The author is an analyst of NH Investment & Securities. He can be reached at firstname.lastname@example.org. -- Ed.
Satrec Initiative (SI) is a domestic satellite manufacturer competing in the global marketplace. Having secured technological competitiveness thanks to active investments in R&D, the firm’s new orders are expanding. With the space industry now transforming into a private-oriented commercial market, Satrec is well positioned to see its valuations re-rate in response to its strong financial structure and rising earnings.
Satellite maker boasting global-level technological competitiveness
We draw investor attention to recent (since 3Q19) sharp increases in the share prices of space industry-related companies listed in the US amid the ongoing transformation of the global space industry towards being a private-oriented commercial market (rather than being shaped only by government and military projects). Thus, given that Silicon Valley is directing greater investment towards space-related firms, demand for Satrec Initiative’s electro-optical (EO) satellites should continue to expand going forward.
Satrec stands as the sole domestic player capable of developing, manufacturing, and exporting satellite systems. Evolving alongside Korea’s space industry, the firm has secured global-level technological competitiveness via active R&D investment activity. Competing with Airbus (France), Thales (Italy), IAI (Israel), and NEC (Japan) in the global marketplace, Satrec’s expanding new orders are translating into steady earnings growth.
R&D investments bearing fruit: Attracting higher new orders
Satrec’s consolidated annual sales upped to W70.0bn (+52% y-y) last year. Helped by higher R&D expenditure since 2015, the firm has been widening its product portfolio through cutting-edge technological advancements. As a result, its new overseas orders are on the rise. And, the firm is putting in place future earnings catalysts via its expansions into various satellite-related industries through subsidiaries SIIS (satellite image sales) and SIA (satellite data analysis). A likely drop this year in R&D-related amortization costs for intangible assets should contribute towards OPM improvement.
As of end-2019, Satrec’s order backlog was sized at W166.0bn. Due to the recognition of revenue based on cost input, 2020 sales and OP should climb to W86.4bn (+23.3% y-y) and W11.5bn (+26.3% y-y), respectively. Anticipated additional orders in 1H20 will likely further spur earnings growth this year. Of note, unlike Satrec, most overseas space-related players are facing operating losses or high valuations (Refer to Table 2 in full report). Based on its projected earnings for this year, Satrec’s shares are currently trading at a 2020 P/E of 20.9x. Considering its strong financial structure and rising earnings, valuations re-rating should be in the cards.