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Research: Industrials
RADA has issued guidance for 2021, which calls for revenues above $120m (growth of more than 60% year-on-year) and significantly improved profitability. Confidence in the outlook is supported by new order inflows demonstrating RADA’s success in obtaining initial orders in major US Army production programs. We are upgrading our 2021 revenue forecasts by 5.6% to $120.2m and our EPS forecasts by 9.5% to 29.6c. The 2020–24 forecast EPS CAGR of 25.4% supports our new DCF valuation of $12 (previously $10). The company also trades at a significant 50% PEG discount to the peer group despite almost double the growth rate.
RADA Electronic Industries |
Raising forecasts and valuation |
New guidance issued |
Aerospace & defence |
23 December 2020 |
Share price performance
Business description
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Analysts
RADA Electronic Industries is a research client of Edison Investment Research Limited |
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RADA has issued guidance for 2021, which calls for revenues above $120m (growth of more than 60% year-on-year) and significantly improved profitability. Confidence in the outlook is supported by new order inflows demonstrating RADA’s success in obtaining initial orders in major US Army production programs. We are upgrading our 2021 revenue forecasts by 5.6% to $120.2m and our EPS forecasts by 9.5% to 29.6c. The 2020–24 forecast EPS CAGR of 25.4% supports our new DCF valuation of $12 (previously $10). The company also trades at a significant 50% PEG discount to the peer group despite almost double the growth rate.
Year end |
Revenue ($m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/18 |
28.0 |
1.1 |
4.4 |
0.0 |
208.4 |
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 |
54.0 |
N/A |
12/21e |
120.2 |
12.9 |
29.6 |
0.0 |
31.1 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Strong finish to 2020 improves visibility
On 18 December, RADA announced $102m of new orders in 2020 and $23m of new orders in November and December (to date). The majority of orders are for the US Army, namely the IM-SHORAD Stryker program (referenced in our update note published on 12 November) and the ELBIT/IMI Iron Fist active protection system. RADA’s participation in these major multi-year programs increases visibility as it transforms into a supplier for long-term programs rather than on an urgent needs basis.
Forecasts revised up
We are raising our 2021 revenue forecasts to $120.2m from $113.8m (up 5.6%), which represents year-on-year estimated growth of 59% in 2021 following 70% growth in 2020. EPS forecasts rise by 9.5% as we are now looking for EBITDA margins of 12.8% from 12.4% previously, reflecting the operationally geared business and management’s confidence in improving profitability.
Valuation: Deep discount to peers remains
As noted previously, RADA’s valuation compared to the peer group is compelling. With a PEG ratio of 1.2x, RADA still trades at a 50% discount to the peer group despite almost twice their earnings growth. A valuation of $12 per share would still represent a discount of 36% to the peer group. Using a WACC of 7% and terminal growth rate of 2%, our DCF model also supports a $12 valuation.
Strong finish to 2020
On 18 December, RADA announced new orders of $102m year to date, which represents 70% year-on-year growth. As a reminder, orders are generally fulfilled over a six-month to one-year period, so the strong end to the year provides confidence in the outlook for 2021. In November and the month to 18 December alone, RADA received orders of $23m. The vast majority of new orders are for software-defined tactical radars and, specifically, serial production for two US government programs. As RADA is a sub-contractor in these major US Army programs, these represent multi-year revenue opportunities for RADA. The two serial programs are:
■
IM-SHORAD Stryker: as referenced in our last update note, RADA is participating in the General Dynamics Land Systems and Leonardo DRS $1.2bn US Army project. RADA states that further production orders are expected in 2021.
■
ELBIT/IMI Iron Fist active protection system (APS): the initial order is for 200 radars and RADA expects volumes to grow in 2021 and 2022. RADA will participate in the APS system for the US Army Bradley AFV upgrade program, which has the potential to reach 150 vehicles and 600 radars.
Exhibit 1: 2021 estimates revised upwards
Revenue ($m) |
EBITDA ($m) |
EPS (c) |
|||||||
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
|
2020e |
75.9 |
75.9 |
0 |
9.6 |
9.6 |
0 |
17.05 |
17.05 |
0 |
2021e |
113.8 |
120.2 |
5.6 |
14.2 |
15.4 |
8.5 |
27.07 |
29.63 |
9.5 |
Source: Edison Investment Research
Exhibit 2: 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 |
120.2 |
Cost of Sales |
(17.8) |
(28.4) |
(47.8) |
(74.6) |
||
Gross Profit |
10.2 |
15.9 |
28.1 |
45.7 |
||
EBITDA |
|
|
1.8 |
0.3 |
9.6 |
15.4 |
Operating Profit (before amort. and except.) |
|
|
1.0 |
(1.0) |
7.4 |
12.4 |
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 |
10.0 |
||
Net Interest |
0.1 |
(0.1) |
0.5 |
0.5 |
||
Profit Before Tax (norm) |
|
|
1.1 |
(1.1) |
7.4 |
12.9 |
Profit Before Tax (US GAAP) |
|
|
0.2 |
(2.2) |
5.3 |
10.5 |
Tax |
0.0 |
0.0 |
0.0 |
0.0 |
||
Profit After Tax (norm) |
1.1 |
(1.1) |
7.4 |
12.9 |
||
Profit After Tax (US GAAP) |
0.2 |
(2.2) |
5.3 |
10.5 |
||
Average Number of Shares Outstanding (m) |
33.2 |
38.1 |
43.4 |
43.5 |
||
EPS - normalised (c) |
|
|
4.41 |
(2.01) |
17.05 |
29.63 |
EPS - normalised fully diluted |
|
|
4.34 |
(1.97) |
16.70 |
29.03 |
EPS - (US GAAP) (c) |
|
|
1.71 |
(5.02) |
12.30 |
24.11 |
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 |
12.8 |
||
Operating Margin (before GW and except.) (%) |
3.4 |
-2.2 |
9.8 |
10.3 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
4.6 |
16.8 |
18.6 |
20.7 |
Intangible Assets |
0.0 |
0.0 |
0.0 |
0.0 |
||
Tangible Assets |
4.6 |
9.1 |
11.0 |
13.0 |
||
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 |
78.1 |
95.9 |
Stocks |
11.2 |
17.2 |
30.3 |
36.1 |
||
Debtors |
13.6 |
13.5 |
20.1 |
28.4 |
||
Cash |
21.2 |
14.1 |
25.3 |
28.4 |
||
Other |
2.1 |
1.8 |
2.2 |
3.0 |
||
Current Liabilities |
|
|
(10.2) |
(13.4) |
(15.9) |
(22.9) |
Creditors |
(10.2) |
(13.4) |
(15.9) |
(22.9) |
||
Short term borrowings |
0.0 |
0.0 |
0.0 |
0.0 |
||
Long Term Liabilities |
|
|
(0.7) |
(8.5) |
(8.5) |
(8.5) |
Long term borrowings |
0.0 |
0.0 |
0.0 |
0.0 |
||
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 |
85.1 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
(3.7) |
(3.6) |
(7.6) |
7.7 |
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) |
(5.1) |
||
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 |
3.1 |
||
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) |
(28.4) |
Source: Company accounts, Edison Investment Research
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Research: Energy & Resources
Brooge Energy (BROG) recently signed new offtake contracts for a third of its Phase I storage capacity for a 50% premium to previous contracts, effective from November 2020. These agreements were made possible due to the current high demand for storage in the Middle East, and BROG’s advanced technological capabilities and strategic location in Fujairah. The new contracts provide for increased revenue and EBITDA in FY21, in addition to the Phase II contribution to realisations that is expected to start in 2021. Phase III pre-construction work started in Q420, marking a significant milestone in developing this transformational project for the company. Our updated valuation, which is based on a blend of DCF, EV/EBITDA and P/E approaches, remains unchanged at $11.0/share.