RDW - Redwire Corporation: Beaten-Down Potential Space Infrastructure Leader

Summary

• Redwire Space is a pure-play space infrastructure company that provides civil, commercial, and security-critical solutions.
• Failing to meet the initial SPAC forecasts and consecutively missing guidance brought the company's valuation down to current levels.
• Redwire increases revenue, although not as fast as expected, and is close to achieving and sustaining profitability.
• QinetiQ Space NV's recent acquisition should improve Redwire's financials, integrate the available solutions, and further open the European Market.

Investment Thesis

Redwire Corporation ( RDW ) is a pure-play space infrastructure company formed by a group of companies Redwire has been acquiring for the last 3 years. Operating in a hot sector - a market expected to exceed $1T worth in 2040 according to the recently published Citi GPS - and providing critical solutions to its customers, enables Redwire to claim significant orders and/or contracts from civil, commercial, and security missions. Controlling cash burn is crucial for a growth company, especially in a rate-hike environment, and Redwire seems to be in control of that matter.

Although failing to meet the initial forecasts brought its valuation down to current levels, Redwire could be close to a turning point assuming the management start meeting expectations. Thus, considering the growth prospect of the company, Redwire may prove a long-term investment opportunity at current or lower levels.

A brief company overview

Redwire Space, Inc. was initially formed on 06/01/2020 by a private equity firm, AE Industrial Partners, through the merger of Adcole Space and Deep Space Systems. Redwire then acquired Made in Space, Roccor, LoadPath, Oakman Aerospace, Deployable Space Systems, Techshot, and, most recently, QinetiQ Space NV from Luxemburg, Europe. The company has been trading on the NYSE since 09/03/2021, after the completion of the SPAC deal with Genesis Park Acquisition Corp., which valued the company at a $620M Pro-forma EV. It is headquartered in Jacksonville, FL, while operating another 8 locations in the U.S. and one in Luxemburg, Europe.

The company offers innovative solutions in various fields:

• Manufacturing of industrial products for space and terrestrial use.
• Digital engineering technology.
• On-orbit servicing, assembly, and manufacturing.
• Advanced sensors and components.
• Space domain awareness and resiliency.

Redwire aspires to be an integral part of the next-generation space economy which will be characterized by on-orbit massive human activity, and colonization of the moon and planet Mars. Although these aspirations may seem futuristic or even eccentric, it is a matter of a few decades to happen. In fact, Redwire is involved in almost every mission to Mars and many other critical space missions so far. Governmental agencies such as NASA or ESA increase their budget, large corporations increase their investing activity in the sector, and big names like E. Musk and J. Bezos are already involved. The M&A strategy could transform Redwire into a major integrated space infrastructure player. The company already presents important partnerships, contracts, and orders.

QinetiQ Space NV acquisition

On 11/01/2022, the company announced the completion of the acquisition of QinetiQ Space NV. The acquired company is based in Luxemburg, Europe, and combined with Redwire's business in Luxemburg will form Redwire Europe. The transaction expands Redwire's portfolio through QinetiQ Space NV's complementary core space infrastructure offerings including advanced payloads, small satellite technology, berthing and docking equipment, and space instruments. Redwire's TAM and Europe exposure will expand while revenue, EBITDA, FCF, and backlog numbers will significantly improve. To highlight the importance of the acquisition, Redwire's CEO Peter Cannito mentioned during Redwire's Q3 2022 earnings call that European Space Agency is expected to submit a three-year budget with an increase of more than 25% from funding secured in 2019, in their upcoming ministerial meeting. The transaction will cost Redwire ~$32M, and considering that on 03/31/2022 QinetiQ SpaceNV announced a $49M revenue, and a $3M net income for FY 2022, while also bringing in a $113M contracted backlog and ~150 highly skilled professionals, this should be considered a good deal for Redwire.

SPAC forecasts vs reality

Initial forecasts proved a bit optimistic, and with the general market/macro conditions not being favorable, the stock price plummeted from a ~$17 spike to ~$2.15. Redwire was not a typical pump-and-dump SPAC stock. Considering the fact that the company was EBITDA and FCF positive by the time of the announced SPAC merger, the valuation based on the initial forecasts seemed like a bargain compared to other SPAC peers. Missing revenue and EBITDA forecasts consecutively though, is never a good message to investors. The company posted Q3 2022 ER on 11/08/2022 and revised FY 2022 guidance downwards yet another time. Thus, the initial SPAC forecasts should no longer be expected to be met.

Q3 2022 financial developments and FY 2022 guidance

Although failing to meet guidance again, Redwire presented important developments and increased revenue for Q3 2022, both YoY and QoQ.

• Revenue increased 14.0% YoY and 1.4% QoQ, to $37.2M for Q3 2022.
• Pro-forma Adjusted EBITDA was $(1.5)M vs $(0.3)M YoY.
• Total Backlog reached $304M as of September 30, 2022, an increase of $52.3M compared to June 30, 2022.
• Bain Capital and AE Industrial Partners together, made an $80-million investment. AE Industrial Partners commits its support to Redwire and Bain Capital's involvement, which is not some random fund, is also positive. Redwire will fund the QinetiQ Space NV acquisition and intends to use the remaining capital for future growth.
• Book-to-bill ratio is improved and currently stands at 1.18 for the nine months that ended on 09/30/2022.
• For Q4 2022 Redwire expects improved revenue and gross margin compared to Q3 2022. However, contract execution delays push revenue execution into subsequent quarters. Therefore, Redwire revised FY 2022 guidance and now expects revenues of $140M-$155M and Pro Forma Adjusted EBITDA of $(13.0)M-$(6.0)M. However, QinetiQ Space NV's acquisition will have a significant and positive contribution to Redwire's top and bottom lines.

Competition

The space infrastructure market is fragmented and there are no large corporations involved, contrary to the spacecraft, satellite, or rocket manufacturers market. Redwire aspires to offer integrated solutions to claim a large stake in the market while growing both organically and through M&A activity.

Valuation

The company is currently valued at an EV of ~$253M. Market cap is ~$165M and net debt is ~$88M. While Redwire is on the verge of profitability it still is a growth company. 2022E P/S ((TTM)) currently stands at ~0.92 while the sector median 2022E P/S ((TTM)) is ~1.25 according to Seeking Alpha data. This fact could be hinting that the company may be currently undervalued compared to peers. A fairer valuation could bring the stock price to ~$3 in the near future (a conversion price of $3.05 per share happens to have been agreed upon under the terms of the recent Bain-AE financing agreement).

Looking more into the future to estimate the potential valuation of Redwire, assumptions must be made to decide whether Redwire would be a worthwhile investment or not.

• For FY 2025, the company initially expected a ~$1.5B revenue and a ~$250M adjusted EBITDA. Applying a 2025E EV/EBITDA ratio of 10, Redwire's EV would be ~$2.5B, ~x10 of the current EV. The consecutive inability of the company to meet or beat guidance though makes these forecasts seem unrealistic.
• Applying a $1B revenue with a 15% adjusted EBITDA margin for 2025 would result in a $150M EBITDA. With a 2025E EV/EBITDA ratio of 10, this would mean an EV of ~$1.5B, ~x6 of the current EV.
• In a worst-case scenario, applying a $500M revenue, a 12% EBITDA margin that would result in $60M adjusted EBITDA, and a 2025E EV/EBITDA ratio of 10, would result in an ~x2.4 of the current EV.

Considering the fact that even in a worst-case scenario the company would be valued 2.4 times more than it currently is, Redwire seems to have the potential to more than double its EV until 2025.

Risks

The increasing interest in the growing space economy may reflect a bright future, however, this future could still be a bit far away. Investments may stall or be canceled and governments may pause or delay funding due to unfavorable macro/market conditions. Supply chain matters could also affect the company, as well as talent scarcity. Thus, revenue could grow at a lower-than-expected rate and increased costs could suppress profit margins. Additional capital may be needed to fund future growth, something that could lead the company to take on more debt or cause a dilution to the existing shareholders. Finally, the management may fail to meet forecasts and expectations.

Conclusion

To sum up, Redwire seems poised to play an important role in a sector expected to grow for many years and support civil, commercial, and security missions, the development of an important on-orbit activity/economy, and future generations' attempts to colonize space, the moon, and Mars. Despite the growth rate being lower than initially forecasted, the company still grows, while being on the verge of solidifying profitability.

Therefore, a bright future could be laying ahead, assuming the management will improve execution matters and macro/market developments will gradually be more in favor of growth companies. In the meantime, just yesterday, 11/10/2022, a macro glimpse of hope popped up following the CPI data release and, as a result, markets soared. This may be the pivot point everyone was looking for, yet, the future will tell.

At the end of the day, investors who believe in the sector should study the Redwire case and consider initiating a long-term position at current or lower levels. They should be aware of the market/macro conditions and the management's ability to ramp up and start meeting their guidance though.

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