AAC Clyde Space — Hyperion augments organic progress

Sequentially AAC Clyde Space seems to be making good progress. Q220 saw the main effect of the pandemic-related disruption to the supply chain and order intake and lower assembly work at customers deferring sales of subsystems. Q320 saw a healthy return to revenue growth, which drove an improvement in profitability despite lower gross margins of 46% (Q319 57%) due to a lower mix of standard products.

The key highlights of Q320 were:

Major orders received in Q320 were:

AAC Clyde Space’s shares also began trading on the American OTCQX market during Q320.

On 11 November 2020, the company announced a public private partnership project in collaboration with the UK Space Agency and ESA (European Space Agency). Initially worth €19.7m (SEK202m) to develop an innovative satellite constellation and data service called xSPANCION, the project is to be delivered in two phases. The initial design phase worth SEK18.4m will run until mid-2021, adding some SEK9m to the current backlog. The second phase will see AAC develop, build and supply 10 satellites by the end of 2023. The project requires the development of new technologies for the future constellation, such as for propulsion, intersatellite links, safe and secure transmission of data and a customer interface. Outside the project, AAC Clyde Space will enter into customer service agreements for data delivery from the constellation.

The company has also announced the acquisitions of Hyperion Technologies in the Netherlands for SEK21.2m and SpaceQuest in the US for c SEK75.6m (see our note). The Hyperion acquisition completed in November and following the receipt of US regulatory approvals the SpaceQuest deal should complete later this month.

The company also successfully raised SEK52m of gross proceeds via a directed share issue that accompanied the announcement of the deals. The new funding should support both organic investment and the pursuit of other M&A opportunities in the New Space segment to further strengthen the groups capabilities and IP.

Excess demand from the directed offer was partially fulfilled by a block sale by two significant shareholders also sold down their stakes. Fouriertransform had previously announced its intention to sell in line with its internal strategy and founder of Clyde Space and group CSO, Craig Clark also sold part of his holding. He has agreed a lock-up period of six months for the remainder of his stake.

The momentum seen in Q320 is expected to continue in Q420 as major projects are executed as they progress towards launch next year. The group continues its business development efforts with customers regard new prospects for satellites, subsystems and data service contracts.

Hyperion will make an initial seven-week contribution, although it will be relatively modest. We expect a sales contribution of around SEK20m in FY21 with a positive contribution to EBITDA. We have not included SpaceQuest as the deal is not completed. It is likely to also make a small incremental revenue contribution in the current year and should be enhance earnings when completed.

The acquisitions add technical capabilities in onboard data computers, propulsion technologies and laser communication development programmes, as well as manufacturing capacity and ground stations. When completed the SpaceQuest will add constellation operation and data services delivery experience.

As a result of the strong progress in Q320, we have raised our estimates modestly for FY20 for the ongoing group and now expect sales of just under SEK100m, with a SEK2m contribution from Hyperion. Overall, our sales estimates rise 5% in FY20 and by 11% in FY21.

Although management has previously deferred its expectation of positive EBITDA and operating cashflow being achieved in FY21, our estimates do edge closer largely as a result of the addition of Hyperion. We suspect that once SpaceQuest makes an additional contribution, group EBITDA may well move into profit next year.

The New Space market has been developing over at least the last 20 years. Essentially, New Space involves the funding of space opportunities by privately backed businesses or investors, as opposed to space agency and other institutionally supported programmes. The opportunities lie across the space segments ranging from suborbital activities to deep space exploration. All areas of the industry from ground equipment and infrastructures to mission design, network development, production, launch, operational services and support have seen significant increases in commercial investment. The result has been the emergence of a community of new aerospace companies of various scales seeking to exploit the growing opportunities through innovation and disruptive technologies that transform the affordability of space endeavours.

AAC Clyde Space is a leading player in the small satellite segment (<500kg), more specifically for nanosatellite and microsatellites up to 50kg. It expects the overall small satellite market to be worth around $42bn between 2019 and 2028, with its addressable market being a smaller proportion of this despite the higher numbers of satellites being launched.

Just under 1,200 nanosatellites have been launched over the last two decades, of which around 775 remain operational. Almost half of these have been deployed by just two LEO constellations for Planet Labs (c 330 nanosatellites) and Spire. Following a relatively quiet year in 2019 with just 188 launches, the number of deployments is expected to more than double in the current year according to Eric Kulu, Nanosats Database, www.nanosats.eu and rise to over 500 in 2023.

The nanosatellite solutions being offered by the AAC Clyde Space provide lower capital intensity, asset-light access for customers who merely want data to process. The proposition of utilising a low-cost network forms the basis of the Saas offering by AAC Clyde Space, whether the customer or AAC Clyde ultimately own the satellite. Amongst its immediate peers AAC Clyde Space is the first to have SaaS under contract with its first two platforms being launched in 2021. It already has several SaaS customer projects in the order book and SpaceQuest operates a constellation of five slightly larger platforms offering data services.

Management believe the initiation of its SaaS activity makes it unique in the sector.

Since the arrival of Luis Gomes as CEO in May 2019, AAC Clyde Space has been refining its strategy to grow in the New Space market. The evolved strategic roadmap now has two clear areas of focus: improve and grow. Although self-evident, the rationale is to improve and extend existing capabilities and IP and to grow organically through market penetration, expansion of the capabilities (including SaaS) and extending the international reach. The two recent acquisitions clearly fit these criteria, complementing the organic evolution of the existing Swedish and Scottish operations.

The key elements to deliver the strategy are:

Successful execution of the strategy should see a strong development of SaaS over the next few years, a substantial increase in platform volume production and strong growth in subsystem sales to third parties.

AAC Clyde Space management see SaaS as a key driver to the success of the group. Essentially turnkey contracts with AAC designing building and operating satellites that may be owned by customers or retained as proprietary platforms, much of the total project funding is received in advance of launch (normally 30–50%). Recurring service revenues start from launch typically some two years after the initial contract. Of course, the in-service lives of LEO satellites are typically only around five years, although replenishment satellites should be required to maintain service and add capabilities as improved technologies become available. The low capital cost nature of nanosatellite is clearly an advantage in this regard.

As service provision becomes the dominant revenue stream over the next few years, we would expect to see substantial positive progression of earnings and cash flows.