Investors seem to be discounting a product that is shaping up to be the Company’s future lifeline
Juri Zguri | Ubika Research Analyst | May 31, 2016: Despite having its share price plummet back to Earth during the past year, things may be looking upwards once again for tech stock UrtheCast Corp. (TSE:UR).
UrtheCast Corp. (TSE:UR) is a Canada-based technology company engaged in developing a Ultra High Definition (HD) video feed of Earth, streamed from space in full color. UrtheCast is focused on the commercialization of high definition, near real-time video and images of Earth from space. UrtheCast has built, launched, installed, and operates two cameras on the International Space Station (ISS). Video and still image data captured will be downlinked to ground stations and displayed on the UrtheCast Web platform. UrtheCast’s cameras provide Ultra HD video and still imagery of Earth, which allows monitoring of the environment, humanitarian relief, social events and agricultural land. The Company also provides engineering and services to customers in the space industry. Earth Video Camera Inc. (EVC) is a wholly-owned subsidiary of the Company.
UrtheCast brought in revenues of C$47.3M in fiscal 2015, and remains as a development play in the Earth Observation (EO) imagery sector. Management’s guidance for FY2016 revenues is $55-60M. Its market cap sits at $107M, and average volume from May 25, 2015, to May 25, 2016 is ~400,000.
Figure 1. Price & Volume Trends for UrtheCast
Source: Ubika Research, Yahoo Finance
The Company’s stock price is down ~30% YTD. In our opinion, the market has set an inefficiently low price, compared to UrtheCast’s value. Particularly, there has been too much correlation between the price movements of UrtheCast, and the price movements of oil. While the Canadian economy is relatively (to other nations like the U.S.) dependent on the price of oil, that does not imply that all Canadian companies are as well. The following figure exemplifies the positive correlation (~0.72). As exemplified, a lower price of oil has somewhat led to a lower stock price. This is unjustified, given UrtheCast’s diversified portfolio of revenue segments.
Figure 2. Relationship between UrtheCast Stock Price & Oil Price
Source: Ubika Research, Yahoo Finance
To be sure, almost all of UrtheCast’s sales come from outside Canada, signifying its relatively low dependence on the Canadian economy in general. In this regard, a depreciating Loonie (which can be seen as a consequence of the depressed oil prices) is not a negative factor in terms of earnings.
Figure 3. UrtheCast Revenue Segmentation
Source: Thompson Reuters
While UrtheCast is not the largest player in its respective sector, we believe ambitious goals, coupled with prudent management that is capable of execution, allow for upside in the mid-long term future. The following factors will come into play to provide significant share-price appreciation:
• Execution of 16 Satellite OptiSAR Constellation
On June 19, 2015, UrtheCast announced the newest addition (currently has 4 sensor systems) to its commercial products: a Synthetic Aperture Radar (SAR) of EO satellites. One main feature the OptiSAR will offer is optimized multispectral imaging through cloud avoidance.
R&D phase and some prototype testing for this technology have already been completed. That being said, revenue generation from this segment is projected to be in the 2018-2020 timeline. Analysts are expecting a firm contract for the product by the end of 2016. This gives long-term investors something to look forward to.
One market UrtheCast has only recently ventured into is the lucrative American economy. On April 4, 2016, UrtheCast signed a five-year Cooperative Research and Development (CRADA) with the U.S. National Geospatial-Intelligence Agency (NGA). The Company has expressed interest in establishing relationships with American companies that hold a strong footprint in the Department of Defense and/or Intelligence Communities. One such product they could leverage is the OptiSAR. We believe UrtheCast can also leverage its now-established exposure into the U.S. market, and attract more government agencies, as well as corporations in need of EO imagery devices.
Figure 4. OptiSAR Constellation
Source: Company Filings
• Growing Demand & Market Size in EO Imagery
The EO market is set to expand several fold in the coming decade. Despite high initial capital costs, as well as strong government regulations and dependence, the EO market is certainly competitive and thus in a growth phase. Traditionally, companies in the space provided imagery and information solely to government entities. However, with the growth of technology, corporate enterprises have increasingly demanded such imagery for their operations. Most importantly, the long-term trend incorporates the every-day consumer, where intricate Web and media applications become available across the globe. One research report by Northern Sky Research (NSR) forecasts a $5.1 billion market by 2023, citing advancing resolution imaging as the key catalyst.
One example of a geoanalytics opportunity that UrtheCast can take advantage of is through agriculture.
Agriculture giant Monsanto estimated that ~1 billion farm acres globally could be supported by geoanalytics services and product, and mentioned that the market could sustain $20-$25/acre.
The Company’s Filings mention that one such technology is remotely-sensed data, which is estimated to improve over 40 separate agricultural decisions (i.e. seed selection, tillage, crop diagnostics, Harvest, etc).
Figure 5. Earth Observation Imagery Market Size Forecasts
Source: Company Filings
The major catalysts we see for the Company moving forward are as follows:
• Strong cash position. UrtheCast ended Q1 with $39 million in cash and equivalents. Despite being down from $47.5 million last quarter, we see this healthy cash balance (net cash of $1.6 million) as a catalyst due to enhanced M&A potential
• OptiSAR rollout. This product is shaping up to be the Company’s future lifeline. It is using significant resources, and expects an impressive rate of return on its investment. Advanced product technology, a competent management and engineering team, and a rapidly-growing industry all help boost this product’s valuation contribution
• U.S. exposure. UrtheCast’s exposure to the U.S. is amplified with the NGA deal. Not only does the NGA agreement provide revenue generation potential in the 2017-2018 horizon, but successful partnerships and clientele in the U.S. may lead to greater growth in the lucrative U.S. market
As with any relatively small technology business, there are inherent risks that investors should be cognizant of:
• Slower rollout of OptiSAR. As the product begins to attract customers, supply chain management will be pivotal to the segment’s future success. This is especially true if competitors release similar products during that time span
• Negative earnings. The Company continues to operate at a loss. In order to continue operations in the longer term, this will have to change. To be sure, EBITDA is expected to turn positive in FY2016, providing relief and evidence of a profitable operation
In closing, we found UrtheCast to be an outlier that has been potentially undervalued by investors. Looking at the Company from a financial valuation standpoint, it trades at a 2.5x EV/Sales (LTM), compared to its mean peer group multiple of 2.7x. While the Company is trading relatively in-line with its peers, we believe the rollout of OptiSAR is currently not being factored in as much by investors. We advise a closer look at UrtheCast in the coming quarters.