MARKET ARTICLE (REF #002-SEP-2020)
Amazon’s AWS Ground Station business (“AWS GS”) and Addvalue Technologies’ Inter-Satellite Data Relay System (“IDRS”) both help clients to communicate with their satellites. As end users demand for real time turnaround of earth imagery and other observation data, the IDRS complements the existing ground station network with its always-on connection to the satellite. While the ground station handles heavy data downloads to earth, the IDRS can provide real time telemetry, tracking and communication. Taken together, both networks form a comprehensive solution to the same client. Capella Space will be the critical testbed for this suite of technologies. If proven economically feasible, Amazon may want to acquire Addvalue eventually for its IDRS technology. The IDRS may generate operating profit of at least US$20m per year.
What is the IDRS used for? Customer’s press release says it all.
In a press release dated 21 January 2020, satellite operator Capella Space made the following points
1) The industry standard is for end users to wait for eight hours to receive satellite data.
2) End users want data that is reliable, timely and high quality.
3) Real time tasking of its entire constellation of satellites will be provided by a highly secure encrypted two-way link with Inmarsat, through a partnership with Addvalue.
IDRS is “holy grail” that is critical to Capella Space’s value proposition.
• In the same press release, Capella Space asserted that it will be the first and only Synthetic Aperture Radar (“SAR”) provider to provide real-time tasking and capture of very high-quality imagery anywhere on Earth at any time.
• According to a 6 August 2019 article titled “Capella First For ‘Holy Grail’ of Real-Time SAR-Sat Images” by breakingdefense.com, real time tasking and receiving of data is an industry “holy grail” and that every single remote sensing company will go “this direction” in the future.
• Therefore, the real time tasking capability offered by Addvalue’s IDRS solution is of high value and will be highly sought after by other satellite companies in the future.
How it works? AWS and IDRS are complementary solutions.
• Each of Capella Space’s satellites will carry an IDRS terminal that will keep the satellite constantly connected to Inmarsat’s network.
• End users will use a web application to send orders to Capella Space which will instantly route the instructions e.g. location, time and frequency of revisit, through the Inmarsat network to the next available satellite without having to wait for the satellite to pass by any ground station.
• The satellite immediately reorients itself to take images and will return a thumbnail and meta data (through the Inmarsat network) to the end user within minutes.
• Full resolution images will be downloaded to AWS GS within 20 minutes. Capella Space’s satellites will be able to link with an AWS ground station every 20 minutes.
(As summarised from the 6 August 2019 breakingdefense.com article.)
Currently, there are six AWS GS ground stations – US East (Ohio), US West (Oregon), Middle East (Bahrain), EU (Stockholm), EU (Ireland) and Asia Pacific (Sydney). The US ground stations were launched in May 2019, followed by Bahrain in November 2019, Stockholm in December 2019 and Ireland and Sydney in April 2020.
Amazon had wanted to build 12 stations globally by the end of 2019, but these plans were slowed after it realised customers wanted ground stations in different locations than originally assumed. Future sites will be decided with customers, but at least one “high latitude site” will be completed in 2020. Local regulatory regimes also prevented Amazon from predicting when future sites will be completed and activated.
One ground antenna can only talk to one satellite at one time. IDRS ensures always on connection.
• One key difference between a ground station service and the IDRS is that the former is designed for high speed data download, capable of downloading gigabytes of data from the satellite in one second. Using a ground station connection to conduct telemetry, tracking and command operations (“TT&C”) will not be as resource efficient as using the IDRS.
• One individual antenna at the ground station can only communicate with one satellite at one time. For the same ground station to handle both data download and TT&C, two antennas will have to connect to the same satellite. The IDRS allows instruction to be sent to a satellite even as it is engaging in data download to a ground station.
IDRS will strengthen AWS GS’s competitiveness.
In a nutshell, it is not unconceivable for Amazon to acquire Addvalue given that both parties share overlapping customers and that the IDRS will strengthen AWS GS’s value proposition to satellite operators by offering true real time TT&C, in addition to data up/down link.
What is at stake? Tens of millions of recurring sales each year that goes straight to gross profit.
Capella Space has remarked that it plans to pull down 2 to 5 terabytes or 2,000 to 5,000 GB of data per satellite per day. The design of the satellite that it unveiled in the January press release is capable of downloading data at an average rate of 1.2 gigabits per second (“Gbps”). This means each satellite will spend 3.7 to 9.3 hours a day downloading data to AWS GS. AWS GS charges US$3 to US$22 per minute of connection.
Conversely, the IDRS has a data rate of up to 200 kilobits per second (“Kbps”) or a daily data transmission rate of 2.16 gigabytes. Assuming 50% utilization and a cost of US$2 per megabyte, each satellite will generate US$2,160 of airtime revenue per day, split e.g. 80/20 between Inmarsat and Addvalue. For a constellation of 36 satellites, we are looking at US$5.68 million of revenue accruing fully to Addvalue per year, with no cost.
Addvalue in its latest financial results announced on 30 July 2020 mentioned that it has secured a contract from a third IDRS customer, in addition to Capella Space and another existing (unnamed) customer. Including licensing income from another customer that is using IDRS’ intellectual property, Addvalue has a total of four IDRS customers. Assuming similar constellation sizes, four customers alone may generate some US$20m upwards of airtime revenue for Addvalue each year.
Launch today marks the start of IDRS airtime revenue generation, after delays in 2019
Addvalue launched the IDRS as early as August 2017. By March 2018, it had entered into commercial agreements with two clients. By March 2019, it had successfully delivered one engineering version of the IDRS terminal for integration with the client’s satellite and for ground testing.
However, the first commercial launch of the IDRS terminal into space was not executed in 2019 as Capella Space took time to redesign its satellite to meet users’ requests, thus cumulating in the January 2020 press release by Capella Space whereby the new satellite design was unveiled. The first commercial launch of the redesigned satellite Sequoia was originally scheduled for March 2020, which was again delayed due to Covid-19. The launch is now slated for 31 August 2020. Addvalue has since delivered one terminal in late 2019 and one terminal in early 2020 to Capella Space.
In a nutshell, the IDRS went through a three-year gestation period following its commercial launch in August 2017. With a pipeline of customers and launches lined up, growth can be expected to be exponential going forward.
Capella Space has committed to at least US$1 million of terminals. Another six IDRS terminals will be delivered to Capella Space by the end of March 2021. Capella Space will also be launching its 36 satellites in stages. Hence, the IDRS terminal orders are also being staggered.
What’s the value of Addvalue? Undervalued when compared to Virgin Galactic.
Addvalue had earlier engaged an intangible asset specialist which valued its business at S$123 million (US$88.5 million) as of 31 May 2017. This is equivalent to 9.2x price-to-sales and 50.5x price-to-earnings. These multiples may seem lofty, but should be viewed in the context of the growth potential of Addvalue’s business. Addvalue has a high gross margin of 74% in its latest financial year! This is proof of the high technology content of its business.
Another space company Virgin Galactic is trading at US$4.4 billion despite having revenue of only US$3.8 million and net losses of US$211 million in 2019. In contrast, Addvalue reported revenue of US$9.6 million and a net profit of US$1.75 million for its latest financial year ended March 2020.
In terms of price to book, Virgin Galactic is trading at 10.37x while Addvalue is trading at just 8.14x book value. Adjusted for the conversion of its debt to equity, Addvalue is trading at just 3.06x book value (2.6 cents x adjusted share base of 2.1 billion shares / USD SGD rate of 1.39 against US$7.8 million of reported equity and US$5.05 million of debt). This implies upside of 238% once benchmarked against Virgin Galactic!
One may argue that Virgin Galactic has managed to raise more funding than Addvalue and thus has access to much more financial resources and thus deserves a premium. However, equity of US$467 million will not last long in the context of US$211 million of annual losses. Conversely, Addvalue is profitable in its latest financial year.
Addvalue had 1.87 billion shares outstanding as of 31 March 2020. Including 340.9 million shares to be issued following an ongoing placement and assuming the conversion of all convertible debt, the S$123 million valuation works out to an approximate fair value of 5.56 cents per share – almost double its closing price of 2.6 cents on Friday 28 August 2020.
Someone should give Jeff Bezos a call!
Disclaimer: This article is written for general information only and itself and its contents are not meant to be construed as any form of trading and investment recommendation or advice to readers. The data and figures are based on publicly available information. Any consensus or projections provided herein are subject to execution risk and no warranty is provided. Changes may occur without prior notice. Trading and investment involve risk.
Market & Analytics Team
ALA Advisors Pte Ltd