors the human eye can see, and just beyond the visible into the near infrared. Multispectral 8-band includes coastal, yellow, red-edge, and near infrared 2. SWIR stands for Short Wave Infrared, which allows for mineral and material detection, as well as visibility through some obstructions, such as smoke and haze.
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 11 Industrial Products MacDonald, Dettwiler and Associates Ltd.
DigitalGlobe’s previous acquisitions
GeoEye: combination with its (then) largest competitor Prior to 2012, GeoEye was DigitalGlobe’s largest competitor. Both companies relied heavily on the U.S. government as their key customer for their high-resolution satellite imagery. The two companies won a combined $7.3bn contract in 2010 to supply images to U.S. agencies through the old EnhancedView program, which accounted for ~41% (~$150MM) of GeoEye’s revenue back in 2011. In mid-2012, NGA planned to renew DGI’s contract for the third full year without cuts, while proposing to cut the GeoEye portion. Shares of GeoEye trended lower on the news, and the two companies reached an agreement for DGI to acquire GeoEye for about $900MM to create the world’s largest commercial-imagery satellite company.
DGI estimated that the combined DGI and GeoEye would generate savings of $1.5bn over 10 years compared with what the two companies would spend separately. The majority of the savings would come from reducing the combined fleet, as well as eliminating overlapping ground facilities. The merged company would also be free to coordinate orbits, usage (commercial or government) and capacity of its satellite fleet.
Spatial Energy: addition in the Oil & Gas space In early 2014, DigitalGlobe acquired Colorado-based Spatial Energy, a leading source for digital imagery and related services to the oil and gas industry. There were no financial terms disclosed with the transaction. Spatial Energy, at the time of the acquisition, provided geospatial solutions to 12 of the top 20 largest oil and gas customers
The Radiant Group: geospatial solutions provider to the U.S. Intelligence Community DigitalGlobe purchased The Radiant Group in late 2016 from Aston Capital for $140MM in cash, funded with cash on hand and revolving line of credit. The company provides analytical solutions that moves data through quickly and accurately through its collection to analytics and management tools. The acquisition expanded DGI’s customer base across the U.S. Intelligence communities by taking over its 80+ pre-existing contracts with various divisions of the US government. The acquisition also brought in expertise in big data analytics, cloud computing and machine learning, where data collected by DGI can now be processed into useful geospatial information, Radiant Group is anticipated to contribute ~$100MM in revenue each year, and accounted for ~$35MM of DGI’s Q2/17 revenue. Competitors in the earth imagery space
Airbus A&D constellation Airbus owns and operates 10 satellites under its Aerospace and Defence constellation. The satellites have both radar and optical capabilities. In addition to satellite imagery, Airbus also competes with MDA/SSL in the GEO satellite manufacturing business, winning ~16% of last 10 years’ GEO comsat orders. In September 2017, Airbus announced its investments in the satellite-servicing business, developing a vehicle capable of refueling, repairing and monitoring the health of spacecraft orbiting Earth. As of year-end 2016, Airbus’ Defence and Space division generated ~ €11.85 billion in annual revenues (~18% of all of Airbus’ revenues); of which, 31% (~€3.7 billion) are generated from Space Systems, and 42% (~€5.0 billion) are generated from CIS – Communications, Intelligence and Security, and the remainder from military aircraft.
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 12 Industrial Products MacDonald, Dettwiler and Associates Ltd.
DGI’s 30cm-spec BlackSky satellite fleet BlackSky has a planned constellation of 60 fast-revisit, high-resolution Earth-observation remains the market satellites, with six spacecraft on orbit by the end of 2017. BlackSky represents one of the leader in providing newer startups, with its first spacecraft, Pathfinder 1, being launched only about a year ago. high-resolution In 2017, BlackSky announced that it has established a joint venture backed by Thales Alenia imagery to to build and operate this constellation. BlackSky’s satellites are designed for a shorter commercial and mission life (~3 years) orbiting at a lower altitude. Each satellite weighs approximately 60kgs defense partners and is about the size of a mini-fridge. BlackSky aims to have its full constellation in orbit, providing 1-m resolution color imagery by year 2019.
DigitalGlobe Planet Planet (formerly Planet Labs) is a “small sat” startup, currently focusing on providing medium resolution imagery. In February 2017, Planet launched 88 Dove satellites to orbit, and now images all of Earth’s landmass every day. Planet acquired Terra Bella (previously known as Skybox Imaging, which was purchased by Google in 2014 for ~$500MM) in early 2017. Notably, the Skybox satellites were built by MDA. The company has a constellation of 149 smallsats.
Airbus Key Competitive Advantages DGI highlights several competitive advantages in the earth observation / geospatial market:
Resolution and accuracy: DGI estimates its imagery resolution is 5x its nearest competitor (>10x best “small sat”), and 2x as accurate (>10x best “small sat”) in pinpointing locations from which the imagery is taken Timeliness: DGI can deliver information from image capture to downlink within 20 minutes, and has the highest daily revisit rates BlackSky Extensive image archive: with 15+ years in operation, DGI has established an extensive image library with past EO data
Exhibit 12: WV-4 is about the size of a Chevy Suburban; the telescope makes up ~2/3 size
Planet/Terra Bella
Source: Company reports, DGI presentations
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 13 Industrial Products MacDonald, Dettwiler and Associates Ltd.
GEO market (in total value) holds steady, though the count is down
Six GEO satellites awarded YTD; one at ~$500MM to MDA/SSL By our count, six commercial communications satellites have been awarded year to date. We, and most industry observers, continue to expect 10-12 orders in 2017E. Order flow can clearly be lumpy and impacted by replacement cycle, financing capacity and industry events (e.g., SpaceX, Ex-Im bank, technology advances, etc.). However, we see longer-term industry fundamental demand drivers remaining solid. Broadly, we expect that the number of satellites ordered per year may decline, but that some will be ‘Ultra High Throughput’ programs, carrying much higher price points. Combined with LEO programs, we believe the total industry value metric is becoming more relevant than the simple count of satellite orders.
Exhibit 13: Year to date, the industry has announced 6 GEO satellite awards
Satellite Operator Primary Contractor Est. Launch Announced Est Value 2017 JCSat 18 / Kacific-1 Kacific, Skyperfect JSAT Boeing Satellite Systems 2019 02/2017 ~$150MM ArabSat 6D Arabsat, KACST Taqnia Space 2019 03/2017 ETS-9 JAXA Mitsubishi Electric 2021 04/2017 Palapa N1 Palapa Satelit CGWIC 2020 05/2017 Inmarsat-5 (Global Express) Inmarsat Thales Alenia Space 2019 05/2017 ~$130MM EchoStar XXIV / Jupiter-3 Hughes Network Systems MDA/SSL 2021 08/2017 ~$500MM Source: Spacenews, Company Reports, Satellite Today, Milsatcom Magazine, Gunter’s Space Page, Satbeam, RBC Capital Markets
MDA remains the longer-term market leader with 30% market share over the last five years. In 2016, MDA secured 27% of commercial communications satellite contracts, sufficient to maintain the market leadership position.
MDA was recently awarded the contract to manufacture EchoStar XXIV – an Ultra high Density Satellite to Hughes Network Systems. The contract value was said to be ~$500MM, and was has been added to MDA’s backlog. The satellite is planned for launch in early 2021. (Link)
Recent industry market-share data is summarized below:
Exhibit 14: MDA maintains market leadership position in L5Y and L10Y satellite manufacturing contracts
Satellite Awards Market Share 2011 2012 2013 2014 2015 2016 2017 L5Y L10Y Airbus Defence and Space 19.0% 8.7% 23.8% 17.4% 22.2% 3.3% 16.3% 15.8% MDA / Space Systems Loral 28.6% 17.4% 28.6% 39.1% 27.8% 26.7% 16.7% 30.1% 24.9% Boeing Satellite Systems 9.5% 34.8% 14.3% 4.3% 11.1% 26.7% 16.7% 13.3% 14.3% Lockheed Martin 9.5% 8.7% 11.1% 6.7% 3.6% 5.5% Thales Alenia Space 4.8% 4.3% 4.8% 21.7% 11.1% 13.3% 16.7% 13.3% 12.2% OSC 9.5% 8.7% 14.3% 8.7% 11.1% 3.3% 9.0% 9.9% ISS Reshetnev 4.8% 6.7% 1.2% 5.1% Mitsubishi Electric 9.5% 8.7% 16.7% 3.6% 2.5% CGWIC 8.7% 4.8% 5.6% 13.3% 16.7% 6.0% 5.1% Other 4.8% 8.7% 9.5% 16.7% 3.6% 4.6% Note: In 2016, Ekspress 90 and Ekspress 103 contracts were awarded to ISS Resehtnaev and Thales Alenia; they are counted towards ISS market share here. Eutelsat 5 West B satellite contract was awarded to Airbus Defence and Space and Orbital ATK; it is counted towards Airbus market share here. Market share figures in 2016 are calculated based on 15 total contracts awarded.
Source: Spacenews, Company Reports, Satellite Today, Milsatcom Magazine, Gunter’s Space Page, Satbeam, RBC Capital Markets
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 14 Industrial Products MacDonald, Dettwiler and Associates Ltd.
Again, looking ahead we think it is increasingly important to look at total order value, rather than strictly the number of satellites ordered. A ~$500MM+ award clearly carries more impact than a more traditional satellite order. Pipeline opportunities for MDA/SSL from expected GEO satellites We continue to update our database of all available launch plans for global satellite operators. Our research indicates there are as many as 38 communications satellites potentially scheduled for manufacture and launch from 2019 through 2022 that have yet to confirm awards to manufacturers.
Exhibit 15: We see as many as 38 comsats without confirmed awards
2019 Launch Year (Est.) Prior Constellation Contractors 2021 Launch Year (Est.) Prior Constellation Contractors ASIA Operator Boeing/MDA/OSC EUR Operator Airbus NA Operator Boeing/MDA ME Operator IAI/MDA LATAM Operator Boeing/MDA/OSC/Thales EUR Operator Boeing/Airbus/MDA EUR Operator Boeing/Airbus/MDA NA Operator Boeing/MDA EUR Operator Boeing/Airbus/MDA NA Operator Lockheed/MDA NA Operator MDA/Boeing/Lockheed EUR Operator Thales NA Operator Boeing/MDA EUR Operator Boeing/Orbital/MDA EUR Operator MDA/Airbus/OSC ASIA Operator Boeing/Lockheed/OSC NA Operator Boeing ASIA Operator Boeing/MDA/OSC EUR Operator Boeing/Airbus/MDA 2020 Launch Year (Est.) Prior Constellation Contractors ASIA Operator OSC ME Operator IAI/ISS ME Operator MDA/Mitsubishi 2022 Launch Year (Est.) Prior Constellation Contractors ME Operator MDA/Mitsubishi NA Operator MDA/Boeing/Lockheed EUR Operator ISS Reshetnev EUR Operator Boeing/Airbus/MDA EUR Operator Mitsubishi Electric EUR Operator Boeing/Orbital/MDA ASIA Operator Boeing/MDA/OSC ASIA Operator Mitsubishi/Boeing/Lockheed ASIA Operator Boeing/MDA/OSC EUR Operator MDA/Airbus/OSC NA Operator MDA/Boeing/Lockheed LATAM Operator MDA/Boeing/Thales ASIA Operator MDA/Thales ASIA Operator MDA/Thales EUR Operator MDA/Airbus/OSC EUR Operator MDA/Airbus/OSC Sources: Spacenews, Company Reports, Satellite Today, Milsatcom, Gunter’s Space Page, Satbeam, RBC Capital Markets Research (as of Oct 2017)
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 15 Industrial Products MacDonald, Dettwiler and Associates Ltd.
Beyond GEO: Recent contracts demonstrate leadership in space technologies In addition to traditional GEO satellite manufacturing, MDA has a number of other strong businesses, including manufacturing satellite components, satellite imagery and space robotics aimed at commercial and government customers. The pipeline remains strong, and MDA has recently secured numerous contracts from the U.S. Government and its commercial partners.
Some notable recent contracts include:
Aug ’17 – Ultra High Density Satellite: MDA was awarded a ~$500MM contract to manufacture EchoStar XXIV – an Ultra Density Satellite for Hughes Network Systems, planned for launch in early 2021. (Details) Jul ’17 – WorldView Legion program: DGI contracted the manufacture contract (worth a few hundred million U.S. dollars) of its next-gen Earth imaging satellite constellation to MDA. (Details) Jun ’17 – Satellite life extension agreement with SES: As part of the DARPA partnership announced in February, MDA has signed SES as its first commercial customer for the in- orbit satellite refueling service. (Details) Feb ’17 – Satellite servicing spacecraft contracted by US DARPA: MDA was selected by the US DARPA to develop a servicing spacecraft for its RSGS (Robotic Servicing Geosynchronous Satellites) program, enabling the capability to repair and upgrade satellites in the geosynchronous orbit. (Details) Jan ’17 – Psyche: NASA named MDA as a key supplier in the Psyche planetary exploration mission; it is a long-term program, with launch scheduled for 2023. Approximate contract value of C$100MM. (Details) Dec ’16 – On-orbit robotics system: NASA selected MDA to manufacture the Restore-L program Spacecraft Bus, and to provide support services for the on-orbit robotic servicing system. (Details)
Exhibit 16: Selection of MDA/SSL’s previously awarded NASA contracts
Source: Company presentations
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 16 Industrial Products MacDonald, Dettwiler and Associates Ltd.
Exhibit 17: Summary of combined entity pro-forma financials
2017E MDA 2017E MDA+DGI 2018E 2019E 2020E 2021E
Revenue MDA Communication 1,337.1 1,337.1 1,429.9 1,544.0 1,688.9 1,790.0 MDA S&I 694.2 694.2 747.2 772.5 881.3 1,003.0 MDA Inter-segment (9.9) (9.9) (10.4) (10.4) (10.4) (10.4) DigitalGlobe 1,149.9 1,195.5 1,240.1 1,309.2 1,262.0 Revenue Synergies 0.0 0.0 0.0 0.0 0.0 Total Revenues 2,021.5 3,171.4 3,362.2 3,546.3 3,869.1 4,044.6
Cost of Goods Sold, SG&A MDA Communication 1,157.5 1,157.5 1,245.9 1,342.7 1,463.6 1,544.3 MDA S&I 497.7 497.7 531.6 549.8 628.2 713.8 MDA Corporate expenses 23.3 24.4 24.8 25.3 25.9 DigitalGlobe 621.4 631.0 637.3 688.5 668.9 Cost Synergies 0.0 45.0 50.0 70.0 70.0 Total COGS, SG&A 1,655.2 2,299.8 2,387.9 2,504.7 2,735.6 2,882.8
Operating EBITDA from Continuing Ops 366.3 871.5 974.3 1,041.6 1,133.4 1,161.8 Less Corporate expense (23.3) (24.4) (24.8) (25.3) (25.9) Less Finance Costs (net) (51.7) (168.3) (155.6) (140.7) (114.6) Less Depreciation & Amortization (60.3) (390.0) (410.0) (410.0) (435.0) Less Tax Expense, excl. tax on items (45.2) (31.3) (36.1) (44.6) (46.9) affecting comparability Adj. Net Income 185.8 360.4 415.0 512.8 539.4 Weighted avg. number of shares - basic 36.5 59.1 59.3 59.5 59.6 Weighted avg. number of shares - diluted 36.5 59.2 59.4 59.6 59.7
Adj. EPS Per share - Basic 5.09 6.09 6.99 8.61 9.04 Per share - Diluted 5.08 6.09 6.99 8.61 9.04
Capital expenditures Property, plant and equipment (62.4) (450.0) (350.0) (300.0) (300.0) Intangibles (68.6) (60.0) (60.0) (60.0) (60.0) Total capital expenditures (131.0) (510.0) (410.0) (360.0) (360.0)
Proceeds from long-term debt 3,301.1 (450.0) (250.0) (400.0) (430.0) Interest paid on debt (44.5) (168.3) (155.6) (140.7) (114.6)
Balance Sheet Cash 450.7 233.9 310.8 418.2 526.0 Total Debt 4,092.5 3,642.5 3,392.5 2,992.5 2,562.5 Net Debt 3,641.8 3,408.6 3,081.7 2,574.3 2,036.6 Net Debt / EBITDA 4.2x 3.5x 3.0x 2.3x 1.8x Source: RBC Capital Market estimates, Company reports
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 17 Industrial Products MacDonald, Dettwiler and Associates Ltd.
Exhibit 18: Company snapshot
MacDonald, Dettwiler and Associates TSX:MDA, NYSE:MDA $68.10 Stock Rating Outperform (OP) 1 Year Target: $94.00 Implied All-In Return: 38.6% MDA Standalone MACDONALD, DETTWILER AND ASSOCIATES LTD. MDA-TSE Market capitalization 2,489 76.00 Net cash (890) Enterprise value 3,379 $105 72.00 Shares outstanding (f.d.) 36.5 $94
MDA + DGI Combined Entity $68 $62 68.00 Market capitalization 4,026 Net cash (3,629) Enterprise value 7,654 64.00
Shares outstanding (f.d.) 59.1 (CAD/sh) Price Share
CLOSE 66.60 52W-H 80.28 52W-L 61.80 AVGVOL 168,384 60.00 Feb 17 Mar 17 Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17 Dividend $0.37 1,000
Yield 0.5% Price
Target Upside Year end 31-Dec 500 C$/US$ exchange rate: 0.7612 Downside
- MDA Standalone MDA + DGI Combined Entity Multiples: 2014 2015 2016 2017E Multiples: 2017E 2018E 2019E 2020E Actual Forecast Pro-Forma Forecast P/E 11.8x 11.2x 11.8x 13.4x P/E 11.2x 9.7x 7.9x EV/EBITDA 10.0x 9.2x 9.5x 9.8x EV/EBITDA 7.9x 7.3x 6.8x
Key Financials 2014 2015 2016 2017E 15-17E CAGR Key Financials 2017E 2018E 2019E 2020E 18E-20E CAGR Revenues 2,099 2,117 2,064 2,021 (2.3%) Revenues 3,171 3,362 3,546 3,869 7.3% Corporate EBITDA 338 366 354 343 (3.2%) Adj. EBITDA 872 974 1,042 1,133 7.9% Adjusted EPS $5.76 $6.08 $5.80 $5.08 (8.6%) Adjusted EPS nmf $6.09 $6.99 $8.61 18.9% Dividend $1.30 $1.48 $1.48 $1.48 Dividend nmf $1.48 $1.48 $1.48 Shares O/S (f.d.) 36.1 36.3 36.4 36.5 Shares O/S (f.d.) nmf 59.2 59.4 59.6
Total debt 754 986 831 4,093 Total debt 4,093 3,643 3,393 2,993 (9.4%) Net debt 737 945 812 3,642 Net debt 3,642 3,409 3,082 2,574 (13.1%) Net debt/EBITDA 2.2x 2.6x 2.3x nmf Net debt/EBITDA 4.2x 3.5x 3.0x 2.3x
Cash flow from operations 999 980 1,096 FCF (ex. Interest, div) 233 327 507 FCF/share $3.94 $5.50 $8.52 FCF yield 5.8% 8.1% 12.5% Source: RBC Capital Market estimates, FactSet, Company reports
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 18 Industrial Products MacDonald, Dettwiler and Associates Ltd.
Valuation Our base case price target of $94 reflects the now-complete acquisition of DigitalGlobe. We project moderate growth from the combined business, with revenue up ~7% over the longer- term. We value the combined MDA/DGI entity on an average of 15x P/E, 9x EV/EBITDA on a rolling 2Y forward basis, and our DCF analysis. We believe these multiples are appropriate given MDA's technology and market positioning, margin profile, robust backlog and growth outlook. Our $94 target supports our Outperform rating. Risks to rating and price target • Challenges to the integration efforts of the combined business; • Lengthy delays or declines in the level of communication satellite orders can pressure revenue and margins, as well as weigh on investor sentiment; • Changes to customer end-markets, capital availability for customers planning to acquire communication satellites, technological innovation/competitive dynamics, major project delays and/or cancellations; • Failure to renew, or changes in pricing in DigitalGlobe's EnhancedView contract with the US government can pressure revenue and margins; and • Significant declines in the US DoD budget could reduce the government's expenditures in space systems, satellites and/or imagery data needs. Company description Maxar Technologies was formed with the merger of MacDonald, Dettwiler & Associates and DigitalGlobe Inc. in Oct 2017. The combined company is a global leader in end-to-end space solutions, including high-resolution satellite imagery and data analytics, communication satellite manufacturing, groundstations, radar satellites and space robotics.
MDA was a global communications and information company that provided technology solutions to commercial and governments worldwide. It was a leading contractor for manufacturing satellites, science mission spacecrafts, space robotics, satellite antennas and subsystems, surveillance and intelligence systems, defense and maritime systems, and provided geospatial radar imagery.
DGI was the global leader in high resolution Earth imagery, and previously acquired the Radiant Group with data analytics and management capabilities. DGI has a constellation of five imaging satellites in orbit, providing 90% of the foundational imagery data used by the U.S. government through its long-term EnhancedView contract, as well as data and insights for other international governments and commercial partners.
The company plans to continue to reorganize all or part of it’s corporate and operating structure to ensure the ultimate combined entity is incorporated in the U.S. by the end of 2019, subject to customary approvals. The company operates from 15 locations in the United States, Canada, and internationally. The stock currently trades under symbols: NYSE:MDA and TSX:MDA, with ticker anticipated to change to MAXR in early October to reflect the new company name, Maxar Technologies.
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 19 Industrial Products MacDonald, Dettwiler and Associates Ltd.
Required disclosures Non-U.S. analyst disclosure Steve Arthur and Niki Shi (i) are not registered/qualified as research analysts with the NYSE and/or FINRA and (ii) may not be associated persons of the RBC Capital Markets, LLC and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Conflicts disclosures The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates.
Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in, this report. To access current conflicts disclosures, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/ DisclosureLookup.aspx?entityId=1 or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.
A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than investment banking services from MacDonald, Dettwiler and Associates Ltd. during the past 12 months. During this time, a member company of RBC Capital Markets or one of its affiliates provided non-securities services to MacDonald, Dettwiler and Associates Ltd..
RBC Capital Markets has provided MacDonald, Dettwiler and Associates Ltd. with non-securities services in the past 12 months. Explanation of RBC Capital Markets Equity rating system An analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst's sector average. Although RBC Capital Markets' ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis. Ratings Top Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 months with a favorable risk-reward ratio. Outperform (O): Expected to materially outperform sector average over 12 months. Sector Perform (SP): Returns expected to be in line with sector average over 12 months. Underperform (U): Returns expected to be materially below sector average over 12 months. Risk Rating As of March 31, 2013, RBC Capital Markets suspends its Average and Above Average risk ratings. The Speculative risk rating reflects a security's lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limited operating history that result in a higher expectation of financial and/or stock price volatility.
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 20 Industrial Products MacDonald, Dettwiler and Associates Ltd.
Distribution of ratings For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/ Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described above). Distribution of ratings RBC Capital Markets, Equity Research As of 30-Sep-2017 Investment Banking Serv./Past 12 Mos. Rating Count Percent Count Percent BUY [Top Pick & Outperform] 859 52.92 294 34.23 HOLD [Sector Perform] 660 40.67 154 23.33 SELL [Underperform] 104 6.41 7 6.73
References to a Recommended List in the recommendation history chart may include one or more recommended lists or model portfolios maintained by RBC Wealth Management or one of its affiliates. RBC Wealth Management recommended lists include the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio: Dividend Growth (RL 8), the Guided Portfolio: ADR (RL 10), and the Guided Portfolio: All Cap Growth (RL 12), and former lists called the Guided Portfolio: Large Cap (RL 7), the Guided Portfolio: Midcap 111 (RL 9), and the Guided Portfolio: Global Equity (U.S.) (RL 11). RBC Capital Markets recommended lists include the Strategy Focus List and the Fundamental Equity Weightings (FEW) portfolios. The abbreviation 'RL On' means the date a security was placed on a Recommended List. The abbreviation 'RL Off' means the date a security was removed from a Recommended List. Equity valuation and risks For valuation methods used to determine, and risks that may impede achievement of, price targets for covered companies, please see the most recent company-specific research report at https://www.rbcinsight.com or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. MacDonald, Dettwiler and Associates Ltd. Valuation
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 21 Industrial Products MacDonald, Dettwiler and Associates Ltd.
Our base case price target of $94 reflects the now-complete acquisition of DigitalGlobe. We project moderate growth from the combined business, with revenue up ~7% over the longer-term. We value the combined MDA/DGI entity on an average of 15x P/E, 9x EV/EBITDA on a rolling 2Y forward basis, and our DCF analysis. We believe these multiples are appropriate given MDA's technology and market positioning, margin profile, robust backlog and growth outlook. Our $94 target supports our Outperform rating.
Risks to rating and price target • Challenges to the integration efforts of the combined business; • Lengthy delays or declines in the level of communication satellite orders can pressure revenue and margins, as well as weigh on investor sentiment; • Changes to customer end-markets, capital availability for customers planning to acquire communication satellites, technological innovation/competitive dynamics, major project delays and/or cancellations; • Failure to renew, or changes in pricing in DigitalGlobe's EnhancedView contract with the US government can pressure revenue and margins; and • Significant declines in the US DoD budget could reduce the government's expenditures in space systems, satellites and/or imagery data needs. Conflicts policy RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. To access our current policy, clients should refer to https://www.rbccm.com/global/file-414164.pdf or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time. Dissemination of research and short-term trade ideas RBC Capital Markets endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having regard to local time zones in overseas jurisdictions. RBC Capital Markets' equity research is posted to our proprietary website to ensure eligible clients receive coverage initiations and changes in ratings, targets and opinions in a timely manner. Additional distribution may be done by the sales personnel via email, fax, or other electronic means, or regular mail. Clients may also receive our research via third party vendors. RBC Capital Markets also provides eligible clients with access to SPARC on the Firms proprietary INSIGHT website, via email and via third-party vendors. SPARC contains market color and commentary regarding subject companies on which the Firm currently provides equity research coverage. Research Analysts may, from time to time, include short-term trade ideas in research reports and / or in SPARC. A short-term trade idea offers a short-term view on how a security may trade, based on market and trading events, and the resulting trading opportunity that may be available. A short-term trade idea may differ from the price targets and recommendations in our published research reports reflecting the research analyst's views of the longer-term (one year) prospects of the subject company, as a result of the differing time horizons, methodologies and/or other factors. Thus, it is possible that a subject company's common equity that is considered a long-term 'Sector Perform' or even an 'Underperform' might present a short-term buying opportunity as a result of temporary selling pressure in the market; conversely, a subject company's common equity rated a long-term 'Outperform' could be considered susceptible to a short-term downward price correction. Short-term trade ideas are not ratings, nor are they part of any ratings system, and the firm generally does not intend, nor undertakes any obligation, to maintain or update short-term trade ideas. Short-term trade ideas may not be suitable for all investors and have not been tailored to individual investor circumstances and objectives, and investors should make their own independent decisions regarding any securities or strategies discussed herein. Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital Markets' research. For a list of all recommendations on the company that were disseminated during the prior 12-month period, please click on the following link: https://rbcnew.bluematrix.com/sellside/MAR.action The 12 month history of SPARCs can be viewed at https://www.rbcinsight.com/CM/Login. Analyst certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.
October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 22 Industrial Products MacDonald, Dettwiler and Associates Ltd.
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October 5, 2017 Steve Arthur, CFA (416) 842-7844; [email protected] 23 Industrial Products MacDonald, Dettwiler and Associates Ltd.
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