AAC Clyde Space — Preparing to AACcelerate growth

Interest and investment in New Space continues to gather pace, and AAC Clyde Space remains at the forefront of the development of low earth orbit (LEO) nanosatellite constellations and supporting subsystems for both its own use and as a supplier to third-party small satellite manufacturers and operators. The low-cost nature of the small satellite segment continues to provide the opportunity for new customers to access space data for a variety of applications ranging from the earth observation and scientific community, to maritime domain awareness, weather and climate analysis as well as communications including the Internet of Things (IoT).

As the importance of space data continues to grow to analyse and resolve issues in multiple domains on the planet, the emergence of low-cost access in an increasingly competitive LEO environment continues to gather pace. The enlarged group already includes such a constellation at SpaceQuest. The appointment of its founder Dino Lorenzini as group chief scientific officer seems a natural development as AAC Clyde Space moves to deploying its own nanosatellite constellations to address weather, climate and maritime domains. In this respect the additional capabilities of Omnisys and Hyperion enhance the group’s ability to develop appropriate satellite buses, systems and payloads. All of the acquisitions have continued to deliver positive EBITDA contributions.

In addition, 2021 has been a year of significant geographic expansion with additional manufacturing resource added in both Europe and the dominant US market. The opening of a South African-based subsidiary to address the growing African space market further extends the group’s global reach.

Although the pandemic has been a constraint on growth over the last two years, positive momentum continues as evidenced by the growth of the order backlog this year. Included in the intake was the company’s largest SDaaS contract to date for SEK100m for Wyvern of Canada.

Of the SEK500m management revenue target in FY24 by, SEK100m is expected to be generated by SDaaS compared to our estimate of less than c SEK20m in FY21. Management’s new growth plan expects SDaaS revenue to grow to a targeted SEK1.35bn ($250m) by 2030. We have upgraded our long-term model assumptions to incorporate the new information and to mirror the top-line development being indicated by management. Our expectation is that SDaaS will deliver EBITDA margins in excess of 40% compared to mission and product margins in the region of 15–20%.

The rapid growth of SDaaS should provide strong leverage on the relatively fixed operational cost base. Clearly building its own constellations of tens of satellites (from five currently) requires significant recurring investment in intangible development costs that ultimately transfer to space assets with relatively short operational lives of around five years. We expect EBITDA margins to improve progressively despite the investment in supporting infrastructure and headcount that has already commenced in FY21.

New Space is a competitive and increasingly crowded environment but AAC Clyde Space is an early and leading entrant in its segment with growing technology capabilities. With an experienced and growing management team, AAC Clyde Space appears well positioned to achieve its goals although operational risks cannot be ignored. Our upgraded discounted cash flow (DCF) value currently stands at SEK7.3 per share but we believe the methodology remains conservative as it excludes longer-term growth. As AAC moves into profits, other financial metrics should start to reflect its future potential.

Overall Q321 looked strong at the top-line level with net sales rising by 23% to SEK33.7m (Q320: SEK27.4m), but this masked a contraction in the ongoing operations in Glasgow and Sweden. Clyde Space in Glasgow and AAC Clyde Space in Sweden saw a 38% decline in net sales to SEK17.0m (Q320: SEK27.4m). Space Mission sales were still constrained by pandemic effects especially on systems suppliers, with Space Products also affected with sales in Sweden falling SEK4.3m partly offset by the introduction of Space Mission sales, which totalled SEK1.5m in Q321. The EBITDA loss at Clyde Space grew to SEK7.5m following a near breakeven H121 contribution.

The acquisitions of Omnisys, SpaceQuest and Hyperion all made strong initial contributions with healthy sales and positive EBITDA. Omnisys made a first third-quarter net sales contribution of SEK9.4m, with SpaceQuest net sales of SEK5.3m and Hyperion adding net sales of SEK2.0m during Q321. The Q321 initial EBITDA contributions also remained positive with Omnisys generating SEK0.2m, SpaceQuest SEK1.7m and Hyperion SEK0.8m.

While SDaaS revenues remain small at present, the order backlog has increased and the strategy has evolved to capture a growing share of the potential market for space data.

On the cost side, the group has been investing in the development of the team and support infrastructure in advance of the anticipated growth. It has also invested in team structures to support growth including a new group management structure introduced in October 2021.

Personnel costs have therefore increased more rapidly than we anticipated and overhead recovery has been affected by slower project progression and lower completions. We regard this as an acceleration of personnel investment rather than a dramatic increase in long-term team numbers with some of the cost brought forward from anticipated increases in FY22.

Key highlights of the first nine months of FY21 (9M21) were:

AAC Clyde Space won significant orders won in Q321:

The group has strengthened and restructured its leadership team to support growth. Stefania Mandirola joined in October as COO and Kulwinder Bhumbra was appointed HR director in November 2021. Peter Anderson, who has been with the company for six years, was appointed chief commercial officer in September 2021, and Dr Andrew Carrel joined in May as VP future programmes to provide leadership in developing the SDaaS opportunity. Luis Gomes (CEO), Mats Thideman (deputy CEO and CFO) and Andrew Strain (CTO) retain their positions under the new leadership structure with Dr Dino Lorenzini, the founder of SpaceQuest, transitioning to chief scientific officer for the group.

The change to the US leadership team saw Dr Lorenzini’s position as CEO of SpaceQuest and head of Americas filled by Chris Fauquier, who has been promoted internally from COO. The new management team of AAC Space Africa bring over 40 years of experience to the group with two pioneers of the African CubeSat industry, Dr Robert Van Zyl and Francois Visser, assuming the positions of managing director and technical director, respectively.

The accelerated costs and contract delays have led us to increase reduce our loss before tax estimates by SEK18.1m in FY21 and by SEK8.0m in FY22. We are expecting some catch up in Q421 as deferred revenues are recognised although supply chain issues remain a global problem and could push some project work into FY22. We still expect the company to move to a positive EBITDA in FY22 and to be cash positive by FY23. We will introduce FY23 estimates after the company reports FY21 results on 17 February 2022.

It is clear that space has become an increasingly high-profile sector for investors. That is reflected in the number of new listings and the amount of capital raised during 2021. Many of these companies are now being afforded interesting valuations and ratings.

We continue to use our capped DCF methodology for AAC (consistent with all our companies) as our main fair value reference point as the company has yet to become self financing. The model captures six years of forecasts and then assumes zero growth in the terminal value with capex normalised to depreciation and working capital flows neutralised. We consider this to be conservative as we do not capture continued growth in companies beyond the forecast period, with AAC clearly outlining a higher growth path than we had previously assumed in our model.

Although subject to the usual risks of operating in space markets (delays, operational failures, space debris etc) these should diminish as higher-margin, recurring SDaaS revenues grow. Our calculated WACC of 11.8% reflects the current situation and the DCF returns a value using FY21 as our base year of SEK7.3 per share (from SEK5.5 previously), reflecting higher growth assumptions.

We calculate that if we were to roll forward to our FY22 estimates as the base year, that value would be extended to SEK9.4 per share reflecting the strong cash flow growth anticipated. If we further extend the growth period to include the estimates during the strategic plan to 2030 before capping the growth, the value rises to SEK15.7 per shares. Successful execution of the strategy and achieving estimated margins are key to realising these higher values.

The sensitivity of our DCF model to changes in WACC assumptions and the terminal growth rate are shown in the table below.