We are long shares of Maxar Technologies, a leading provider of space-based imagery and infrastructure as it nears the launch of a game-changing new constellation, WorldView Legion. The operational and financial benefits of the new fleet once it enters service will be nothing short of transformative. The constellation will expand on Maxar’s already market dominating high-resolution imaging capacity, and enable new higher revisit use cases. We estimate the combination of higher growth and the conclusion of capital spending associated with Legion will drive free cash flow from a little over breakeven currently, to $360m by 2023. This cash flow enables a virtuous cycle of balance sheet repair – as debt reduction and interest savings from refinancing work to de-risk the balance sheet, lowering leverage from 5.0x to well under 3.0x. Longer-term, this prodigious cash flow has the potential to be aimed more directly at shareholder returns. We estimate over the next 4.5 years Maxar is poised to generate an amount of cash equivalent to ~70% of its current market cap.

These are the kinds of changes that should launch a massive re-rating story, so why are shares unchanged from where they were 7 months ago?

Despite setbacks that are normal within the context of demanding space programs, after two negatively received delays in the past year, we believe the market has adopted a wait-and-see approach to the timing of Legion’s launch. In addition, the outcome of a key government contract and the nature of competition from newly public satellite-based data and analytics peers have been identified as longer-term risks to the story. We believe all three concerns are overblown and the next several weeks and months are studded with potential positive catalysts.

First up: an update on the status of Legion on next week’s earnings (Aug. 4^th). Our research and industry checks confirm that Legion is on track to launch before year-end. In fact, we believe Maxar and its suppliers have worked so effectively to address the causes of the delays announced last May, that the engineering teams are now working with a bit of cushion. As far as the government contract, our conversations with former senior officers within the NRO and NGA with decades of procurement analysis and expertise gave us comfort that consensus forecasts are not at meaningful risk. Finally, a significant portion of this report is devoted to addressing the vast differences in design and capabilities which Legion enjoys versus smallsat peers, and how there is little overlap in their TAMs. With BlackSky and Planet engaged in SPAC mergers it’s unsurprising there is a level of “new space” versus “old space” promotion circulating, but as an industry expert advised, “take it all with a grain of salt,” as Maxar and newer entrants are not engaged in head-to-head competition.

At ~14% ‘23E FCF yield and 8x ‘23E EV / EBITDA, both substantial discounts to the S&P and defense peers, we believe the market is discounting far too pessimistic an outlook on the timing and success of Legion. When positive news flow hits regarding constellation launch, we see a stock no longer rooted to the ground, and Legion marching shares upward to our $85 price target (+144%).

Read our full report here.