AAC Clyde Space — SDaaS sales set to grow

Industrials

AAC Clyde Space

SDaaS set to grow

FY22 results

Aerospace and defence

6 March 2023

Price	SEK1.50
Market cap	SEK307m
SEK/$1, SEK/£1
Adjusted net cash (SEKm) at 31 December 2022 (excluding leases of SEK16.5m)		52.1

Shares in issue		204.8m
Free float		89%
Code		AAC

Primary exchange	Nasdaq First North Premier Growth Market
Secondary exchange		OTCQX

Share price performance

%	1m	3m	12m
Abs	(0.7)	(2.3)	(30.9)
Rel (local)	2.1	(7.6)	(32.8)

52-week high/low

SEK2.37

SEK1.22

Business description

Headquartered in Sweden, AAC Clyde Space is a world leader in nanosatellite end-to-end solutions, subsystems, platforms, services and components, including supply to third parties. It has production and development operations in Sweden, Scotland, the Netherlands and the United States, as well as a start-up in Africa.

Next events

FY22 report and accounts	27 April 2023
AGM and Q123 results	25 May 2023

Analysts

Andy Chambers	+44 (0)20 3077 5700
Natalya Davies	+44 (0)20 3077 5700

industrials@edisongroup.com

Edison profile page

AAC Clyde Space is a research client of Edison Investment Research Limited

AAC Clyde Space continued to experience supply chain delays in Q422, which further constrained performance. An aborted acquisition also incurred an exceptional cost that depressed statutory profits. However, despite project delays, order intake has remained healthy. With an element of deferred revenue recovery adding to FY23 plans, management expects substantial growth, generating positive EBITDA and operating cash flow.

Year end	Revenue (SEKm)	PBT* (SEKm)	EPS* (SEK)	DPS (SEK)	P/E (x)	Yield (%)
12/21	180.0	(27.0)	(0.14)	0.0	N/A	N/A
12/22	196.7	(23.8)	(0.11)	0.0	N/A	N/A
12/23e	355.1	0.6	0.00	0.0	N/A	N/A
12/24e	483.6	44.9	0.21	0.0	7.1	NA

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY22 constrained by supply chain delays

Supply chain issues continued into Q422, with supplier delays compromising anticipated delivery of subsystems and delaying projects. Despite a healthy seasonal pick-up in Q422 revenues to SEK60.3m (Q421: SEK62.1m), these were some SEK13m short of management expectations from Q322. The impact was most apparent in sales of Space Products from AAC Clyde in Sweden and Space Missions work at Clyde Space in Glasgow. The more recent acquisitions made healthy sales progress in both Q422 and for FY23, with strong EBITDA margins at SpaceQuest (29%) and Omnisys (18%). In addition, the group’s cash performance was better than expected, with a year-end net cash balance of SEK52.1m.

Medium- and long-term growth targets remain

While the supply chain issues appear to be persistent, management has initiated mitigating actions such as inventory buffers, which should moderate some of the shortages. We expect space data as a service (SDaaS) revenue to accelerate sharply in 2023 and 2024 as more AAC-owned and operated constellation satellites are deployed by both SpaceQuest and Clyde Space, with Kelpie-1 deployed on 3 January for ORBCOMM. As AAC Clyde Space converts its existing backlogs into space assets and data revenues, new order intake is likely to increase in importance to replenish Space Missions and Space Products workloads, as well as developing the stream of data sales.

Valuation: Earnings metrics of increasing relevance

We introduce our FY24 estimates and expect strong progress towards the management revenue target of SEK500m. As higher-margin SDaaS sales accelerate, so should profitability and cash generation. As a result, more traditional earnings metrics should become more meaningful, with a single-digit P/E multiple in FY24 looking undemanding. Our capped DCF has been rolled forward to a 2023 basis and now returns a value of SEK8.0/share (SEK7.2/share previously), as start up cash outflow is replaced by stronger future generation.

FY22 results constrained by supply chain issues

AAC‘s performance in FY22 was constrained by persistent supply chain issues that continued to delay projects and defer revenue recognition into the current year. These continued in Q422, leading to a shortfall against expected revenues indicated by management at Q322 for SEK210m in FY22. With operating costs, depreciation and amortisation increasing broadly in line with our estimates, the revenue shortfall dropped almost directly through to adjusted EBITDA losses (excluding exceptional M&A costs) and adjusted EBIT losses (before acquired intangible amortisation). The reported EBITDA loss was further increased by the exceptional cost of SEK8.6m for an acquisition that did not proceed.

■

FY22 revenues were up just 9% at SEK196.7m (FY21: SEK180.0m), which included a full year contribution from Omnisys compared to eight months and the start-up of AAC Space Africa in Q221. Both AAC Clyde in Sweden and Clyde Space in Glasgow were affected by supplier issues and project delays, with revenues falling 16% and 5% respectively. AAC, in particular, had a challenging Q422, with revenues falling to SEK2.9m (FY21: SEK 16.2m) as component shortages deferred product deliveries to customers. Clyde Space was up in Q422 at SEK22.0m (Q421: SEK18.4m), although the business mix was unusually skewed to space products due to the deferral of Space Missions projects into FY23. Both are expected to recover deferred revenues and achieve strong underlying growth in FY23.

■

The acquisitions made in the last few years (Hyperion, SpaceQuest and Omnisys) increased aggregate revenues by 29% to SEK99.3m (FY21: SEK77.0m). All three made healthy progress, notably SpaceQuest in the US, where revenues grew 63%. The South African start-up, AAC Space Africa, made a first full year SEK3.6m contribution.

Exhibit 1: AAC Clyde Space FY22 results summary

Year to Dec (SEKm)	FY19	FY20	FY21	FY22	% change FY22 vs FY21
By Business
AAC	26.4	28.0	41.4	34.8	(16.1%)
Clyde	40.1	68.0	61.5	59.2	(3.8%)
Hyperion		2.4	13.9	15.5	11.4%
SpaceQuest		0.0	19.2	31.4	63.3%
Omnisys			43.8	52.2	19.2%
AAC Space Africa				3.6
Total group net sales	66.4	98.4	180.0	196.7	9.3%
By activity
SDaaS		3.1	12.8	16.9	31.9%
Space Missions	20.4	51.6	57.5	36.2	(37.1%)
Space Products	45.9	43.7	108.2	139.8	29.2%
Licence & royalties income	0.1	0.0	1.4	3.8	172.4%
Total group net sales	66.4	98.4	180.0	196.7	9.3%
Other operating income	11.2	12.7	17.2	25.2	46.4%
Own work capitalised	3.0	8.3	13.6	21.8	59.8%
Total group income	80.6	119.5	210.8	243.7	15.6%
Raw materials & subcontractors	(27.4)	(50.3)	(83.2)	(82.8)	(0.5%)
Personnel costs	(51.8)	(59.4)	(106.0)	(140.8)	32.8%
Other external expenses	(23.7)	(19.5)	(28.8)	(43.4)	50.7%
Other operating expenses	(5.0)	(7.8)	(5.2)	(6.7)	29.2%
EBITDA (company adjusted*)	(27.3)	(17.5)	(12.4)	(30.0)	141.7%
EBIT (underlying**)	(37.4)	(25.5)	(22.8)	(41.7)	82.4%
Underlying PBT	(38.2)	(26.7)	(27.0)	(23.8)	(11.9%)
EPS - underlying (SEK)	(0.45)	(0.26)	(0.14)	(0.11)	(20.4%)
Adjusted net cash	51.6	62.2	95.5	52.1	(45.4%)

Source: Company reports. Note: *Before exceptional items. **Before exceptionals and PPA intangible amortisation.

■

The adjusted EBITDA loss increased to SEK30.0m (FY21 loss: SEK12.4m) and reported EBITDA increased to SEK38.6m (FY21 loss: SEK14.9m). The FY22 adjustment comprises the SEK8.6m costs incurred for an aborted acquisition (FY21 aggregate: SEK2.7m). The increased adjusted EBITDA loss resulted from under-recovery of the ongoing investment in personnel costs and infrastructure to support future growth as revenues were deferred.

Exhibit 2: AAC Clyde Space adjusted EBITDA by subsidiary

SEKm	Q421	Q422	FY21	FY22
AAC Clyde Space	(0.1)	(0.5)	(11.8)	(12.1)
Clyde Space	1.6	(15.6)	(10.7)	(33.6)
Hyperion	(1.7)	1.0	0.8	0.7
SpaceQuest	0.4	2.3	5.2	9.3
Omnisys	1.7	2.6	5.4	9.4
AAC Space Africa	(1.1)	(1.2)	(1.3)	(3.6)
Total	0.7	(11.5)	(12.4)	(30.0)

Source: Company reports

■

Clyde Space was particularly badly hit by project deferrals, with its FY22 loss almost trebling, while AAC Clyde in Sweden modestly increased its loss. Hyperion maintained its contribution and there was strong progress at both SpaceQuest and Omnisys. AAC Space Africa incurred an initial EBITDA loss of SEK1.3m.

■

The group’s net financial income in Q422 and for FY23 benefited from restatements of additional considerations for both SpaceQuest and Omnisys under IAS 32 and IFRS 9. As a result, net financial income was SEK10.7m in Q422 and SEK17.9m for the full year.

■

The group continued to invest in future growth opportunities, with SEK40.9m invested in fixed assets during the year of which SEK27.7m was in intangible assets, primarily development costs. We expect the level of investment to continue to rise as the number of AAC-owned and operated satellites grows for an increasing number of constellations.

■

The remaining third of the Omnisys warrants were converted as expected during Q422, with 5.78m shares issued. The share count in AAC Clyde Space is therefore 204.8m.

Transitioning to SDaaS delivery

While FY22 proved to be a more challenging year than expected, the company continues to progress its strategy and FY23 should see the deployment of a number of self-owned and operated low Earth Orbit data acquisition nanosatellites that we expect to transform the financial dynamics of the group. Some of these will be additional satellites for SpaceQuest’s existing fleet incorporating updated and upgraded technologies. In addition, the first VDES satellites should be launched during 2023, which should stimulate high-margin data sales to third parties within months of deployment.

Order development remains positive. In Q422, order intake included:

■

An agreement to progress into the final phase of the xSPANCION project, the demonstration phase. This will begin with a phase 3A, focused on scaling constellation production capacity and delivering data services to users. The value of this phase is c SEK35.8m, with the UK Space Agency contributing half.

■

Following a SEK11.6m order for a Starbuck power system received in Q322, the company received a follow-on order worth SEK10.9m for a Sirius computer from Astroscale, for inclusion in its end-of-life space debris removal service, ELSA-M. A further order was subsequently received for additional hardware worth c SEK7.7m, taking the total content to c SEK30.2m.

■

A five-year contract worth c SEK6.2m to maintain radiometers in the telescopes of the Atacama Large Millimeter/submillimeter Array in Chile.

■

A one-year extension contract to operate the SeaHawk satellite, worth c SEK1.9m, with an option for a further two-year extension.

■

A c SEK8.8m order from Intuitive Machines for subsystems for its IM-3 mission. It is AAC’s third order for the lunar landing mission.

Momentum has continued into FY23, with satellites launched including the first Kelpie-1 satellite for ORBCOMM that will provide AIS (automatic identification system) data under an exclusive SDaaS contract to support its business. The loss of Amber-1 on the failed UK launch in early January has no financial impact on AAC. New business won includes a follow-on order worth SEK2.6m from Space Forge, which also lost a demonstration platform on the Virgin launch. The second platform should be deployed in H223.

On 1 March 2023 AAC Clyde Space announced it had shipped the first of three 6U EPIC VIEW satellites for the delivery of hyperspectral imagery data to Wyvern of Canada under a c SEK105m four-year SDaaS contract with annual extensions thereafter. Wyvern specialises in Earth observation and will first offer the data to the agricultural sector to help optimise yields and detect invasive plants, pests and changes in soil makeup. Launch is planned for April 2023 with data delivery commencing in Q223. The further two satellites are also expected to be launched in FY23. AAC Clyde Space will own and operate the satellites.

AAC Hyperion is part of a consortium that has been selected by the European Defence Fund to develop a less than 100kg geosynchronous equatorial orbit (GEO) satellite for space situational awareness. The Naucrates satellite is to be designed so as not to be trackable from ground radar, optical telescope or radio telescope and will be placed in orbit beyond the normal GEO satellites.

Other orders already won this year include:

■

A contract worth c SEK6.1m for reaction wheels to be used on a number of small satellites from a US blue-chip company.

■

AAC SpaceQuest is to procure and resell c SEK16.6m of products to another US blue-chip company over the next 12 months.

■

A significant order for satellite subsystems worth c SEK23.8 m from a US development company supplying spacecraft and other multi-mission systems to be delivered in FY23.

The order backlog stood at a record SEK427.8m at the year end, up by 5%, albeit slightly inflated due to the delivery delays.

Exhibit 3: AAC Clyde space order backlog development

Source: Company reports, Edison Investment Research estimates

With an element of catch-up from deferred FY22 projects and systems deliveries, we expect the backlog to support our growth expectations for the group. These appear to have been further underpinned by the recent order activity. We expect to see additional healthy order intake in the current year, with the newly deployed satellites providing verification of the SDaaS offering.

Our FY23 revenue expectations are broadly unchanged at SEK355m, with high-margin SDaaS revenues expected to grow sharply. In line with management expectations, our EBITDA is positive and we expect operating cash inflow to increase, albeit investment to support growth is likely to lead to a FY23 reduction in net cash.

We also introduce our forecasts for FY24, which see revenues approaching the previously indicated management expectation of SEK500m. With cost base investment having already been initiated, we expect costs to rise at a slower pace than sales, providing significant operating leverage. In turn, we expect that to drive net cash flow into positive territory in FY24, despite ongoing increases in investment to support growth.

Exhibit 4: AAC Clyde Space estimates revisions

SEKm	2022e	2022		2023e			2024e
	Prior	Actual	% change	Prior	New	% change	New
By Business
AAC	49.6	34.8	(29.9%)	72.3	66.0	(8.7%)	89.3
Clyde	56.1	59.2	5.4%	130.1	145.9	12.2%	207.1
Hyperion	14.6	15.5	6.1%	19.0	20.2	6.1%	24.2
SpaceQuest	31.7	31.4	(1.0%)	41.3	40.8	(1.0%)	53.1
Omnisys	57.0	52.2	(8.3%)	74.1	67.9	(8.3%)	84.9
AAC Space Africa	5.0	3.6		20.0	14.3		25.0
Total group net sales	214.1	196.7	(8.1%)	356.7	355.1	(0.4%)	483.6
By activity
SDaaS	19.0	16.9	(10.9%)	55.0	55.0	0.0%	101.0
Space Missions	53.7	36.2	(32.6%)	113.6	74.7	(34.2%)	88.0
Space Products	137.7	139.8	1.6%	186.1	225.4	21.1%	294.6
Licence & royalties income	3.8	3.8	0.0%	2.0	0.0	(100.0%)	0.0
Total group net sales	214.1	196.7	(8.1%)	356.7	355.1	(0.4%)	483.6
Other operating income	17.3	25.2	45.9%	7.3	7.3		3.0
Own work capitalised	22.5	21.8	(3.2%)	37.2	38.0		58.3
Total group income	253.9	243.7	(4.0%)	401.2	400.4	(0.2%)	540.0
Raw materials & subcontractors	(85.6)	(82.8)	(3.3%)	(149.8)	(149.1)	(0.4%)	(200.7)
Personnel costs	(136.2)	(140.8)	3.4%	(165.0)	(165.4)	0.2%	(190.3)
Other external expenses	(42.4)	(43.4)	2.4%	(60.6)	(60.4)	(0.4%)	(72.5)
Other operating expenses	(5.0)	(6.7)		0.0	(3.6)		(4.8)
EBITDA (adjusted)	(15.3)	(30.0)	95.9%	25.7	21.9	(14.8%)	71.5
EBIT (Pre PPA amortisation)	(31.7)	(41.7)	31.2%	6.0	(2.5)	(141.0%)	42.8
Underlying PBT	(24.9)	(23.8)	(4.4%)	4.9	0.6	(87.8%)	44.9
EPS - underlying continuing (SEK)	(0.12)	(0.11)	(3.9%)	0.02	0.00	(87.8%)	0.21
DPS (SEK)	0.0	0.0		0.0	0.0		0.0
Adjusted net cash/(debt)	28.6	52.1	81.9%	(3.6)	25.5	N/M	61.2

Source: Edison Investment Research estimates

In terms of valuation, our capped DCF has been rolled forward to FY23. As we would expect given the nature of the company and its model, the increasing cash flows lead to a significant increment in value as weaker historic cash flow is replaced by stronger future generation. It is also aided by the better than expected starting net cash level, which adds more than SEK0.11/share to the value.

The sensitivity of the value to terminal growth rates and WACC is shown in Exhibit 5 below, with the WACC calculated at 12%. The returned value is SEK8.0/share (SEK7.2/share previously).

Exhibit 5: AAC Clyde Space DCF sensitivity to WACC and terminal growth rate (SEK/share)

WACC	7.0%	8.0%	9.0%	10.0%	11.0%	12.0%	13.0%	14.0%	15.0%
Terminal value growth rate
0%	15.9	13.5	11.6	10.2	9.0	8.0	7.2	6.5	5.9
1%	18.2	15.2	12.9	11.2	9.8	8.6	7.7	6.9	6.3
2%	21.6	17.4	14.5	12.4	10.7	9.4	8.3	7.4	6.7
3%	26.5	20.6	16.7	13.9	11.9	10.3	9.0	8.0	7.1

Source: Edison Investment Research estimates

We also note that the more traditional earnings-based metrics are becoming more meaningful, with a single-digit P/E anticipated for FY24 at an early stage of the growth trajectory.

Exhibit 6: Financial summary

	SEKm	2020	2021	2022	2023e	2024e
Year-end 31 December		IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Net sales		98.4	180.0	196.7	355.1	483.6
Own work capitalised and other operating income		21.1	30.9	47.0	45.3	56.3
Group income		119.5	210.8	243.7	400.4	540.0
EBITDA		(17.5)	(12.4)	(30.0)	21.9	71.5
Operating Profit (before amort. and except).		(22.2)	(21.9)	(40.5)	8.3	56.4
Intangible Amortisation		(3.3)	(0.9)	(1.2)	(10.7)	(13.6)
Exceptionals		(12.1)	(15.8)	(25.4)	(16.7)	(16.7)
Other		0.0	0.0	0.0	0.0	0.0
Operating Profit		(37.5)	(38.6)	(67.0)	(19.2)	26.1
Net Interest		(1.3)	(4.2)	17.9	3.1	2.1
Profit Before Tax (norm)		(26.7)	(27.0)	(23.8)	0.6	44.9
Profit Before Tax (FRS 3)		(38.8)	(42.8)	(49.1)	(16.1)	28.2
Tax		0.5	3.3	2.6	0.8	(1.4)
Profit After Tax (norm)		(26.4)	(24.9)	(22.5)	0.6	42.7
Profit After Tax (FRS 3)		(38.3)	(39.5)	(46.5)	(15.3)	26.8

Average Number of Shares Outstanding (m)		102.3	173.8	196.9	204.8	204.8
EPS - fully diluted (SEK)		(0.26)	(0.14)	(0.11)	0.00	0.21
EPS - normalised (SEK)		(0.26)	(0.14)	(0.11)	0.00	0.21
EPS - (IFRS) (SEK)		(0.37)	(0.23)	(0.24)	(0.07)	0.13
Dividend per share (SEK)		0.0	0.0	0.0	0.0	0.0


EBITDA Margin (%)		-17.8	-6.9	-15.2	6.2	14.8
Operating Margin (before GW and except.) (%)		-22.5	-12.2	-20.6	2.3	11.7

BALANCE SHEET
Fixed Assets		523.0	681.0	728.6	740.1	765.1
Intangible Assets		494.3	639.5	665.5	660.9	669.0
Tangible Assets		16.2	26.4	48.6	65.0	82.4
Right of use asset		12.5	15.1	14.6	14.1	13.7
Investments		0.0	0.0	0.0	0.0	0.0
Current Assets		113.3	193.4	152.8	142.7	191.6
Stocks		12.8	13.2	20.2	35.5	45.9
Debtors		9.5	23.0	24.5	39.1	50.5
Cash		62.4	96.1	52.1	25.5	61.2
Other		28.5	61.1	56.0	42.7	33.9
Current Liabilities		(56.1)	(129.2)	(170.2)	(198.5)	(245.1)
Creditors		(56.1)	(128.5)	(170.2)	(198.5)	(245.1)
Short term borrowings		0.0	(0.6)	0.0	0.0	0.0
Long Term Liabilities		(14.4)	(16.6)	(17.8)	(18.1)	(18.6)
Long term borrowings		(0.3)	0.0	0.0	0.0	0.0
Lease liabilities		(12.9)	(15.1)	(16.5)	(17.0)	(17.4)
Other long term liabilities		(1.2)	(1.5)	(1.2)	(1.2)	(1.1)
Net Assets		565.8	728.6	693.5	666.3	693.0

CASH FLOW
Operating Cash Flow		(14.6)	(37.3)	(13.7)	17.1	100.5
Net Interest		(0.2)	(0.2)	18.8	4.0	3.0
Tax		0.4	2.1	1.3	(0.0)	(2.2)
Capex		(17.2)	(29.2)	(40.9)	(48.6)	(66.4)
Acquisitions/disposals		(6.2)	2.6	(43.6)	0.9	0.9
Financing		49.2	94.1	33.3	0.0	0.0
Dividends		0.0	0.0	0.0	0.0	0.0
Net Cash Flow		11.4	32.0	(44.7)	(26.6)	35.8
Opening net debt/(cash) excluding lease liabilities		(51.6)	(62.2)	(95.5)	(52.1)	(25.5)
HP finance leases initiated		0.0	0.0	0.0	0.0	0.0
Other		(0.8)	1.3	1.3	0.0	0.0
Closing net debt/(cash) excluding lease liabilities		(62.2)	(95.5)	(52.1)	(25.5)	(61.2)
Net financial liabilities including lease liabilities		(49.3)	(80.4)	(35.6)	(8.5)	(43.8)

Source: Company reports, Edison Investment Research estimates

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London │ New York │ Frankfurt

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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