The author is an analyst of NH Investment & Securities. He can be reached at firstname.lastname@example.org. -- Ed.
Satrec’s share price has plunged 46% from its previous high. But, we point out that the firm’s earnings are insulated from Covid-19 effects. We foresee 2020E sales growth of 23% y-y on an increased order backlog.
Sharp earnings uptrend to kick off from 1Q20
Even though the impact of the Covid-19 outbreak on Satrec Initiative (Satrec)’s earnings is to be limited, its share price has plunged 46% from its previous high. As its major customers in the electro-optical satellite market are domestic and overseas governments and the military, Satrec Initiative’s work projects are performed under annual budget and project schedules, an advantage which insulates its earnings from global economic slowdown effects. Thus, there is little risk of delays in delivery of ordered products, and slated overseas bidding in May and October is expected to proceed normally.
As of end-2019, Satrec’s order backlog amped up to W166.0bn (+192% y-y), backed by expanding product lineups through cutting-edge technological advancements. As the company recognizes sales based on cost input, sales are expected to start climbing from 1Q20—we forecast full-year 2020 sales of W86.4bn (+23% y-y) and OP of W11.6bn (+26% y-y).
Offers strong valuation merit versus global space players
Satrec Initiative is Korea’s representative satellite player. Growing alongside the domestic space industry, it is capable of direct development and manufacturing of satellite systems. In the global arena, the firm competes with Airbus (France) and Thales (Italy). Boasting global technological competitiveness, its overseas orders are rising. Satrec is benchmarking global satellite companies, including expanding its satellite-related businesses via subsidiary SIIS (satellite image sales) and SIA (aviation data analysis).
Satrec’s shares are currently trading at a 2020E P/E of 11.8x and an EV/EBITDA of 2.9x. Weighed upon by both high research and development expenditure and increased depreciation costs (due to the owning of their own satellites), most overseas space-related players now find themselves in operating loss situations or are trading at high valuations. Noting that the average EV/EBITDA for its overseas peers is 11.6x, we view Satrec’s shares as being significantly undervalued. With the global space industry increasingly driven by private sector-oriented commercial markets (rather than only by government and military projects), greater investment is being directed towards space-related firms. Given this backdrop, demand for Satrec’s electro-optical (EO) satellites should continue to expand going forward, translating into valuation re-rating.