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Equity Research – Space, The Final Frontier?

Space…is it credible?

For decades now, science fiction has proved a major attraction for the movie industry. We all understand space as a concept, though only a few hundred people have had direct experience of it. ‘Space’ investment opportunities have proliferated over the last decade.

New themes, new investment areas have been important vogue areas. One only needs to glance over at the crypto currency craze as an example of investors yearning for, and wanting to invest in, something new and different, ‘warts n’all’.

In terms of investing in space, the future could look similar to the present with each distinct area holding its own.

Launched in 2019, the first ‘space’ focused ETF, the Procure Space ETF (Nasdaq:UFO) seeks to provide returns that broadly correspond to the S-Network Space Index (developed by S-Network Global Indexes). The fund has a value of c. US$128m and holds 32 investments in diverse areas including satcom/ ground based satcom, rocket/ satellite manufacturing, space technology and hardware, space based imagery. The ETF has c. 12% of its funds invested in global defence contractors, with c. 44% invested in satellite related businesses.

“Space investment” can be slimmed down into four main areas.

a)      “space satellites” (“satcom”) – building a satellite/ GPS infrastructure in orbit for internet/ data communications or land based satcom telephony (often for remote locations). Companies adopting this business model include UK based Inmarsat.

Pioneered by RCA Communications, “Satcom 1” the first satellite with advanced telecommunications launched in December 1975. There has since been extensive investment/ overinvestment in satellite networks. According to Northern Sky Research satcom revenues could reach $29bn by 2029 helped by 5G and opportunities in consumer broadband, / military and maritime. Short-term C-19 disruption has limited aerospace and cruise related demand but C-19 could trigger much needed M&A in the sector. I view satcom as investable but cyclical/ easy to get wrong. It is an area of telecoms infrastructure that is relatively mature.

b)      “space travel” – for example SpaceX has transported astronauts to / from the International Space Station (ISS) under contract. Whilst SpaceX is not a publicly traded company, it has raised substantial equity funding from private equity investors, the most recent equity fund raise at $419.99 per share (February 2021) implied a valuation of US$74bn on the SpaceX business. CEO Elon Musk wants SpaceX to launch more than 1,000 satellites via Starlink for delivering high speed internet to consumers anywhere on Earth. The Starlink plan Musk expects will cost about US$10bn to build first-hand.

‘Blue Origin’ led by Jeff Bezos is also a US based private company and developer of manned spacecraft for the Moon and Mars. Blue Origin is very much a wealthy person’s ‘plaything’ and an IPO is only likely once cashflows are more predictable. Space travel is highly evolutionary and experimental. We cannot find a route for private investors to participate at this stage.

c)       “space tourism” – is where the imagination really runs riot. Space tourism lets passengers experience weightlessness. Who knows, at some point ‘space walks’ on the Moon could be possible!

Space tourism is basically piloted tours taking wealthy people on trips to the edge of space for c. $250k- $600k per ticket (Virgin Galactic Holdings Inc NYSE: SPCE). It is very niche and heavily motivated by its publicity value. Virgin claims it has around 600 ‘future astronaut reservations’ apparently for trips to space. Space tourism is clearly an evolving area but one that is not lacking supporters, the Procure Space ETF fund has invested 4.58% of its net assets (11th largest holding) in Virgin Galactic.

Virgin Galactic reported a net loss of $129.6m for Q1 2021 on zero revenues. The business has a market capitalization of $7.5bn. Longer term Virgin Galactic is expected to migrate its service offering to hypersonic flights over long distances (New York to Sydney for example). Space tourism is highly evolutionary and experimental, with limited investment alternatives. Hence this area is very high risk.

d)      “space infrastructure” – the construction of space transport vehicles/ space stations – so far mainly US, Russian and Chinese governments agencies have provided the means for aerospace companies to build space infrastructure/ vehicles/ components. This area includes things like LRV’s (lunar roving vehicles “moon buggies” built by Boeing or LM’s (lunar modules by Northrop Grumman) or propulsion technology generally.  Aerospace/ defence companies with significant space related businesses include Boeing, Lockheed Martin, Northrop Grumman and Raytheon. The US has a clear advantage and expertise, with a significant heritage going back to President Kennedy and the Apollo programs of the 1960s and 1970s.

www.boeing.com

The Boeing CST-100 “Starliner”; the first crew capable space capsule (designed to carry 7 people) to make land-based touch down in the United States (22 December 2019).

Taking the US quartet in context; their space businesses are meaningful.

US defence co Q1 revenue ($bn) Q1 space revenue ($bn) “Space” business is it on its own?
Boeing $15.20 $7.1* Not segregated
Lockheed Martin $16.25 $3.0 Yes, segregated
Northrop Grumman $9.15 $2.5 Yes, segregated
Raytheon $15.30 $3.7 Partially Segregated

There are a few issues with using defence & aerospace companies as a proxy for space investing.

i)                     Defence & aerospace is naturally diversified, in terms of US defence contractors, their space related operations are c. 20%-30% of group revenues.

ii)                   When compared to the global defence group, the US grouping has a far higher proportion of space related revenues (as a comparison, BAE Systems does not detail space related revenues/ Thales SA has c. 11% group revenues in Thales Alenia Space).

iii)                 Given i) will continue then ESG considerations are important constraints, due to unethical military / ordinance/ military component businesses inherent in US defence companies.

Looking at the US defence sector in isolation, none of these defence giants plan to demerge their space businesses anytime soon, these operations are seen as growth areas and complimentary to their other businesses. If for example Boeing demerged its space business that would provide “pure play” exposure (that so far has been elusive). Space infrastructure (via US defence companies) is easy to invest in, with a proven track record and carries the lowest risk of corporate failure.

Conclusion

Space is an evolving sector with distinct niches. I was surprised when writing this report how far the technology has come. The biggest endorsement is the willingness of some of the world’s wealthiest individuals to invest in its future as well as enjoy and share its thrills.

Where will the sector be in fifty years? We can say conclusively it will still be there – and this possibly is its main endorsement. On that basis it should only be considered for the longer term

The space investment alternatives are so far limited to a small ETF and the US defence giants. I think this approach is broadly correct and captures the exposure commensurate with the present time.

 

 

 

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