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Improving despite COVID constraints

AAC Clyde Space 2 September 2020 Update
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AAC Clyde Space

Improving despite COVID constraints

H120 results

Aerospace & defence

2 September 2020

Price

SEK3.22

Market cap

SEK310m

SEK11.59/£

Adjusted net cash (SEKm) at 30 June 2020

34.9

Shares in issue

96.2m

Free float

77%

Code

AAC

Primary exchange

Nasdaq First North Premier

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.9

(22.4)

(10.9)

Rel (local)

0.3

(29.1)

(22.9)

52-week high/low

SEK5.57

SEK2.64

Business description

Headquartered in Sweden, AAC Clyde Space 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

Q320 results

26 November 2020

Analyst

Andy Chambers

+44 (0)20 3681 2525

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

The performance in H120 was encouraging, especially given the global disruption caused by the pandemic in Q220. However, external challenges that arose, such as delays or deferral of orders by customers and disruption to the supply chain for key components and subsystems, are expected to weigh on H220 and could persist into FY21. We are reducing our net sales estimates for FY20 and FY21 by 12% and 24%, respectively, which still represents strong growth in both years, although deferring the estimate of positive EBITDA beyond FY21.

Year end

Revenue (SEKm)

PBT*
(SEKm)

EPS*
(SEK)

DPS
(SEK)

P/E
(x)

Yield
(%)

12/18

77.9

(38.3)

(0.50)

0.0

N/A

N/A

12/19

66.4

(38.2)

(0.45)

0.0

N/A

N/A

12/20e

113.9

(15.1)

(0.15)

0.0

N/A

N/A

12/21e

147.6

(13.8)

(0.14)

0.0

N/A

N/A

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

Improved performance despite COVID

Despite the impact of the pandemic, Q220 again delivered year-on-year improvements in revenues and at all earnings levels. Net sales grew by 34% to SEK42.4m for H120 and EBITDA losses reduced by 27% to SEK8.7m (H119: SEK14.2m). While internal operational performance during lockdown was robust, aided by mitigation measures, COVID-19 did lead to some supply chain disruption and customer order deferrals in the period, but nevertheless the performance remained encouraging. While the order backlog fell 10% to SEK164m (Q120: SEK182m), this was largely due to a stronger SEK, and before the recent SEK17m collaborative project with Saab and ORBCOMM.

Potential challenges for 2021

H220 activity levels appear encouraging given three anticipated platform deployments and ongoing work on five other satellites. However, delays to some new customer orders and project milestones caused by late receipt of subsystems and components from suppliers lead us to reduce our net sales assumptions for FY20 by 12% to SEK114m and increase the EBITDA loss to SEK5.0m. Although supported by the healthy H120 order backlog, management notes the challenges to achieving positive EBITDA in FY21 if current conditions persist. Much will depend on the timing of anticipated new projects. We have reduced our FY21 net sales estimates by 24% to SEK147.6m and deferred the achievement of positive EBITDA to FY22.

Valuation: Still in early growth phase

The company recently announced that its shares can now be traded on the OTCQX market in the US, providing more direct access for US investors, as one of AAC Clyde Space’s strategic goals is to increase its operational US presence. Our capped DCF, using zero terminal growth and a calculated WACC of just under 12%, currently returns a value of SEK6.0 per share on our reduced estimates.

H120 results

Despite the COVID-19 disruption, which saw management respond quickly with mitigation measures, the performance of the group in Q220 remained quite robust despite some disruption to supply chain and order intake. Increasing revenue recognition as projects progressed in the engineering and development phase in Q220 meant platform sales remained stable sequentially compared to Q120, whereas the impact of lockdown led to lower sequential sales of subsystems to customers as assembly work was curtailed. As in Q120, the business mix led to a reduction in Q220 gross margin to 47% (Q219: 58%), with more third-party systems deliveries and a lower share of standard products. Given the lockdown, the performance was quite robust. We expect some improvement as assembly activity levels increase in H220, both internally and at customers following the easing of lockdown measures, alongside an increasing flow of major project work as execution against orders in the backlog continues.

Exhibit 1: AAC Clyde Space H120 results summary

Six months to June (SEKm)

H119

H120

% change

By operation

AAC

13.8

14.8

7%

Clyde

17.9

27.6

54%

Net sales

31.7

42.4

34%

By activity

Satellite platforms

7.9

23.3

197%

Subsystems

23.7

19.1

(20%)

Licence income

0.1

0.0

(100%)

Net sales

31.7

42.4

34%

Other operating income

5.4

5.8

9%

Development work capitalised

1.5

4.9

231%

Group income

38.5

53.1

38%

Raw materials & subcontractors

(14.2)

(22.6)

59%

Personnel costs

(24.9)

(28.9)

16%

Other external expenses

(11.2)

(10.3)

(9%)

EBITDA adjusted

(11.9)

(8.7)

(27%)

Other operating expenses

(2.3)

(5.1)

120%

EBITDA reported

(14.2)

(13.7)

(3%)

Depreciation and amortisation

(6.6)

(5.7)

(13%)

EBIT

(20.8)

(19.5)

(6%)

PBT

(21.3)

(20.3)

(4%)

Net income

(21.1)

(20.0)

(5%)

EPS (SEK)

(0.29)

(0.21)

(28%)

Net cash at period end

72.9

34.9

(52%)

Lease liabilities

(12.7)

(9.3)

(26%)

Total net financial assets/(liabilities)

60.2

25.6

(58%)

Source: Company reports

Key highlights of H120 were:

Group net sales rose 34% to SEK42.4m (H119: SEK31.7m). Platform and satellites accounted for 55% of group net sales compared to 25% in H120.

Satellite platform revenues grew strongly at Clyde Space in Glasgow as projects progressed. It was partially offset by a 20% reduction in subsystems net sales, with 8% growth for AAC in Sweden to SEK14.8m (H119: SEK13.7m) more than offset by a SEK5.7m fall in subsystems sales at Clyde Space, which may be partly attributable to supply disruption as well as lower platform assembly work during lockdown.

Group EBITDA loss modestly reduced to SEK13.7m (H119: SEK14.2m) as a slightly increased loss at Clyde of SEK8.3m (H119 loss: SEK7.7m) was more than offset by a reduction in losses in Sweden to SEK5.5m (H119 loss: SEK6.4m).

The loss before tax of SEK21.3m was 4.4% lower than in H119.

Adjusted net cash (excluding leases) at H120 was SEK34.9m compared to SEK52.6m at the start of the year.

The order backlog of SEK164m was 3% lower than at the start of the year, in part reflecting deliveries during H120 broadly matching order intake as customers delayed order placement due to the pandemic. The primary reason for the decline from the record Q120 level of SEK182m was a strengthening of the Swedish krona of around 7% against both the US dollar and sterling.

Exhibit 2: AAC Clyde Space net sales split by segment activity, H120

Exhibit 3: AAC Clyde Space order backlog development (SEKm)

Source: Company reports

Source: Company reports

Exhibit 2: AAC Clyde Space net sales split by segment activity, H120

Source: Company reports

Exhibit 3: AAC Clyde Space order backlog development (SEKm)

Source: Company reports

Major orders received in Q220 were

SEK4m order from Moog of the US to develop solar panels for its Small Launch Orbital Manoeuvring Vehicle (SL-OMV), a CubeSat transit and deployment system.

A SEK2m order extension from Loft Orbital to include power systems for two satellites.

An order for a 6U satellite from Orbital Micro Systems worth SEK7m.

A SEK27m grant was received during the period from Scottish Enterprise to support the development of the next generation of nano and small satellites.

So far in Q220, the company has announced a collaborative project with Saab and existing customer ORBCOMM in the maritime communication domain worth SEK17m, of which SEK12.2m is a grant from the Swedish Transport Administration. This covers the initial EPIC 3U satellite in the project that is due to launch in mid-2022, which will be the first to be built in a new assembly facility being installed in Sweden, increasing AAC Clyde Space’s manufacturing capacity.

The company has also recently announced the receipt of a SEK3.7m order from two existing Japanese customers for Sirius avionics subsystems for delivery in Q420 and continuing the success of AAC’s supply to the country’s small satellite industry.

Outlook

While the order book remains relatively stable given the lumpy nature of the platforms business and the still relatively small revenue scale of AAC Clyde Space as a group, infill orders that we had anticipated to add to H220 revenues appear to have been at least partially deferred. Management still expects to book increased platform sales in H220 as three satellites are due for launch and work on five other platform projects gathers pace reaching milestones and allowing revenue recognition. We also anticipate strong recovery in subsystems sales from the depressed levels seen in Q220.

While we still expect strong growth in FY20 with acceleration in revenues through H220 as the New Space returns to the ‘new normal’ activity levels, we are reducing our group net sales estimates by 12%. Overall group income falls by just 2%, reflecting increased levels of capitalised development work, as well as increased other operating income primarily reflecting the R&D tax credit. With costs and cash flow remaining a key focus due to the pandemic, we expect only a modest 2% reduction in net income for FY20. We now anticipate a slightly higher level of adjusted net cash at the year end.

In addition, we note management’s comment that if current conditions persist, then FY21 guidance for positive EBITDA and operating cashflow in FY21 is at risk. As the stable order book is encouraging, we have therefore taken a more cautious approach to net sales growth, reducing group income by 19% against our previous estimate, with the group income growth rate reduced to 22% compared to 50% previously. We now expect a small EBITDA loss and negative net income compared to a previously positive contribution to retained profit.

Exhibit 4: AAC Clyde Space estimates revisions

Year to Dec (SEKm)

2020e

2021e

 

Prior

New

% change

Prior

New

% change

By Business

 

 

 

 

 

 

AAC

39.736

30.209

(24.0%)

50.420

38.762

(23.1%)

Clyde

90.1

83.7

(7.1%)

143.7

108.8

(24.3%)

Total group net sales

129.8

113.9

(12.2%)

194.2

147.6

(24.0%)

By activity

 

 

 

 

 

 

Satellite platforms

36.6

59.2

61.6%

76.9

78.1

1.6%

Subsystems

92.2

54.8

(40.6%)

115.2

68.5

(40.6%)

Licence & royalties income

1.0

0.0

(100.0%)

2.0

1.0

 

Total group net sales

129.8

113.9

(12.2%)

194.2

147.6

(24.0%)

Other operating income

2.0

10.0

400.0%

0.2

6.5

 

Own work capitalised

2.9

7.5

162.8%

3.8

5.9

 

Total group income

134.7

131.4

(2.4%)

198.2

160.0

(19.3%)

 

 

 

 

 

 

Raw materials & subcontractors

(48.0)

(46.7)

(2.7%)

(68.0)

(62.0)

(8.8%)

Personnel costs

(62.2)

(62.2)

(0.0%)

(75.1)

(75.1)

0.0%

Other external expenses

(25.6)

(22.5)

(12.2%)

(29.1)

(25.1)

(13.9%)

Other operating expenses

0.0

(5.0)

 

0.0

0.0

 

EBITDA (company reported)

(1.2)

(5.0)

306%

26.0

(3.7)

n.m.

EBIT (Pre PPA amortisation)

(14.2)

(14.5)

2.1%

9.3

(13.2)

n.m.

 

 

 

 

 

 

Underlying PBT

(14.8)

(15.1)

2.0%

8.7

(13.8)

n.m.

 

 

 

 

 

 

EPS - underlying continuing (SEK)

(0.15)

(0.15)

6.3%

0.09

(0.14)

n.m.

DPS (SEK)

0.0

0.0

 

0.0

0.0

 

Adjusted net cash/(debt) (excluding leases)

25.1

30.6

22.2%

30.3

21.5

(29.0%)

Source: Edison Investment Research estimates


Exhibit 5: Financial summary

SEKm

2018

2019

2020e

2021e

Year-end December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Net sales

 

 

77.9

66.4

113.9

147.6

Own work capitalised and other operating income

11.3

14.1

17.5

12.4

Group income

89.2

80.6

131.4

160.0

EBITDA

 

 

(28.5)

(27.3)

(5.0)

(3.7)

Operating Profit (before amort. and except).

(30.8)

(32.7)

(10.4)

(9.3)

Intangible Amortisation

(7.2)

(4.6)

(4.1)

(3.8)

Exceptionals

(5.2)

(2.9)

(2.2)

(2.0)

Other

0.0

0.0

0.0

0.0

Operating Profit

(43.2)

(40.2)

(16.7)

(15.1)

Net Interest

(0.3)

(0.8)

(0.5)

(0.6)

Profit Before Tax (norm)

 

 

(38.3)

(38.2)

(15.1)

(13.8)

Profit Before Tax (FRS 3)

 

 

(43.6)

(41.0)

(17.3)

(15.7)

Tax

0.9

0.5

0.2

0.8

Profit After Tax (norm)

(37.5)

(37.8)

(14.9)

(13.1)

Profit After Tax (FRS 3)

(42.6)

(40.6)

(17.1)

(15.0)

Average Number of Shares Outstanding (m)

75.4

84.8

96.2

96.2

EPS - fully diluted (SEK)

 

 

(0.50)

(0.45)

(0.15)

(0.14)

EPS - normalised (SEK)

 

 

(0.50)

(0.44)

(0.15)

(0.14)

EPS - (IFRS) (SEK)

 

 

(0.57)

(0.48)

(0.18)

(0.16)

Dividend per share (SEK)

0.0

0.0

0.0

0.0

EBITDA Margin (%)

-36.6

-41.1

-4.4

-2.5

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

-39.6

-49.3

-9.2

-6.3

BALANCE SHEET

Fixed Assets

 

 

396.8

436.9

433.8

429.7

Intangible Assets

392.6

418.6

419.9

420.0

Tangible Assets

4.2

4.1

3.0

1.9

Right of use asset

14.2

11.0

7.8

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

56.2

108.5

88.5

95.7

Stocks

6.5

13.1

19.4

20.7

Debtors

10.1

17.7

20.5

22.1

Cash

12.2

52.4

25.8

30.8

Other

27.3

25.2

22.8

22.1

Current Liabilities

 

 

(35.6)

(60.5)

(62.7)

(69.2)

Creditors

(35.5)

(60.5)

(62.7)

(69.2)

Short term borrowings

(0.2)

0.0

0.0

0.0

Long Term Liabilities

 

 

(2.4)

(16.0)

(7.8)

(19.4)

Long term borrowings

(1.2)

(0.8)

4.8

(9.3)

Lease liabilities

(14.1)

(11.6)

(9.0)

Other long-term liabilities

(1.2)

(1.1)

(1.1)

(1.1)

Net Assets

 

 

415.0

468.9

451.8

436.9

CASH FLOW

Operating Cash Flow

 

 

(49.1)

(15.3)

(13.1)

(3.1)

Net Interest

(0.3)

(0.8)

0.1

0.0

Tax

0.8

0.4

0.2

0.7

Capex

(2.3)

(13.9)

(8.6)

(7.3)

Acquisitions/disposals

(377.4)

(3.0)

0.6

0.6

Financing

404.6

73.3

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

Net Cash Flow

(23.6)

40.7

(21.0)

(9.1)

Opening net debt/(cash) excluding lease liabilities

(35.2)

(10.9)

(51.6)

(30.6)

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

(0.7)

0.1

0.0

0.0

Closing net debt/(cash) excluding lease liabilities

(10.9)

(51.6)

(30.6)

(21.5)

Net financial liabilities including lease liabilities

 

(37.5)

(19.1)

(12.5)

Source: Company accounts, Edison Investment Research


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This report has been commissioned by AAC Clyde Space and prepared and issued by Edison, in consideration of a fee payable by AAC Clyde Space. 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.

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General disclaimer and copyright

This report has been commissioned by AAC Clyde Space and prepared and issued by Edison, in consideration of a fee payable by AAC Clyde Space. 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.

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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.

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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

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.

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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

1185 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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