Orbital Sciences (US: ORB) has travelled far since we first tipped the maker of spacecraft, satellites and test missiles in April last year. In fact, its Antares rocket and Cygnus unmanned cargo capsule have been to the International Space Station (ISS) and back. Its share price is up two-thirds, too, but an exciting merger-of-equals with the aerospace and defence arm of US giant Alliant Techsystems (US: ATK) should generate further substantial gains.
- Exciting merger with Alliant Techsystems
- Cost savings target too conservative
- Pre-merger EPS growth estimate of 21% for 2015
- Record free cash flow
- ATK loaded with debt
- Extra defence exposure
"This merger is the kind of event that is often sought, but rarely found," claims Orbital chief Dave Thompson. He has a point. Orbital ATK, as the new company will be known, would have generated $4.5bn (£2.7bn) of sales in 2013, double-digit operating margin and a cash profit of $585m. When the deal is rubber-stamped at the end of this year, the order backlog will likely sit at an impressive $11bn.
Cost savings of $70m-$100m are expected by 2016, too, but it could easily be much more. Eliminating unnecessary costs for two public reporting companies is straightforward enough, yet ATK is also the world's largest producer of solid rocket propulsion systems and already supplies Orbital. Its parts can make up a third of the total cost of making Orbital's launch vehicles and a fifth of costs for satellites, so the merger will save big bucks.
That kind of cost cutting could also supercharge revenue by $200m a year, says management - lower product costs will fund price cuts and drive demand for space launch vehicles, missile defence systems and satellites. Further out, the much larger company will have the clout to compete for several major new programmes previously out of its league, including the next-generation intercontinental ballistic missile (ICBM), and greater in-space satellite servicing.
It's early days, but management estimates compound annual growth in revenue of 4-5 per cent between 2015 and 2017 – a lot of which is already in the backlog which includes a recently started lucrative eight-flight supply contract with Nasa, worth $1.9bn (£1.2bn) over the next five years. EPS growth of 12-15 per cent is expected and cumulative three-year free cash flow of more than $1bn. That could drive net borrowing below cash profits; impressive given ATK will saddle Orbital ATK with net debt of 2.4 times cash profit. A share buy-back or dividend are the alternatives.
ORBITAL SCIENCES (US: ORB) | ||||
|---|---|---|---|---|
| ORD PRICE: | $27.86 | MARKET VALUE: | $1.7bn | |
| TOUCH: | $27.82-$27.88 | 12-MONTH HIGH/LOW: | $34.16 | $17.03 |
| FWD DIVIDEND YIELD: | NIL | FWD PE RATIO: | 20 | |
| NET ASSET VALUE: | $13.40*† | NET CASH: | $210m† | |
| *Includes intangible assets of $71.3m, or 118¢ per share | ||||
| Year to 31 Dec | Turnover ($bn) | Pre-tax profit ($m)** | Earnings per share ($)** | Dividend per share ($) |
|---|---|---|---|---|
| 2011 | 1.35 | 88 | 1.14 | nil |
| 2012 | 1.44 | 92 | 1.02 | nil |
| 2013 | 1.37 | 104 | 1.13 | nil |
| 2014** | 1.50 | 108 | 1.14 | nil |
| 2015** | 1.57 | 126 | 1.38 | nil |
| % change | +9 | +38 | +35 | - |
Beta:2.0 **FBR Capital forecasts, adjusted PTP and EPS figures †As at 17 April 2014 £1=$1.69 | ||||
ATK brings with it additional defence exposure, too. Precision and strike weapons, ammunition and defence electronic systems will generate 40 per cent of revenue for the combined group. Crucially, however, the US Department of Defence (DoD) budget accounts for "fairly small single-digit percentages". Most of the defence business is in programmes either in, or near production, and ATK sales of ammo to overseas allies are growing.
