Full IDRS Contract Anchors Value

• Addvalue Technologies announced the airtime portion of its first IDRS (Inter-Satellite Data Relay System) contract on 7 June, in which it estimated annual recurring revenue of more than US$40m from the full deployment of the customer’s satellite hardware and the provision of airtime services; and that Addvalue, together with Inmarsat, will be contracted until 2026.
• Given 50% hardware gross margin and 20% share of airtime revenue, we estimate that this contract will contribute about S$0.9m of PATMI in FY19 (ending March 2019).
• Extrapolating expected revenue and profitability to 2026, we value this contract at US$30.46m (S$40.82m) using the residual income method.

With Growth, IDRS Business May be Worth S$70m

Addvalue Technologies is also conducting a feasibility study for its next IDRS customer. Assuming some new contracts, we value the IDRS business at S$70.07m, comprising of S$40.82m from the existing contract and S$29.25m from projected future growth. 

By establishing the value of the IDRS business at 3.47 Singapore cents, we can infer that the market values the non-IDRS business at S$12.76m or 0.63 Singapore cents (4.1 – 3.47 cents).

Non-IDRS Business

The challenge is that the non-IDRS business is not profitable. We noted that

1. the group’s losses in FY18 were aggravated by US$7.9m of non-cash and potentially non-recurring expenses,
2. the group has secured a US$1m design services contract for FY19 and
3. it is in the midst of negotiating another US$10m of non-IDRS contracts.

Hence, we expect non-IDRS losses to narrow and lead to group PATMI of US$0.1m in FY19 including US$0.9m of contribution from the IDRS business.

Updated Valuation at 4.85 – 5.52 Singapore Cents

We reckon that the non-IDRS business can be disposed for US$10m – US$20m. Other valuation adjustments include net proceeds of S$9.6m from a proposed placement and S$5m of estimated government grants. The government has a programme to match investments by Addvalue. Hence, the placement will provide funds for Addvalue to draw down on these grants.

Our computations in this update are based on the expanded share capital of 2.02 billion shares.

Upgrade to Overweight

We lowered our valuation as we tempered our growth expectations. However, we upgrade Addvalue to Overweight in recognition of the progress Addvalue has made in its IDRS business and the now clearer outlook for this business. Upside ranges from 18.4% - 34.6% to 4.85 – 5.52 cents against downside of 15.4% to 3.47 cents.

The proposed placement at an issue price of 4 cents may weigh on Addvalue’s share price. Hence, we qualify our Overweight rating with an average return and average risk qualification.

A potential catalyst could be if Addvalue persuades Inmarsat to take a stake in it. This would open more avenues for cooperation and enhance the viability of the non-IDRS business long term.

Source: NRA Capital Research - 08 Jun 2018