- Maxar Technologies is emerging from a very tough period of restructuring.
- There's plenty to do yet, but there's light at the end of the tunnel.
- We believe the business to be on steady footing now, with balance sheet risk kicked a long way down the road.
- But its recent history means we expect the market to continue to hammer the stock back down.
- We believe MAXR can be a very attractive buy once the market settles.
- This idea was discussed in more depth with members of my private investing community, The Fundamentals. Get started today »
DISCLAIMER: This article is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this article is not an offer to sell or buy any securities. Nothing in it is intended to be investment advice and it should not be relied upon to make investment decisions. Cestrian Capital Research Inc or its employees or the author of this article or related persons may have a position in any investments mentioned in this article. Any opinions or probabilities expressed in this report are those of the author as of the article date of publication and are subject to change without notice.
Maxar Technologies (NYSE:MAXR) is one of a small number of pure-play space stocks we cover in our service here on SeekingAlpha. The company is highly leveraged towards growth in the business of space and we believe that's a very good place to be. We think the space industry is in the early stages of a long-run growth curve, and we don't think this is yet fully appreciated by the market at large.
It's fair to say we have been highly critical of MAXR's stock in our work on SA. Our view changed recently as the fundamentals have improved. And we now see an attractive buy coming down the pike as this bearish market is still treating the company as if it were a busted flush.
The company hit a major balance sheet problem towards the end of 2018. The underlying cause of this was an accumulation of excessive debt used to fund the rollup of a series of space-sector companies under the aegis of the former holding company, MacDonald Dettwiler Associates, a Canadian entity. (The best of those acquisitions was the purchase of Digital Globe in 2017, leading to the rebrand as Maxar and ultimately to the company's redomicile from Canada to the US, in order to maximize its potential for future US government contracts). Then the company was hit by an on-orbit satellite failure, a pretty unusual event. This caused a very significant annual EBITDA and cashflow reduction and whilst MAXR successfully claimed a one-time insurance payout, in a highly levered business one-time money is nowhere near as valuable as recurring money.
The present CEO, Daniel Jablonsky, appointed January 2019, was formerly the CEO of Digital Globe. Since Jablonsky's appointment, the board and senior management team of MAXR has been remade in Digital Globe's image - on balance a positive thing. MAXR's challenges have been for the most part inherited by Jablonsky and team. The rollup debt was accumulated under previous CEOs, and the satellite failure was a kind of grey cygnet event that is exactly the sort of thing that happens in business or sport when you're already having a lousy afternoon. The actions that the team have taken have been on the whole very positive for shareholders.
Restructuring To Date
Throughout 2019 you will find our MAXR coverage kept making the same point. Huge leverage, no cashflow. The potential downside outcome of that isn't rocket science. Although MAXR's national security contracts likely insulate it from a full collapse, bankruptcy and asset sale, it was easy to see a scenario in which lenders accelerated the loans - which is to say commenced the default process - and a debt-for-equity swap took place, diluting those shareholders who were not also lenders. We said that we felt the best way to play the 2019 restructuring was to take a position in both the debt and the equity - a strategy open to many funds but not so many individuals.
Throughout the year, this precarious situation persisted. The sale and leaseback of some real estate in Palo Alto, CA, helped a little, although we felt this was overly celebrated at the time by the lingering army of MAXR cheerleaders (who have been quiet of late - of which more later). The subsequent refinancing of short-term debt maturities alarmed us a little since it resulted in a truly huge interest rate and material OID (original issuer discount - where the value of the money you just borrowed is higher on day one than the money you actually collected from the lender), plus, it appeared from the announcement that the company was using borrowed money to pay the fees incurred to borrow the money. Yikes. That's taking it close to the bone.
Here's how the stock performed through 2019.
A faltering but upwards recovery story.
The big step up right at the end of the year is what changed the picture for us. The company sold one of its major divisions, MDA, to a Canadian private equity fund, for CAD$1bn (approx US$750m). Assuming completion happens as planned in or around Q2 this year, that means MAXR's balance sheet pressure is alleviated for 2-3 years. And that buys the company time to make further improvements.
Risk And Reward
All through 2019 we felt that the stock was running away with itself, ahead of the fundamentals which remained weak. We stayed at Neutral as a result. (Another reason we stayed at Neutral was the chorus of social media folk telling us we were wrong. Whilst this always amuses us no end, it rarely changes our view). We saw there could be upside but we also felt that balance sheet risk presents binary downside which cannot be compensated for. Our approach to investing is - first, try to not lose money, second, try to make some. And MAXR pre the MDA sale carried for us too much risk of losing principal to want to invest.
As we've said elsewhere, our ideal stock in our coverage universe is one where we can hold and make long-term gains, and along the way trade in and out to boost those gains. Well, we declined to take a long term position in MAXR but we found success with a couple of short-term trades posted for our subscribers. You can read about those here and here if of interest.
Now, with the stock correcting hard in the present forgive-nobody environment, we think the risk-reward balance is tilting and once this market levels out (which by the way we think is not yet) we believe MAXR can present an attractive long-term buy.
A Potential Acquisition Target
Through 2019 we said over and again that the three key hurdles we believed the company had to cross were: balance sheet risk reduced; path to operating cashflow established; and the next-gen satellite fleet proven to perform.
Now in March 2020, one has been achieved (balance sheet pressure alleviated, albeit not permanently), one is reportedly very much in progress (next-generation "Legion" satellite fleet buildout) and one is a consequence of the former two (a path to a cashflow positive business). And for us now the numbers stack up.
The management team is highly incentivized on the equity front, with cheap or zero-cost stock. In truth we have felt the team has been overly liberal with its stock awards. But the flip side of that is that we think it can be a benefit to shareholders, at least those who look at the company the way we do below, which is to say, a business that we think can be acquired by a defense major within a year or two.
Let's look at the numbers.
Here we take the information in the company's recent investor day presentations to project to the end of 2020.
Valuation after today's punishing trading is as follows:
And projecting forward to 31 Dec 20 balance sheet and income statement if there is no change in stock price from today:
(You see the revenue multiple fall but the Adj. EBITDA multiple rise. This is because EV has decreased (debt reduced thanks to the influx of cash from the completion of the MDA sale, offset slightly by our assumption of an increased share count), revenue is flat (based on the company's investor day guidance, per the link above) and EBITDA is down (based on the midpoint of the company's investor day guidance, again per link above). So EV down, revenue flat = EV/Rev multiple down; EBITDA down, so EV/EBITDA multiple up).
What really persuades us though is the multiple of Adj. EBITDA that Northern Capital just paid for MDA. It doesn't look like a wild number - 10.7x Adjusted EBITDA.
Let's apply a 10% haircut to that to account for the current market shock. (What remains of MAXR is a better quality business - more recurring revenue and higher core margins - than was the sold MDA unit, so we think a 10% haircut is reasonable. Call it a 20% reduction for the market drop, plus a 10% addition for the quality of business).
So we'll use a multiple of 9.6x and apply that to MAXR's 31 December 2020 midpoint guidance. Here's what that looks like:
Could be good. There's nothing very scientific about that 77% upside potential and we wouldn't hang our hat on it. But it tells us there is substantial upside from here and that makes us want to take a long term position.
That 9.6x EBITDA isn't a silly multiple to choose. The MDA business that was sold was flat-ish on the revenue line, didn't generate much cash, and we think there were relatively few buyers so the valuation multiple wasn't bid up by a furious auction.
What's left in MAXR is flat-ish on the revenue line, doesn't generate much cash at the moment, but we think there could be multiple buyers were the business in play. (Principally LMT and NOC in our view). So we don't think using a 10% lower multiple is absurd, even allowing for the changed market environment.
The management team at MAXR appear to us to be of the rational-financial type, rather than the emotional type. Which is to say that we think they would sell the business for the right price - there's no founder-CEO there for instance. And we think it's not far-fetched to have such a price as a modellable upside target.
MAXR isn't at this stage a predictable business or stock. So we don't think it's a company in which one should aim for a big allocation of your portfolio. As we've seen this last couple of weeks the stock over-reacts to the upside and downside all the time.
For now, we're at Neutral because we have no particular reason to buy the stock right away - the market is too unstable for that in our view. But we have a small chunk of MAXR still in our long term account. And our plan is to add to that once we see the current market settle a little. We don't think that's this week, by the way. Our goal being that if the company is acquired in the next couple of years, we'll make a nice gain. And we'll keep an eye out for oversold/overbought situations with the stock and look to highlight potential trades in those situations too.
Cestrian Capital Research, Inc - 9 March 2020.
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This article was written by
Cestrian Capital Research, Inc. is an independent, SEC-regulated investment research business led by CEO Alex King. Alex is a professional investor with 3 decades of experience. Cestrian specializes in covering growth stocks, index ETFs and index options, long-run investing, swing trading and risk management via hedging.Alex runs the investing group Learn more.
Analyst’s Disclosure: I am/we are long MAXR, LMT, NOC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
We are long MAXR, LMT and NOC on a personal account basis.
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