Industrial age of laser communications

Mynaric 20 April 2021 Update
Download PDF German PDF Download

Mynaric

Industrial age of laser communications

Technology

Scale research report - Update

20 April 2021

Price

€67.20

Market cap

€275m

Share price graph

Share details

Code

M0Y

Listing

Deutsche Börse Scale

Shares in issue

4.1m

Net cash at end December 2020 (excluding €8.0m lease liabilities)

€43.2m

Business description

Mynaric designs and manufactures laser communication terminals for airborne and spaceborne networks. Its objective is to become the world’s leading provider of network equipment for the aerospace communication industry using its serially produced, low-cost laser communication products.

Bull

Wireless laser technology gives faster data rates than conventional microwave transmission.

Wireless laser technology brings internet connectivity to remote regions without installing fibre optic cables.

Tech is cost effective for mega-constellations.

Bear

Technology not proven in complete satellite or airborne communications networks yet.

Rate of commercial roll-out dependent on network operators securing funding.

Limited number of potential network operators to which it can sell equipment.

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

In FY20 Mynaric was selected to provide laser communications terminals for two separate US government constellations. This is clear evidence that satellite networks are beginning to deploy optical inter-satellite links and that Mynaric is seen as having the technical expertise and production capacity to deliver terminals in relatively high volumes. This puts Mynaric in a good position to take market share as demand for terminals starts to grow.

US government programmes mark turning point

The satellites for the US government’s Blackjack programme are scheduled for launch in H221, so Mynaric is preparing to ship terminals for the programme this summer. It has already shipped some commercial product, having delivered airborne terminals for a customer towards the end of FY20 for use in trial deployments. After building close to a dozen terminals in FY20, primarily for in-house testing, the company is preparing to construct around 50 terminals during FY21, around three-quarters of which will be available to meet customer demand. It is expanding capacity to support production of over 100 terminals per year by FY22.

Gearing up for production

Total operating performance (including capitalised development) in FY20 was €9.4m. This was 20% higher than FY19 as development work on space and airborne terminals intensified. Losses after tax trebled year-on-year to €22.7m reflecting a doubling in personnel costs and cost of materials. Net cash (there is no debt apart from finance leases) increased by €36.8m to €43.2m, as €31.9m free cash outflow was offset by fundraising activities raising €66.7m (net). Mynaric has recently announced its intention to pursue an IPO and listing in the US to improve the company’s access to US capital markets, potentially in H221.

Valuation: Analysis of potential revenue

Mynaric does not expect to start delivering significant numbers of commercial units until H221, so we present a scenario analysis rather than a peer group comparison of multiples. This analysis shows a constellation of 100 low earth orbit (LEO) satellites could require €75m of Mynaric’s laser communications terminals and a cluster of 250 airborne communications platforms could require equipment with an estimated €113m in revenues attributable to Mynaric.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA

(€m)

EBIT

(€m)

EPS
(€)

DPS

(€)

P/E
(x)

12/18*

1.4

(7.4)

(7.8)

(2.9)

0.0

N/A

12/19

0.4

(6.5)

(7.7)

(2.8)

0.0

N/A

12/20

0.7

(19.7)

(21.7)

(6.8)

0.0

N/A

12/21e**

N/A

N/A

N/A

N/A

N/A

N/A

Source: Company data, *Restated **Consensus estimates have not been updated since FY20 results were published providing new guidance for volume roll-out.

FY20 technical and commercial progress

First wins in US governmental market

In September Mynaric announced its US subsidiary had been selected as vendor for laser communication products by an undisclosed customer, stating the selection represented Mynaric’s first win in the US governmental market. The value of the contract associated with this is in the mid-seven-digit euros range. We have previously inferred that this contract is related to the first phase of a satellite communications network for the Space Development Agency (SDA). In August 2020 the SDA announced it had awarded a $187m contract to build 10 satellites for the first phase of its LEO communications network to Lockheed Martin, which we have inferred is purchasing optical communications equipment from Tesat and a $94m contract to build 10 satellites to York Space Systems, which we have previously inferred is purchasing equipment from Mynaric’s US operation and SA Photonics. Seven satellites of each batch of 10 will have four optical inter-satellite links, the other three will have two optical crosslinks. Each batch of 10 satellites must be delivered and ready for launch by September 2022. The Transport Layer of the constellation being planned by the SDA will eventually consist of 300–500 satellites.

In October Mynaric announced it had been selected by Telesat to supply multiple units of its CONDOR optical inter-satellite link terminals to Defense Advanced Research Projects Agency’s (DARPA’s) Blackjack Track B programme. The terminals are scheduled to be delivered in mid-2021 to DARPA’s Blackjack System Integrator, with satellites scheduled to launch in the latter part of 2021. Telesat aims to use the mission to demonstrate the capabilities, as well as the interoperability, of laser communication products from different vendors as part of the DARPA Blackjack programme. Mynaric will establish the industry’s first laser communication interoperability lab at its Los Angeles premises as part of the deal. This lab will be equipped with a link testbed capable of emulating conditions in space and testing inter-vendor operability, which is a key requirement of both the DARPA and SDA programmes.

While the US governmental market is by far the most important market for Mynaric at present, it is also attracting the attention of other customers. For example, in January 2020 the company signed a multi-million-euro contract with a customer based in Europe.

First shipment of airborne terminals

Mynaric constructed close to a dozen pre-serial non-sale models of terminals in FY20, with feedback from each iteration used to improve the quality of the product and the production process including the supply chain. This iterative process took longer for the HAWK AIR terminal than had initially been expected because Mynaric’s key customer for this product, who is based in the US, wanted to be able to demonstrate the terminal to its potential customers in live deployments. Mynaric worked through additional iterations, enabling the customer to start its demonstration programme by the year end. Mynaric will use feedback from these trials to define a second-generation product, potentially for widespread deployment on unmanned aerial vehicles. Mynaric successfully passed the ‘critical design review’ stage of development of the CONDOR space-borne terminal during the year, triggering dialog with initial prospective buyers about the refinement of product specifications, which has helped define a second generation product.

Getting ready for volume production

Mynaric started pilot production of both the HAWK AIR and CONDOR terminals in FY20. Management expects Mynaric will manufacture around 50 terminals in 2021, around three-quarters of which will be available to meet anticipated customer demand. As part of getting ready for volume shipments, during FY20 Mynaric started preparation for a new production facility in Germany, which management expects will commence operation in H221 and support annual laser terminal production in the triple-digit range when fully staffed and fitted out. Importantly, Mynaric has brought manufacturing of critical optical components in-house. It has also brought most of the testing in-house, significantly accelerating the development cycle.

FY20 financials

Transition to pre-series production

The German accounting metric ‘operating output’ is more significant than revenue for Mynaric at its stage of evolution, as it includes the value of the increase in finished goods and work in progress, and the amount of development activity on projects that are not linked to specific customer contracts. The total during FY20 was €9.4m, a 20% increase compared with FY19, reflecting intensifying work preparing space and airborne terminals for customer deployment. We note that the German government’s ban on Mynaric shipping satellite terminals to a Chinese customer means the step-change in revenues attributable to product delivery has been pushed back from FY20 to FY21.

Exhibit 1: Analysis of total operating performance

€m

FY20

FY19

Notes

Sales revenues

0.7

0.4

Primarily sales of Hawk AIR terminals in FY20.

Increase in finished goods and work-in-progress

0.2

0.6

Write-downs

(1.2)

0.0

Write down on inventories of first-generation Hawk Air terminals and prototype GS-200 and GS-400 ground stations to net realizable value.

Capitalised development work

6.9

6.1

Cost of development activity.

Property, plant and equipment

1.1

0.1

Capitalised cost of own construction work.

Capitalised borrowing costs

1.1

0.0

Production/construction costs of qualifying assets as per IAS 23.

Other operating income

0.6

0.7

FY20 includes €0.3m grant income.

Total operating performance

9.4

7.9

Source: Mynaric data

The cost of materials (€6.2m) more than doubled as the company prepared for pre-serial production. Personnel costs also doubled (€16.7m) as the total number of employees increased from 99 at the end of December 2019 to 186 a year later, with additions in test, production, design, business development and marketing. Other operating expenses almost doubled to €6.2m, with increased costs in most areas reflecting expansion of development and production capacity, though there was also a €1.1m jump in legal and consulting fees, primarily related to the public share offering, and €0.6m expenses associated with foreign currency translation. Finance costs totalled €1.0m (€0.0m FY19) because of the interest on the €2.5m interim financing taken out and repaid during the year and on a convertible bond (see below). FY20 losses after tax were treble the prior year period at €22.7m.

Continuing to raise finance to support product development

Net cash increased by €36.8m during FY20 to €43.2m (excluding €8.0m IFRS 16 lease liabilities) at end FY20. In addition to €18.2m cash consumed in operations, the company invested €7.0m in intangible assets, primarily the capitalised costs of developing the CONDOR and HAWK AIR terminals and €6.7m in fixed assets, most of which related to production capacity and test equipment. In February 2020, Mynaric raised €12.3m (gross) through a private placement, which was substantially oversubscribed, at €42.50/share. This was followed in October by a placing and subscription collectively raising €52.8m (gross) at €66.0/share. In August Mynaric issued a convertible bond of €5.0m to a qualified investor, which was converted to shares at a fixed conversion price of €56.00/share in December. The funds raised are being used to increase production capabilities, to accelerate customer acquisition, particularly in the US, and to secure and strengthen Mynaric’s market position by investing in advanced developments underpinning next-generation technologies. Mynaric has recently announced its intention to pursue an IPO and listing in the US, the details of which have not been disclosed, to improve its access to US capital markets. Depending on market conditions, this could be completed in H221.

Outlook: Faster ‘internet-in-the-sky’

Negligible impact of pandemic on Mynaric’s operations

The global COVID-19 pandemic appears to have had a negligible effect on the day-to-day operation of Mynaric and does not seem to have had any material impact on potential customers’ plans for launching satellite constellations. If anything, the pandemic has highlighted the importance of providing broadband-quality communications to people across the globe, including those in remote or rural locations where it is not economically practical to provide terrestrial optical communications networks. For these people, provision of broadband via a satellite-based or airborne-based optical communications networks represents a viable alternative. This topic was explored in more detail in our interview with Bulent Altan, Mynaric’s CEO and a SpaceX veteran.

Increasing acceptance of free-space optical communications

The SDA and Blackjack constellations demonstrate that free-space optical communications links are starting to be deployed in satellite networks. The new US administration appears likely to continue investing in satellite communications infrastructure. In February the deputy commander of US Space Command noted that he expected policy guidance from the current administration to ‘be along similar lines’ to that issued by the Trump administration. In the commercial arena, SpaceX already has over 1,200 satellites in orbit in its Starlink (see our report The small satellite market – Small is beautiful for more detail) and has tested in-house optical communications terminals on some of them. If Starlink can demonstrate enhanced data rates using optical rather than traditional microwave links, it is likely other satellite operators will adopt laser communications technology that, not being so vertically integrated, they will need to purchase from third parties.

Valuation

Exhibit 2: Analysis of potential revenues

Internet LEO system

Cost of payload* (€m)

2.0

1.5

1.0

0.75

% payload composed of Mynaric systems

50%

50%

50%

50%

Number of satellites in constellation

50

100

300

1000

Revenues attributable to Mynaric (€m)

50

75

150

375

UAV, aircraft, balloon-based system

Cost of payload (€m)

1.00

0.90

0.68

0.51

% payload composed of Mynaric systems

50%

50%

50%

50%

Number of platforms in constellation/cluster

50

250

500

1000

Revenues attributable to Mynaric (€m)

25

113

169

253

Source: Edison Investment Research. Note: *Payload is the part carrying out communications/sensing function.

Because Mynaric is still at a pre-commercial phase and is not expected to generate operating profit until FY22 or later (we note that none of the estimates forming consensus has been updated since Mynaric’s FY20 results were published), an analysis based on peer multiples is of limited use. We continue to present a scenario analysis (Exhibit 2) showing potential revenues achievable if the technology is deployed in communication systems of different sizes. We split the analysis into two types of system. The first looks at communication networks based on smaller LEO satellites, which typically have more than 100 satellites each. The second looks at communication networks based on many more, less expensive platforms, which may be unmanned aerial vehicles or aircraft. A communications satellite such as that used in the first scenario requires space-qualified terminals, which are more expensive than those on an airborne platform.

General disclaimer and copyright

This report has been commissioned by Mynaric and prepared and issued by Edison, in consideration of a fee payable by Mynaric. 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 2021 Edison Investment Research Limited (Edison).

Australia

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.

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

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Share this with friends and colleagues

You may be interested in