AAC Microtec — Rights success fuels growth

AAC Clyde Space (OMX: AAC)

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Research: Industrials

AAC Microtec — Rights success fuels growth

The success of the SEK82.5m rights issue which was oversubscribed leaves ÅAC Microtec well positioned to continue to pursue the growth opportunities in the small satellite market. The company has had four satellites deployed so far this year and order activity appears robust. However, there is of course a dilutive effect from the rights which we have reflected in our estimates. We will update our numbers further alongside the H119 results on 22 August 2019.

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Industrials

ÅAC Microtec

Rights success fuels growth

Rights issue adjustments

Aerospace and defence

2 August 2019

Price

SEK3.97

Market cap

SEK382m

SEK9.67/US$

Net cash (SEKm) at 31 March 2019

10.1

Shares in issue

96.2m

Free float

89%

Code

AAC

Primary exchange

Nasdaq FN Premier

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(15.5)

(20.3)

(25.9)

Rel (local)

(15.4)

(20.1)

(28.5)

52-week high/low

6.02p

2.62p

Business description

Based in Sweden, ÅAC Microtec is a world leader in nanosatellite end-to-end solutions, subsystems and platforms after merging with Clyde Space in Scotland. The merged company also supplies a range of technology components to other small satellite manufacturers globally.

Next events

H119 results

22 August 2019

Analyst

Andy Chambers

+44 (0)20 3681 2525

ÅAC Microtec is a research client of Edison Investment Research Limited

The success of the SEK82.5m rights issue which was oversubscribed leaves ÅAC Microtec well positioned to continue to pursue the growth opportunities in the small satellite market. The company has had four satellites deployed so far this year and order activity appears robust. However, there is of course a dilutive effect from the rights which we have reflected in our estimates. We will update our numbers further alongside the H119 results on 22 August 2019.

Year end

Revenue (SEKm)

PBT*
(SEKm)

EPS*
(SEK)

DPS
(SEK)

P/E
(x)

Yield
(%)

12/17

13.3

(27.3)

(0.75)

0.0

N/A

N/A

12/18

77.9

(37.2)

(0.48)

0.0

N/A

N/A

12/19e

120.8

(8.4)

(0.09)

0.0

N/A

N/A

12/20e

200.4

27.7

0.26

0.0

15.3

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items. Clyde Space consolidated for 11 months in FY18.

Rights issue adjustment to earnings

The successful two-for-five rights issue at SEK3.0 per share raised SEK82.5m for ÅAC Microtec before issue costs. The funds raised provide working capital flexibility for the company’s continued growth, as well as pursuing other “New Space” M&A opportunities should they arise. We assume the cash raised has only a modest benefit on interest income, so the dilutive effect on EPS in FY20 is around 28%. We have also adjusted all historic and the current year EPS to reflect the notional bonus element of the issue, as is normal practice.

Small satellite market remains busy

Half a century after NASA put a man on the moon, advances in micro-technology and computing are driving the small satellite revolution. AAC Clyde Space is well positioned to benefit from the growing trend in the deployment of constellations of nanosatellites in low earth orbit to replicate applications previously limited to larger geostationary earth orbit satellites. So far in 2019, AAC Clyde Space has deployed four satellites and order development appears encouraging for both satellite platforms and subsystems. We would expect the first batch order for constellations to be won before the year end, given the proposed schedules of existing customers. We will of course reassess prospects when the company reports its H119 results.

Valuation: move to profitability envisaged

We still expect ÅAC Microtec to deliver positive cash flow and earnings in FY20, but this is contingent on booking initial constellation orders before the end of 2019, as well as successful recruitment of appropriately qualified staff. Based on our current estimates, ÅAC is trading on an FY20e P/E of 15.3x, which given anticipated volume growth in the next decade appears undemanding.

Investment summary

Our underlying operating estimates are unchanged at present. We will review these following the interim results on 22 August. The rights issue does bolster cash balances and we have assumed a modest amount of interest income as a result from these additional funds, slightly improving PBT in both years of the forecast. Of course, the weighted average number of shares increases and the earnings per share also reflect the notional bonus element of the rights issue. As is practice, the historic per share estimates are also adjusted by the theoretical ex-rights price (TERP) adjustment factor for the bonus element. Our revised estimates are shown below.

Exhibit 1: ÅAC Microtec earnings revisions

SEKm

2019e

2020e

Prior

New

% change

Prior

New

% change

By business

AAC

41.4

41.4

0.0%

55.3

55.3

0.0%

Clyde

79.4

79.4

0.0%

145.1

145.1

0.0%

Total group revenue

120.8

120.8

0.0%

200.4

200.4

0.0%

By activity

Satellite platforms

34.9

34.9

0.0%

87.2

87.2

0.0%

Subsystems

82.9

82.9

0.0%

105.2

105.2

0.0%

Licence & royalty income

3.0

3.0

 

8.0

8.0

 

Total group revenue

120.8

120.8

0.0%

200.4

200.4

0.0%

Own work capitalised

3.0

3.0

 

2.0

2.0

 

Other operating income

2.2

2.2

 

3.2

3.2

 

Total group income

126.0

126.0

 

205.7

205.7

 

 

 

 

 

 

 

EBITDA (company reported)

0.9

0.9

0.0%

33.6

33.6

0.0%

 

 

 

 

 

 

EBIT adjusted (Pre PPA amortisation)

(8.5)

(8.5)

0.0%

27.5

27.5

0.0%

 

 

 

 

 

 

Adjusted PBT

(8.5)

(8.4)

-1.0%

27.6

27.7

0.2%

 

 

 

 

 

 

EPS - adjusted continuing (SEK)

(0.1)

(0.1)

-20.4%

0.4

0.3

-28.4%

DPS (SEK)

0.0

0.0

 

0.0

0.0

 

Net cash / (debt)

5.0

87.6

N/M

24.0

106.7

344.6%

Source: Edison Investment Research estimates

The company is expected to report H119 results on 22 August 2019.

The four deployments so far in 2019 are:

On 18 January 2019 ALE-1 was launched form Uchinoura Space Centre in Japan on a Japanese Epsilon-4 rocket. It is the first aircraft for ALE Co. AAC supplied the Sirius TCM mass memory module incorporating telemetry and telecommand functionality for communication interface with ground station services.

After being assembled in under six months, the IOD-1 GEMS in-orbit demonstrator (3U) was launched on 17 April 2019 by launch provider Nanoracks on an Antares rocket from NASA Wallops in Virginia, US. It was delivered to the International Space Station from where it will be placed into orbit. Orbital Mission Systems (OMS), the customer, expects to demonstrate miniaturised weather observation technology proving additional data to complement information from larger institutional satellites. OMS plans a constellation of such satellites as part of its GEMS (Global Environmental Monitoring Satellites) programme. It was also the first spacecraft commissioned by the UK’s Satellite Applications Catapult satellite to be deployed as part of the in-orbit demonstration (IOD) programme funded by Innovate UK and the UKSA (UK Space Agency) and led by the Catapult.

On 5 May 2019, York Space Systems in the US successfully launched its first S-Class satellite, which includes AAC’s Sirius avionics subsystems manufactured under a licence signed in FY18. These include on-board computers, mass memory and power system. Further S-Class satellites on order are due for launch in FY19 and FY20.

NSLSat-1 was launched on a Soyuz rocket from Vostochny Cosmodrome in Russia on 5 July 2019 and AAC Clyde Space has confirmed that subsequent contact had been made and all systems were performing as planned. The first 6U nanosatellite built by AAC Clyde Space, NSLSat-1 is the initial deployment in what is expected to be a constellation of 80 satellites for NSLComm of Israel. It provides high throughput data transmission at speeds of up to 3Gbps. It is an example of AAC Clyde Space’s ‘space as a service offering’ end-to-end mission service package that includes mission design, satellite manufacture and data supply.

In addition to these deployments, other notable milestones during Q219 include:

The signing of an agreement to deliver data according to the ‘space as a service’ concept to ORBCOMM Inc of the US, valued at c SEK54m over five years.

SEK4.7m order from Loft Orbital Solutions of the US for Sirius avionics for its Payload Interface & Control Unit for expected delivery in H219.

Exhibit 2: Financial summary

SEKm

2017

2018

2019e

2020e

Year end December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Net sales

 

 

13.3

77.9

120.8

200.4

Own work capitalised and other operating income

4.2

11.3

5.2

5.2

Group income

17.5

89.2

126.0

205.7

EBITDA

 

 

(21.4)

(28.5)

0.9

33.6

Operating Profit (before amort. and except).

(21.7)

(28.8)

0.5

33.0

Intangible Amortisation

(5.6)

(8.0)

(9.0)

(5.6)

Exceptionals

0.0

(6.4)

(5.3)

(5.3)

Other

0.0

0.0

0.0

0.0

Operating Profit

(27.3)

(43.3)

(13.8)

22.1

Net Interest

(0.0)

(0.3)

0.1

0.2

Profit Before Tax (norm)

 

 

(27.3)

(37.2)

(8.4)

27.7

Profit Before Tax (FRS 3)

 

 

(27.3)

(43.6)

(13.7)

22.3

Tax

(0.0)

0.9

0.7

(2.2)

Profit After Tax (norm)

(27.3)

(36.4)

(8.0)

24.9

Profit After Tax (FRS 3)

(27.3)

(42.7)

(13.0)

20.1

Average Number of Shares Outstanding (m)

36.4

75.4

85.5

96.2

EPS - fully diluted (SEK)

 

 

(0.75)

(0.48)

(0.09)

0.26

EPS - normalised (SEK)

 

 

(0.75)

(0.48)

(0.09)

0.26

EPS - (IFRS) (SEK)

 

 

(0.7)

(0.6)

(0.2)

0.2

Dividend per share (SEK)

0.0

0.0

0.0

0.0

EBITDA Margin (%)

-161.1

-36.6

0.8

16.7

Operating Margin (before GW and except.) (%)

-163.3

-37.0

0.5

16.5

BALANCE SHEET

Fixed Assets

 

 

16.3

396.8

384.4

376.4

Intangible Assets

15.9

392.6

380.4

372.8

Tangible Assets

0.4

4.2

4.0

3.6

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

46.0

46.4

142.2

192.9

Stocks

1.9

6.5

10.0

16.3

Debtors

3.6

10.1

18.1

30.1

Cash

37.2

12.2

87.5

106.5

Other

3.3

17.5

26.6

40.1

Current Liabilities

 

 

(16.4)

(25.8)

(41.1)

(63.9)

Creditors

(14.4)

(25.8)

(41.1)

(63.9)

Short term borrowings

(2.0)

0.0

0.0

0.0

Long Term Liabilities

 

 

(1.0)

(2.5)

(1.1)

(0.9)

Long term borrowings

0.0

(1.2)

0.1

0.2

Other long term liabilities

(1.0)

(1.3)

(1.2)

(1.1)

Net Assets

 

 

44.9

414.9

484.4

504.6

CASH FLOW

Operating Cash Flow

 

 

(24.9)

(40.3)

(4.2)

25.2

Net Interest

(0.0)

(0.3)

0.1

0.2

Tax

(0.0)

0.8

0.4

(2.8)

Capex

(4.0)

(1.6)

(2.3)

(3.4)

Acquisitions/disposals

(9.5)

(376.2)

0.0

0.0

Financing

0.1

393.5

82.5

0.0

Dividends

0.0

0.0

0.0

0.0

Net Cash Flow

(38.4)

(24.1)

76.5

19.2

Opening net debt/(cash)

 

 

(73.5)

(35.2)

(11.0)

(87.6)

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

0.1

(0.0)

(0.0)

0.0

Closing net debt/(cash)

 

 

(35.2)

(11.0)

(87.6)

(106.7)

Source: Company reports; Edison Investment Research estimates


General disclaimer and copyright

This report has been commissioned by ÅAC Microtec and prepared and issued by Edison, in consideration of a fee payable by ÅAC Microtec. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Frankfurt +49 (0)69 78 8076 960

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by ÅAC Microtec and prepared and issued by Edison, in consideration of a fee payable by ÅAC Microtec. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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