tank-203496_1920

Positive dynamics

RADA Electronic Industries 12 November 2020 Update
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RADA Electronic Industries

Positive dynamics

Quarterly results

Aerospace & defence

8 November 2020

Price

US$7.3

Market cap

US$318m

NIS3.38/US$

Net cash ($m) at 31 October 2020

23.7

Shares in issue

43.5m

Free float

84.3%

Code

RADA

Primary exchange

Nasdaq

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.5

4.3

44.7

Rel (local)

7.6

(2.7)

25.0

52-week high/low

US$7.7

US$2.2

Business description

RADA Electronic Industries develops, manufactures, markets and sells defence electronics to various armed forces and companies worldwide. It offers military avionic systems and land-based tactical radars for defence forces and critical infrastructure protection solutions.

Next events

Full year results

March 2021

Analysts

Will Manuel

+972 (0)54 978 4802

Andy Chambers

+44 (0)20 3681 2525

RADA Electronic Industries is a research client of Edison Investment Research Limited

RADA Electronic Industries’ (RADA) strong third quarter results and upwardly revised outlook of at least $75m in revenues in 2020 (from $70m) reflect its successful execution of initial orders and participation in major US Army programs. This is illustrated by RADA’s inclusion in the $1.2bn contract recently awarded to General Dynamics for delivery of Interim Maneuver Short-Range Air Defense (IM-SHORAD) systems to the US Army. We increase our EPS forecasts by 37.5% in 2020 and 5.3% in 2021. The 2020–24 forecast EPS CAGR of 25.4% supports our DCF valuation of $10. The company also trades at a significant PEG discount to the peer group despite a higher growth rate.

Year end

Revenue ($m)

PBT*
($m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/18

28.0

1.1

4.4

0.0

165.9

N/A

12/19

44.3

(1.1)

(2.0)

0.0

N/A

N/A

12/20e

75.9

7.4

17.1

0.0

42.7

N/A

12/21e

113.8

11.8

27.1

0.0

26.9

N/A

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

Q3 results illustrate operating leverage

RADA’s third quarter revenues of $20.4m grew by an impressive 81% year-on-year and 16% quarter-on-quarter. Gross margins of 38% were higher than the 36% reported in recent quarters due to economies of scale and manufacturing efficiencies. With operating expenses stable, EBITDA margins expanded to 15% from 10% in the previous quarter, illustrating the operating leverage within the business.

Raising forecasts and rising conviction

We upgrade our FY20 revenue forecasts to $75.9m from $71.6m and continue to expect a 50% increase in 2021 revenues. Our increasing confidence is supported by a growing backlog ($20m in new orders announced since September), initial General Dynamics contract orders expected before the year end and company guidance that calls for continued quarterly sequential revenue growth into 2021. We increase gross and EBITDA margin expectations due to stabilizing opex and manufacturing efficiencies.

Valuation: Remains compelling

RADA’s valuation in relation to its peer group remains compelling. Despite earnings growth 58% higher than the peer group, RADA trades at a PEG ratio of 1.05x, a 43% discount to peers. To smooth near-term distortions, we use RADA’s five-year (2020–24e) compound average EPS growth rate of 25.4% and compare it to the 2021 peer group average. Based on forecasts until 2024 and a terminal growth rate of 2%, our DCF suggest a value of $10 per share.

Near-term outlook

Raising forecasts and rising conviction

Forecasts upgraded due to a growing order backlog and margin improvement.

Level of conviction up as RADA is included in long-term programs.

Change of administration in the US and pandemic could pressurize medium-term defence investment budgets but would likely lead to increased asset protection requirements.

On 2 November, RADA announced the receipt of new orders of $79m since the start of the year (vs $41m during the same period last year) and $20m since September, to be delivered during the first half of 2021. All new orders are software-defined tactical radars for the US market in the areas of counter small unmanned aerial systems (C-sUAS), short range air defense (SHORAD), counter rockets, artillery and mortars (C-RAM) and vehicle protection solutions (VPS). The new orders are mostly follow-ons after a comprehensive testing and evaluation phase.

Receipt of orders from the General Dynamics IM-SHORAD program, expected by management before the year-end, continue the positive trend of moving to long-term programs from an urgent needs basis, thereby bolstering confidence in future growth. RADA’s participation in the General Dynamics program is expected to last for the next three years. As a reminder, RADA has a number of other long-term programs in various testing phases, both in the US and worldwide.

Exhibit 1: Forecast revisions

Revenue ($m)

EBITDA ($m)

EPS (c)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2020e

71.6

75.9

6.1

7.4

9.6

29.7

12.4

17.1

37.5

2021e

107.4

113.8

5.9

13.4

14.2

5.7

25.7

27.1

5.3

Source: PBT and EPS are normalized, excluding amortization of acquired intangibles, exceptional items and share-based payments.

Building for growth

Net cash and equivalents dropped by $5.7m during the third quarter to $23.7m. This in part reflects the strategic inventory build to $29.3m from $26.5m in Q2 to support future growth and ensure continuing supply during the pandemic. We expect the inventory to sales ratio to drop from 40% this year to 30% next year and a move to being cash flow positive in 2021 as the excess inventory unwinds.

Valuation

RADA’s valuation in relation to the peer group remains compelling. Despite earnings growth 58% higher than the peer group, RADA trades at a PEG ratio of 1.05x, a 43% discount to peers. To smooth the near-term distortions, we use RADA’s five-year (2020–24e) compound average EPS growth rate of 25.4% and compare it to the 2021 peer group average.

A share price of $10 would suggest an undemanding PEG of 1.2x, which is still a 35% discount to the peer group.

Exhibit 2: RADA versus the peer group

Ticker

Price
(US$)

EPS 2020e
($)

EPS 2021e
($)

2020e
P/E (x)

2021e
P/E (x)

2021e EPS
growth (%)

PEG ratio (x)

L3 Harris

LHX

186.0

11.56

13.07

16.1

14.2

13.1

1.09

Teledyne Technologies

TDY

364.0

9.89

11.26

36.8

32.3

13.9

2.33

Mercury Systems

MRCY

68.7

2.28

2.6

30.1

26.4

14.0

1.88

Cubic

CUB

59.8

2.5

3.2

23.9

18.5

29.6

0.62

Kratos Defence and Security

KTOS

18.5

0.4

0.5

44.0

39.4

11.9

3.31

AeroVironment

AVAV

78.0

1.9

2.2

41.5

36.1

14.9

2.42

Aerojet Rocketdyne

AJRD

35.2

1.7

1.96

20.7

17.9

15.3

1.17

Average

30.45

26.40

16.1

1.83

RADA

7.3

17.1

27.1

42.5

26.8

25.4

1.05

Premium/(discount)

58.0%

(42.5%)

Source: Edison Investment Research, Refinitiv. Note: Prices as at 9 November 2020.

Our DCF model implies a share price of $10 using a WACC of 7%. The assumptions used to support this are a 22.9% CAGR in revenues (2020–24e) during our explicit forecast period and terminal growth of 2% pa. RADA produced better than expected margins in the third quarter and noted continued potential for operational efficiencies as capacity increases. Note that the risk to our expectation of stable gross margins is therefore on the upside, while EBITDA margins of 15.4% in Q3 are trending towards our medium-term expectations faster than initially expected.

Exhibit 3: DCF sensitivity table

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

0.0%

8.93

7.55

6.53

5.74

5.11

4.60

1.0%

10.38

8.54

7.24

6.26

5.51

4.91

2.0%

12.55

9.92

8.18

6.94

6.01

5.29

3.0%

16.18

12.00

9.50

7.83

6.65

5.77

Source: Edison Investment Research

Exhibit 4: Financial summary

$m

2018

2019

2020e

2021e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

28.0

44.3

75.9

113.8

Cost of Sales

(17.8)

(28.4)

(47.8)

(70.5)

Gross Profit

10.2

15.9

28.1

43.2

EBITDA

 

 

1.8

0.3

9.6

14.2

Operating Profit (before amort. and except.)

 

 

1.0

(1.0)

7.4

11.3

Intangible Amortisation

0.0

0.0

(0.5)

0.0

Exceptionals

(0.9)

(1.1)

(2.1)

(2.4)

Other

0.0

0.0

0.0

0.0

Operating Profit

0.1

(2.1)

4.9

8.9

Net Interest

0.1

(0.1)

0.5

0.5

Profit Before Tax (norm)

 

 

1.1

(1.1)

7.4

11.8

Profit Before Tax (US GAAP)

 

 

0.2

(2.2)

5.3

9.4

Tax

0.0

0.0

0.0

0.0

Profit After Tax (norm)

1.1

(1.1)

7.4

11.8

Profit After Tax (US GAAP)

0.2

(2.2)

5.3

9.4

Average Number of Shares Outstanding (m)

33.2

38.1

43.4

43.5

EPS (c)

 

 

4.41

(2.01)

17.05

27.07

EPS - normalised fully diluted (c)

 

 

4.34

(1.97)

16.70

26.52

EPS - (US GAAP) (c)

 

 

1.71

(5.02)

12.30

21.55

Dividend per share (c)

0.00

0.00

0.00

0.00

Gross Margin (%)

36.4

36.0

37.0

38.0

EBITDA Margin (%)

6.3

0.8

12.7

12.4

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

3.4

-2.2

9.8

9.9

BALANCE SHEET

Fixed Assets

 

 

4.6

16.8

18.6

20.6

Intangible Assets

0.0

0.0

0.0

0.0

Tangible Assets

4.6

9.1

11.0

12.9

Right of use asset

0.0

7.7

7.7

7.7

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

48.1

46.6

76.6

92.2

Stocks

11.2

17.2

30.3

34.1

Debtors

13.6

13.5

20.1

26.9

Cash

21.2

14.1

23.9

28.4

Other

2.1

1.8

2.2

2.8

Current Liabilities

 

 

(10.2)

(13.4)

(15.9)

(21.7)

Creditors

(10.2)

(13.4)

(15.9)

(21.7)

Short term borrowings

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(0.7)

(8.5)

(7.1)

(7.1)

Long term borrowings

0.0

0.0

1.4

1.4

Lease liabilities

0.0

(7.7)

(7.7)

(7.7)

Other long-term liabilities

(0.7)

(0.8)

(0.8)

(0.8)

Net Assets

 

 

41.9

41.4

72.3

84.0

CASH FLOW

Operating Cash Flow

 

 

(3.7)

(3.6)

(7.6)

8.8

Net Interest

(0.2)

0.1

(0.1)

0.5

Tax

0.0

0.0

0.0

0.0

Capex

(0.9)

(4.1)

(4.6)

(4.8)

Acquisitions/disposals

0.0

(0.5)

0.0

0.0

Financing

13.1

1.5

23.5

0.0

Dividends

0.0

0.0

0.0

0.0

Other

0.2

(0.5)

0.0

0.0

Net Cash Flow

8.5

(7.1)

11.2

4.4

Opening net debt/(cash)

 

 

(12.7)

(21.2)

(14.1)

(25.3)

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(21.2)

(14.1)

(25.3)

(29.8)

Net financial Liabilities

(21.2)

(6.4)

(17.6)

(22.1)

Source: Company accounts, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by RADA Electronic Industries and prepared and issued by Edison, in consideration of a fee payable by RADA Electronic Industries. 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 2020 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

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

General disclaimer and copyright

This report has been commissioned by RADA Electronic Industries and prepared and issued by Edison, in consideration of a fee payable by RADA Electronic Industries. 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 2020 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

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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