MDA Ltd. has released its preliminary prospectus for its initial public offering (IPO) and is looking to raise $500 million with an offering price per share between $16 and $20. If the interest in the IPO is strong, then the company could be valued at $2 billion as it goes public. That valuation would suggest a nice return on investment for Northern Private Capital (NPC) who bought the company from Maxar Technologies just over a year ago for $1 billion. However, is the company worth this valuation?
As a private company the last year, and as part of larger public one in Maxar before that, it was difficult to get a clear picture of MDA’s sales and value. Now however, thanks to the company going public and with a prospectus with recent revenue data, we have a better picture.
That picture suggests the IPO offering price of between between $16 and $20 per share is well priced based on current and projected revenue. However, you could argue that based on current tech valuations and IPO craze, and what’s happening with other space sector companies, that the company is undervalued.
Revenues look promising
In looking through MDA’s summary financial section of the prospectus, the first thing you notice is the three year downward trend in revenue from a reported $547.3 million in 2018 to $411.5 million in 2020. That’s not a good thing. It reflects in part the winding down of the RADARSAT Constellation Mission which was a flagship program for MDA, the Covid-19 pandemic in 2020, and the repatriation of the company.
However, when you look at what MDA lists as their flagship programs today, it’s clear there’s a lot of revenue upside. MDA lists the Canadarm3, the Canadian Surface Combatant program and the Telesat LEO Constellation as their recently awarded flagship programs.
While MDA has been working for several years to get these programs on the books as flagship programs, the revenue for these programs barely started to trickle in last year. As they move forward in their development, revenue from these program will increase substantially. The question is, will other new programs and potential flagship programs be in the offing?
In the prospectus MDA states that “we believe an opportunity exists to grow our revenues from approximately $411 million in Fiscal 2020 to between $800 and $900 million in Fiscal 2022.” They state a “significant portion” of that revenue will come from these flagship programs. And they’re right. Those three flagship programs are pretty much locked in. They also say that “by leveraging our competitive strengths we believe we will continue to grow revenue rapidly beyond 2022 and achieve over $1.5 billion of revenue in Fiscal 2025. In addition, we have a long term target for our Adjusted EBITDA margin of 18% to 20%.” Clearly MDA is bullish on its prospects as you would expect with a company going for a substantial IPO.
Near term potential
In examining the prospectus there were three items that caught my initial interest that relate to MDA’s future potential; It’s Geointelligence business prospects, it’s defence opportunities and international expansion.
Its Geointelligence and defence opportunities are somewhat tied together. But first it’s important to note that 45% of MDA’s 2020 revenue came from its Geointelligence business area. By 2025, MDA is setting a revenue target of $565 million for its Geointelligence business. To achieve that they are moving forward with their SARnext program, their follow-on program for the RADARSAT-2 satellite. While MDA states that the Total Addressable Market over the next five years for Satellite Systems is $875 billion, it’s the $90 billion Geointelligence market that has a lot of short and long term upside. MDA states that “we are currently developing SARnext, a next-generation radar satellite system that will enhance our EO (Earth Observation) solutions offering, and is expected to generate estimated total revenue to MDA of approximately $2 billion over the next 15 years.”
Part of the revenue MDA hopes will come are from contracts with the Department of National Defence. “We will leverage our EO satellite capabilities and track record to execute on future opportunities. We are currently working on a pipeline of attractive EO opportunities, including two large satellite programs for the Canadian government, namely the Department of National Defence’s Defence Enhanced Surveillance from Space (“DESS-P”) program and the CSA’s Earth Observation Service Continuity (“EOSC”) program.”
While it’s unclear what direction the Canadian Space Agency (CSA) will take with the EOSC program, MDA clearly sees a path forward with DND’s DESS-P program.
In discussing its international expansion MDA states that “we see significant opportunity for international expansion in a number of attractive geographies, including the United Kingdom and Australia, which are strategically aligned with NATO and lack a large national space company incumbent. To address these international expansion opportunities we intend to enhance our existing presence in the United Kingdom and seek additional opportunities to further expand our international footprint. This expansion will enable us to support countries outside of the U.S. and Canada as they pursue their ambitious space programs.”
The United Kingdom has been very aggressive in wanting to expand its footprint in the global commercial space sector and is working towards getting a larger market share. So it’s not surprising that MDA would want to try to expand further there. Canada and the United Kingdom working more closely together could benefit both. While Australia is also aggressively looking to be a player in the global space sector, it is a much smaller market than the UK.
Workforce expansion needed
With the government as an important customers, it will come as welcome news that MDA is anticipating at this time in needing to hire 400 engineers to support its growth. Combined with R&D investments, MDA says it will invest $600 million over five years. MDA’s workforce would expand by almost 20% to 2400 people.
Paying down the debt
Of note, most of the proceeds of the IPO will go to paying down its existing debt. That’s a very good thing that will allow the company to be a little more nimble. “We are undertaking this Offering to repay borrowings and fund key growth initiatives. Specifically, the Company intends to use approximately $340 million of the net proceeds of the Offering to repay approximately 80% of the outstanding indebtedness under the First Lien Credit Facilities ($424 million outstanding as of December 31, 2020). The remainder of the net proceeds of the Offering will be used to fund a portion of our ongoing growth initiatives that require capital investments, the largest of which is the development of SARnext, our next-generation EO commercial satellite.”
The downside
“The U.S. Chamber of Commerce estimates that the space economy will grow from approximately US$385 billion in 2017 to US$1.5 trillion by 2040.” With numbers like that can there be any downside? Of course there is.
While MDA sees a lot of upside going forward, and clearly there is a growing global space sector, MDA still faces competition in many of its international business segments. As well, with a little over half of its revenue coming from government, there’s always the prospect of changing governments and priorities. But the overall picture at the moment favors MDA.
MDA Preliminary Base Prep Prospectus
Wed. March 24, 2021, 8:45 am ET update – A previous version of this story omitted the “Paying down the debt” section.