AAC Clyde Space — Extending its world view

As part of its strategic growth plan, AAC Clyde Space has consistently identified targeted M&A in the New Space segment as a significant potential driver, expanding technical capability and broadening the geographic footprint with a major focus on establishing a manufacturing presence in the important US market. A bit like waiting for launches, there can be periods of inactivity and suddenly two deals appear one after the other. The proposed acquisitions of SpaceQuest in the US for an initial SEK75.6m and Hyperion Technologies in the Netherlands for an initial SEK22.8m meet both the commercial and technological strategic criteria.

Both companies are privately owned, and the deals have earnout agreements and shareholder lock-up arrangements on shares issued to the vendors, who will remain with the enlarged group. Following completion, we expect the businesses to add profitable, established revenue streams that should accelerate the attainment of positive EBITDA for the enlarged group to FY21.

As with the existing operations in Sweden and Scotland, SpaceQuest and Hyperion Technologies will be wholly owned subsidiaries of AAC Clyde Space AB with localised operational management and group-level business development, R&D and financial management. The enlarged AAC Clyde Space will have four manufacturing locations in Uppsala, Glasgow, Fairfax and Delft.

The complementary nature of the product offerings should allow AAC Clyde Space to extend the range of in-house subsystems and components it develops, manufactures and integrates into its EPIC CubeSat platforms. In addition, the deals provide a significant expansion of the global footprint of AAC Clyde Space and, importantly, provides a US manufacturing base for its EPIC CubeSat platform range. US customers represent the largest market for space services including the small satellite segment, and US-manufactured platforms are a requirement for US government licences. As SpaceQuest already operates its own small constellation of satellites, it also directly strengthens AAC Clyde Space’s Space-as-a-Service (SaaS) offering.

The deals partly address one of the lessons for space equipment manufacturers arising from the pandemic as well as other industries – securing the supply chain. Vertical integration bringing more subsystem capabilities within the group should help to mitigate some of the project delays seen this year.

AAC Clyde Space has reached an agreement to purchase 100% of SpaceQuest, one of the pioneers of the New Space segment, having been founded in 1994. It currently employs 11 people at its facility in Fairfax, Virginia. The consideration is to be settled through the issue to the owners of 24m shares at SEK3.15 per share, but the consideration may vary depending on share price development until the acquisition is completed. There is an additional revenue-based earnout agreement for FY21, FY22 and FY23 amounting to a maximum of $0.9m, $1.0m and $1.3m, respectively. FY21 and FY22 are to be settled in shares and the FY23 earnout will be paid in cash. Immediately following completion, the SpaceQuest owners will own 16.3% of the enlarged AAC Clyde Space share capital (before earnouts, including shares issued for the capital raise and the acquisition of Hyperion – see below) and will be subject to a lock-in agreement for each third of their holdings for periods of six,12 and 18 months.

The deal is subject to shareholder and regulatory clearance, including CFIUS (the Committee on Foreign Investment in the US) approval. AAC Clyde Space shareholders’ approval will be sought at an EGM to be held on 5 November 2020, and we expect the deal to complete around the end of the year allowing for the regulatory approvals process.

With over 25 years of design and manufacturing experience, SpaceQuest has the longest space heritage of any of the four proposed AAC Clyde Space subsidiaries. It has built and deployed 20 satellites on 12 launches over that period. It was also a pioneer in satellite-based AIS (automatic identification system) data collection, and today operates a small LEO (low earth orbit) constellation of eight AIS satellites with a network of ground stations, selling global data to customers worldwide.

The company manufactures its own 25cm cube microsatellite (AprizeSat) and offers a 3U CubeSat platform. It also manufactures a range of subsystems and components including antenna systems, radios & modems, attitude determination and control subsystems as well as AIS payloads. SpaceQuest has been flying AIS payloads and collecting data since 2009.

It also has an extensive customer base including the Canadian Space Agency, NASA, US Navy and US Air Force, corporates such as LeoStella, ORBCOMM, Iceye and Northrop Grumman as well as universities. These extend AAC Clyde Space’s relationships to new clients as well as increasing engagement with existing customers.

In 2019, revenues grew by 9% to $2.6m (SEK24m) with EBITDA of around $0.85m (SEK7.8m, 33% margin). The company has a long history as a highly profitable company. Despite the pandemic, in H120, SpaceQuest achieved sales of $0.9m (SEK8m) with EBITDA of c $0.18m (SEK1.6m, margin 20%). Revenue for 2020 is estimated at $2.5m (SEK22.5m).

In our opinion, the positioning and development of SpaceQuest closely resembles the proposed strategic template for growth of AAC Clyde Space. The addition of its highly experienced senior management team in the US led by the founder, Dr Dino Lorenzini, brings many complementary skills to the enlarged group gained in the largest and most important regional market for small satellites.

As announced on 7 October 2020, AAC Clyde Space is to purchase all of the shares in the privately owned Hyperion Technologies based in Delft in the Netherlands. The shareholders of Hyperion Technologies will receive 7.755m new shares worth c SEK21.7m (at SEK2.8/share) on completion, as well as c SEK1.1m in cash. There is an additional cash earnout for up to c SEK1.1m based on FY21 performance to be paid in Q122. Hyperion shareholders will own approximately 5.3% of the shares in the enlarged AAC Clyde Space group (before earnouts, including shares issued for the capital raise and the acquisition of SpaceQuest) and will be subject to a lock in agreement for each third of their holdings for periods of six,12 and 18 months. The deal is subject to approval by regulatory authorities and AAC Clyde Space shareholders at an EGM to be held on 5 November 2020.

Hyperion was founded in 2013 and currently employs 15 people. It specialises in the development and supply of high-performance, miniaturised components for small spacecraft including propulsion systems. It is noted for its expertise in attitude and orbit control subsystems, Products include ADCS (altitude determination and control systems) that include state-of-the-art star tracker and related systems. The Hyperion engineering team has been developing optical communications technologies as part of a Dutch consortium, using laser technology to open up extremely high-speed communication between satellite and ground station as well as between satellites in orbit. All of these are complementary to AAC Clyde Space’s existing subsystem capabilities. It has also developed and supplies a 12U nanosat platform. The acquisition extends AAC Clyde Space’s technical capability and offering as well as adding to the customer base. The deal also extends the footprint in the European Union, with the Delft facility close to another leading European space engineering university.

Hyperion has been growing rapidly with revenues up 48% in 2019 to €1.2m and positive EBITDA of c €0.1m (8% margin) before non-recurring costs of €0.2m. In H120, revenues were €0.7m and EBITDA was €0.2m, a margin of 28%.

The company has raised capital of SEK52m before costs, as announced on 15 October 2020. 19.2m new shares were issued through an accelerated bookbuild at a price of SEK2.70/share and the new shares starting trading on the Nasdaq First North Market in Stockholm the following day. The discount to the closing price was just 4.4% due to strong demand, and some of the excess was satisfied by a block trade disposal of 10.56m shares involving two shareholders. Fouriertransform has sold its entire holding in line with a previously announced intention and its legal obligation. In addition, Craig Clark, the group CSO and founder of Clyde Space, sold part of his holding and has agreed a six-month lock-up for his remaining shares. In both the placement and block trade, the buyers were a group of around 40 qualified private individual investors and family offices

The total number of shares in issue currently increases to 115.45m, and this will expand to 147.20m once the two deals complete. We assume the vendor shares do not count as free float, so we estimate the free float post the acquisitions would be 74%.

We expect AAC Clyde Space to end FY20 with adjusted net cash balances (excluding leases) of SEK71.1m before consolidation of Hyperion and SpaceQuest. The strengthened balance sheet will allow AAC to extend its business development capacity, develop a new highly integrated, software-defined platform and invest in expanding the highly profitable SaaS business line.

As is our normal practice, we do not include acquisitions in our models until they complete. Our published estimates are currently for the ongoing activities of the group based in Glasgow and Uppsala, where our estimates have been revised down to reflect the latest comments from management that were announced on 18 September 2020. Management indicated that sales for FY20 were only expected to be around SEK100m, representing growth of 50%.

In response to the latest information, we have lowered our earnings expectations for the existing group as shown in Exhibit 1. Our assumption is that the platforms business of Clyde Space in Glasgow is likely to be more affected than the subsystems activities of the two businesses. As we expect project work to recover rapidly next year, our revenue and earnings reductions are more subdued.

Although FY20 net sales still reflect strong annual growth, our lower net sales are some SEK17m below our previous estimate of SEK113.9m, and we have reduced our revenues estimates accordingly, with a consequent drop through on earnings at all levels. The reduction is mainly due to the COVID-19 impact on ordering patterns at customers, and supply chain disruption delaying project milestones and deferring revenue recognition. The company started the year with a backlog of SEK88m for delivery in 2020. While some of this may have slipped, the implication is that only net SEK12m was added to the orders on hand for FY20 since the start of the year. Management says the New Space market and interest in AAC Clyde Space’s products remain strong and that after the COVID-19 lull in the summer it is seeing a significant pick-up in activity for Q420 and Q121.

Despite the lowering of growth expectations this year, the total order backlog at H120 of SEK164m was robust, down just 3% on the start of the year and despite trading SEK42m of H1 revenues. Order intake has remained relatively positive in the year to date, despite the lull due to the pandemic, and we expect further bookings through the remainder of the year. As a result, we expect the increased activity from Q420 to continue through 2021. While the estimated level of FY21 sales may not yet lead to positive EBITDA for the ongoing business, we think the trend remains in the right direction with the possibility of achieving a break-even run rate later in FY21.