Earth intelligence and space exploration are gaining momentum not just in the United States, but around the world. At the start of fiscal year 2022, the Biden administration announcement a 6.6% increase in NASA’s budget proposal to $24.8 billion. While 50% will be spent on manned spaceflight activities, robotic missions will occupy 30% and the rest (20%) will be used for overhead costs, including technology development, aeronautics and management necessities. Currently, more than 4,852 active satellites are in orbit handling communications, remote sensing, among other space roles. Over the next decade, a four-fold increase in the number of satellites is expected to reach at least 17,000.
In this article, I will explain why Maxar Technologies Inc. (MAXR) is a buy despite the stock price dropping 22.40% over the past year. Investors should expect a successful replacement of the EnhancedView tracking program later in 2022 by EOCL as a sustainable revenue-generating business. Additionally, the company plans to execute and invest in both ground intelligence and space-based infrastructure to achieve critical future mission objectives.
Strategic partnership with NRO
Towards the end of 2021, the National Reconnaissance Office (NRO) called for offers from commercial satellite imagery providers in the United States. This call was under the Electro-Optical Commercial Layer (EOCL). Under this program, Maxar Technologies receives an annual payment of $300 million from the NRO to provide high-resolution imagery using its satellites. The company’s contract with the NRO was extended until August 2022 after it was ratified in 2010. This extension is good news for Maxar as it reported revenues of $468 million in the fourth quarter of 2021. Thanks to the contribution from EOCL, the company’s consolidated revenue for the full year reached $1.77 billion (as of December 31, 2021). It reflects a $47 million increase from reported earnings in 2020.
In his fourth quarter 2021 earnings call, CEO Dan Jablonsky highlighted the fact that the U.S. government has been Maxar’s customer for more than 20 years. Essentially, this shows the continued demand for geospatial data and analytics that further illustrate the company’s high image quality. Maxar’s investments in constellation assets, secure ground systems, data infrastructure, 3D capabilities, AI and ML analytics technology will pay off.
Not surprisingly, with the current Russian invasion of Ukraine, Maxar and BlackSky Technology (BKSY) have been able to deploy their high-resolution satellite imagery to provide military intelligence, even to the public.
Via the Secure Watch platform, Maxar Technologies also provides humanitarian and environmental organizations with free access to satellite imagery. In my view, Maxar is looking to increase its dominance in the geospatial imagery analytical space over the next decade while combining national security analysis with environmental conservation.
From 2021, the market value of the geospatial analysis industry was $9.1 billion. It is expected to reach $37.5 billion by 2026 at a CAGR of 32.8%. That said, Maxar confirmed in its earnings call its focus on launching the WorldView Legion satellites in mid-2022 in line with its Earth Intelligence priorities. In collaboration with SpaceX (SPACE), Maxar has set the reservation window from May 15, 2022 to June 13, 2022 for liftoff.
Legion – The Future
With a global footprint in more than 70 countries, investors should expect the WorldView Legion to increase space surveillance missions from 2022 and beyond. Across the Legion, Maxar will revisit, moving locations on Earth up to 15 times per day for intel-gathering missions. Such efficiency means increased demand from different governments around the world, as many countries tackle the growing threat to national security and environmental protection.
Maxar’s $35 million contract with WorldView Legion Satellites (as part of Maxar’s Direct Access Program) will (among other things) customers to upload and download 30cm class satellite images to its ground station. Commercial customers, as well as defense and intelligence experts, will have access to the world’s most advanced Earth imaging satellites. In addition to this, the images are associated with encrypted downlinks and data distribution rights to meet the needs of space missions.
Legion satellites are the future of space exploration as customers will also have access to Maxar’s 3D data suite. All six satellites are compatible with the global infrastructure, providing customers with highly accurate collection capability. This capability is essential for powering sensor-shooter applications and AI/ML modeling.
What caught my attention as part of its priorities for 2022 and in line with the development of the Earth Intelligence system, was the additional investment of $30 million in the company. This investment is aimed at improving SaaS and DaaS offerings, increasing Maxar’s precision 3D coverage, and increasing referral flow to accelerate the company’s mission.
Capital structure and future market growth
Maxar always seeks to maintain financial flexibility to support growth projects, generate cash and reduce debt through liquidity control. The company’s cash balance is $47 million against a market capitalization of $2.75 billion. With its enterprise value of $4.84 billion, this shows that Maxar’s debt is high. Even so, the company has reduced its accumulated debt (retained earnings) from $1.125 billion in June 2019 to $720 million as of December 31, 2021 (a 36% decline). During the same period, total liabilities decreased by 29.80%, from $4.352 billion to $3.035 billion.
While revenue increased 12% (year-over-year), Adjusted EBITDA also increased 24% as operating margins increased 320 basis points. International defence, intelligence and commercial customers contributed 9% of Earth Intelligence revenue, with EBITDA also growing 14% against 170 basis point growth in margins.
To ensure revenue growth, especially in Earth Intelligence, Maxar’s strategy is to deliver revenue growth through product subscription. As the enabler of today’s geospatial analysis, analysts using open source intelligence (OSINT) use Twitter (TWTR), TikTok, Facebook (FB) and other social media to provide timely data real about current developments on the ground.
Cloud capabilities from other companies such as Google (GOOG), Microsoft (MSFT), Oracle (ORCL) and others are configured to help commercial customers communicate geospatial data and improve collaboration with decision makers. Cloud-based data deployment provides business intelligence that is rapidly increasing in adoption in the geospatial imagery market.
Compared to Google, Maxar appears to be on an upward trajectory, especially with its next verticals in subsequent launches expected in Q2 2022. The chart shows that the stock price yield gain could exceed 20% over the course of the year.
Maxar’s enterprise value of $4.84 billion is higher than the market cap of $2.57 billion, signaling a high debt to cash level of just $47 million. Maxar’s current liability stands at $622 million as of December 31, 2021. Additionally, in addition to quarterly operating expenses of $50 million made by the company through 2022, an additional investment of $30 million dollars should contribute to the growth and development of the company’s infrastructure. In contrast, current assets are $529 million, which means Maxar’s working capital in Q1 2022 will be -$93 million. The business will operate with negative working capital.
Maxar has yet to fully recover from the impact of Covid19 after reducing its quarterly current assets from $1.261 billion in December 2019 to $529 million in December 2021 (a decline of 58.05%). Cash levels also decreased by 20.34% over the same period.
At the end of the line
Maxar’s prospects for launching the WorldView Legion satellites remain key highlights for 2022 as the company prepares to revamp its infrastructure capacity during the year. Maxar is still working to improve its liquidity levels with indicators showing an increase in liabilities versus current assets. However, the solid investment in Earth Intelligence, a move that is being replicated by major companies such as Google and Microsoft, will continue to put Maxar in the limelight over the long term. For these reasons, we are offering a Buy rating for this stock.