AAC Clyde Space — Strong trading progress in H123

Q223 saw net sales increase by 53% to SEK75.9m (Q222: SEK49.5m). The improvement reflected the start of the unwinding of project delays arising from the COVID disruptions, although there were some ongoing deferrals, notably in the commissioning of SDaaS satellites launched in H123. AAC Clyde Space in Sweden, Hyperion and Omnisys all delivered strong revenue growth in the period, while Clyde Space and SpaceQuest were flat year-on-year, with the smaller AAC Space Africa still building its business. Overall, the group delivered positive EBITDA of SEK2.3m in Q223 (Q222: loss of SEK3.2m), with positive contributions from AAC Clyde, Hyperion, SpaceQuest and Omnisys more than offsetting an increased loss at Clyde Space and start-up losses at AAC Space Africa.

Key highlights of H123 were:

Adjusted net debt (excluding leases) at end H123 was SEK31.8m before the benefit of the rights issue proceeds of SEK35.9m in July. Gross cash was SEK13.0m compared to SEK52.1m at the start of the year. The operating cash outflow was SEK43.0m in Q223 (Q222: SEK32.2m), reflecting further working capital increases. For H123, the operating outflow increased to SEK52.8m compared to SEK25.3m in H122. As well as the fund-raising, we expect receipt of the R&D tax credit and milestone payments, together with the start-up of the SDaaS revenues, to boost H223 cash flow.

The order backlog remained robust at SEK443.7m with strong sales growth outpacing still healthy order intake. While some of the Space Products backlog was consumed during Q223, both Space missions and SDaaS saw moderate increases as sales did not meet earlier expectations.

To try and provide a better understanding of how the group is growing, we include commentary on each subsidiary.

In the original Uppsala-based business, the operations continue to focus on Space Products revenues in the form of a suite of avionics, data processing and power management systems for customers. It has started to build up its Space Mission capabilities, although at present these remain relatively small (H123 sales: SEK1.16m).

Q223 saw a sharp improvement in performance as avionics sales grew, thanks to recent order intake. The business also received further licence income of SEK6.1m (H122: nil), which we now expect to be an element of future revenues and is essentially a 100% margin. It boosted Q223 EBITDA to SEK3.05m, which was not enough to offset the Q123 loss, but the margin of almost 18% is encouraging and more aligned with our medium-term expectations.

The Glasgow-based operations are the principal core Space Missions activity of the group, providing satellite platforms and mission solutions to third parties, as well as developing platforms for its own use as it builds up its SDaaS offering.

Although revenues were marginally up year-on-year in H123, the performance was not as strong as anticipated. It should be noted that much of the capitalised development work, which is increasing as its own satellite development accelerates, is in Clyde Space, so activity levels are higher than net sales suggest. More satellites are to be launched over the next 18 months. The primary reason for the H123 shortfall against our expectations was the delay to commissioning launched satellites that had been expected to start generating higher-margin SDaaS revenues during Q223. These are now expected to come onstream in H223, providing a significant boost to both sales and EBITDA performance, which should accelerate into FY24 as more of its own network satellites are deployed.

Based in Delft in the Netherlands, Hyperion supplies reliable, high-performance miniaturised subsystems for small satellites, including electronic and mechatronic systems. It has built a strong reputation for attitude and orbit control technologies and laser communications, and is working closely with academic and industry partners on advanced technologies such as optical satellite communications and propulsion systems. Hyperion’s sales are categorised as Space Products.

Revenues stepped up strongly in H123 and remained stable at c SEK15m in both quarters, generating a consistent and healthy margin of c 31.8%. Revenue was over four times the level of H122, with the total in FY22 only SEK15.5m. The performance was well ahead of our expectations, so we have significantly upgraded our revenue estimates for FY23, although we are assuming the strong performance is likely to ease a bit in H223. Nevertheless, Hyperion should make a strong contribution to the group EBITDA improvement.

SpaceQuest is the US arm of AAC Clyde based in Fairfax, Virginia in the United States. The business has been operating longer than the other AAC subsidiaries and already delivers SDaaS from its own constellation of four satellites and ground stations. It also supplies a range of satellite components, microsatellite subsystems, ground stations, AIS data and M2M connectivity to other commercial aerospace manufacturers and institutions.

SpaceQuest also made strong progress compared to H122, with revenues more than doubling. However, overall, this was much as expected. There was a slight mix shift as SDaaS revenues of SEK9.1m continued to be delivered by the existing fleet of satellites at a relatively stable rate, with the deployment of newer platforms now deferred to FY24. We believe the delays were caused by supply chain issues. However, while the Space Products revenues compensated for the modest shortfall in H123, Q223 saw a sharp drop-off in sales that resulted in some overhead under-recovery, leading to a drop in the EBITDA margin to 25.2%. We expect H223 to be similar to the first-half performance with a significant improvement in SDaaS revenues in FY24.

Omnisys is the most recently acquired of the group businesses and is based in Gothenburg, Sweden. It develops and manufactures measuring instruments, including advanced weather data sensors for meteorological and climate research applications. The company is able to develop advanced payloads that should be available to provide space data for customers operating in a growing number of fields such as science, medical and security. All of Omnisys’s sales are categorised as Space Products.

Omnisys saw a further significant increase in revenues in Q223 as it continued to work through its backlog. However, while Q223 saw exceptionally high growth, the margin dropped considerably as there were excess costs incurred on one specific project. We do not expect the issue to persist and we would expect margins to return to more normal levels of more than 20% in H223.

Based in Cape Town, South Africa, AAC Space Africa commenced operations in August 2021 to capitalise on the expected rapid growth in demand for satellites and space services in Africa. The business has been designated as AAC’s centre of excellence for advanced radio communication systems and is still in its start-up phase.

In H123, it generated modest revenues of SEK1.0m (H122: SEK1.7m), although the previous year benefited from a Space Missions project that completed in Q422. The H123 EBITDA loss was SEK2.2m compared to a loss of SEK1.4m in H122.

H223 should see the launch of additional satellites for Orbcomm and Wyvern adding to the launches in H123. In addition, AAC Clyde Space and its partners in the AOS joint venture, Orbcomm and Saab, are set to launch Ymir-1 in November, the first demonstrator satellite for the proposed VHF Data Exchange System maritime communication system. With the first xSPANCION and additional SpaceQuest satellites expected to be deployed in FY24, AAC expects to have 13 of its own satellites in operation by the end of next year. That should ensure that SDaaS revenues grow sharply over the next 18 months.

With the Space Mission backlog recently enhanced by the SEK16.1m order from Kawa Space and the shorter-cycle Space Products backlog maintained at a similar level to the start of the year, the company appears to be on track to achieve the target of SEK500m sales in FY24.

As a result of the significant difference in the sales mix in H123 compared to our expectations, we have reduced our sales estimate for FY23 by 7.5%. We significantly cut our Clyde Space revenue expectations to reflect the slower ramp-up of SDaaS and the still sluggish third-party Space Missions sales activity. However, the reduction is offset to a great degree by sharper than expected improvements at both Hyperion and Omnisys. SpaceQuest and AAC Clyde Space in Sweden are trading much as anticipated. Overall, we are not changing our PBT or EPS estimates substantially, although the percentage change is significant for small numbers.

Our aggregate adjustments for FY24 lead to a marginal decline in revenues and EBITDA, with a 10% reduction in PBT and 11% lower EPS due to a slightly higher share count (we have assumed all of the Omnisys earnout shares are issued by the end of FY24).