Executive Summary – Improving Fundamentals for Addvalue Technologies Ltd (SGX: A31)

We are excited to present SGX Main Board listed Addvalue Technologies Ltd (“Addvalue” or the “Company”) as an attractive investment opportunity for our clients. We believe that its technology and expertise are being undervalued and that the Company is on the cusp of a sustained turnaround driven by multiple pillars of growth from 2H FY23F. In this report, we provide a “BUY” recommendation on Addvalue, with a target price of S$0.030 per share (+131%, or S$0.025 per share on a fully diluted basis, +92%).

 

Key Investment Merits

Rare Singapore company to have established industry standard in satellite communication.

• Addvalue started development of its inter-satellite data relay service (“IDRS”) from as early as 2014, launched the IDRS in 2017, launched its first commercial terminal in October 2019 (under fast growing earth observation customer Capella Space’s payload); and commissioned the system in November 2020 jointly with satellite communication giant Inmarsat. 

• The commissioning of the IDRS in 2020 has launched a new era of “always-on”, on-demand 24/7 satellite communication, cutting turnaround from hours to minutes. Whereas it used to take 90 minutes to 8 hours to task a satellite and receive data, IDRS’s users can task a satellite and receive a first look picture within minutes and higher quality data within 20 minutes. 

• Seeing IDRS capabilities as a critical competitive advantage, 10 satellite operators/owners from US, Europe, Japan and Taiwan are planning to use the IDRS for their satellites today, within a short span of two years since its commissioning in 2020. 

• The recent Ukraine war has proved the usefulness of real time (both high frequency and high resolution) imagery and data, with mass media using satellite data to report on the latest movements on the front line. Several innovations are driving renewed investments in satellite constellations. These include all-weather synthetic aperture radar satellites that can penetrate atmospheric conditions and cloud cover to observe the earth both day and night, as well as satellites capable of detecting radio frequency emissions that can detect GPS interference, jamming operations and other applications. 

• Assuming 30 satellites per constellation, approximately 300 satellites will be equipped with IDRS terminals based on these 10 customers, translating to revenue potential of US$45m from the sale of terminals alone. 

• To-date, Addvalue has shipped 30 terminals, of which only 7 have been launched into space. We anticipate exponential revenue growth from the IDRS business over the next 2 to 3 years, as Addvalue’s lengthy investment in IDRS bears fruit. 

 

Addvalue’s technology and engineering expertise spans far beyond space communication, to military, aerospace and telco applications.    

• Addvalue’s second pillar of growth on the other hand has a much shorter gestation period. It first started supplying software defined radio modules in 2018, under a contract with a government agency. These orders have turned into a recurring revenue stream and the Company launched its first ultra-high performance reconfigurable digital radio module (the “ADRS1000”) in 2021.

• Software defined radio’s value proposition lies in its reconfigurability and ability to operate multiple channels without a corresponding increase in hardware footprint, with applications in high throughput areas such as 5G networks, as well as applications in radar and signal monitoring.

• We are impressed that Addvalue has partnered with industry leaders Avnet and AMD to develop the ADRS1000. Addvalue’s ability to secure these partners provide evidence that its engineering expertise and technology suite are more valuable than its current market capitalization of US$34m suggests. 

• The ADRS1000 is one the priciest products made with Xilinx components that are carried by Avnet, lending weight to the sophistication of the product. Initial orders for shipment within 2022 have been received.

 

Rights issue of convertible bonds provide attractive opportunity to increase participation.

• Company aims to raise net proceeds of S$5.6m from rights issue of 5-year 6% convertible bonds. Several large investors and directors have committed to subscribe for at least 60% of the convertible bonds, indicating strong interest in the rights issue.

• The Company had raised about US$6.8m of funds from the conversion of warrants and options by investors since the end of FY22 (ended March 2022). Hence, the Company has adequate liquidity, and the purpose of this rights issue is to better position itself for future growth. We expect fund raising risk to drop following this rights issue.

We believe that Addvalue deserves a premium for joining the club of exclusive revenue generating space companies and for being a segment leader in its industry. Industry peers trade at median P/S of 9.1x. Excluding unprofitable companies, the peer P/E is 26.5x. Our DCF based valuation translates to 6.02x FY2023F sales and 18.11x FY2024F net profit.

 

Recommendation

Rating Target Price Current Price Upside/(Downside)

BUY S$0.030 (S$0.025, fully diluted basis) S$0.013 as of 30 September 2022 +131% (+92%, fully diluted basis)

 

Share Price Information

Company Profile	Design, development and distribution of communication products and services
Market Cap: 52 week Hi / Lo: Daily volume:	S$42.15 million S$0.020 / S$0.010 1.96m (3-month daily average)

Source: ALA Advisors, Bloomberg

 

Financial Summary

Y/E March US$m	2021	2022	2023F	2024F	2025F
Revenue	2.7	5.5	11.2	16.2	20.2
EBITDA	-3.4	1.0	2.9	6.1	7.6
Operating profit	-4.3	-6.6	1.6	5.0	6.7
Net profit	-6.2	-8.0	0.6	3.7	5.1
EPS (US$ cents)	-0.31	-0.34	0.02	0.11	0.14
PE (x)	NM	NM	50.1	7.9	5.8
P/B (x)	4.8	15.5	2.5	1.9	1.5
ROE (%)	4.3	14.0	2.9	2.2	1.7

Source: ALA Advisors, Bloomberg

NOTE: The full Market Research report is for intended clients only and upon request. To receive it, please email: contact@alaa.sg