RDW - Redwire Corporation: Speculative Buy On Space Growth

2023-12-20 07:43:12 ET

Summary

• Redwire Corporation is a pure play space company with three focus areas: Integrated Mission Enabler, Explore, Live and Work in Space, and Multinational Mission Support.
• The company's products include power generation, antennas, deployable solutions, and camera systems, with an estimated 5-year addressable market of $100 billion to $140 billion.
• Redwire went public via a SPAC deal in September 2023, and while it has stable liquidity, there is a dilution risk due to convertible preferred stock and long-term debt.

In recent months, I have significantly expanded my coverage in various fields and my coverage now spans over 100 publicly traded names. One of the areas where I have expanded my coverage is space. I believe that the increased global security threat levels as well as the commercialization of space provides significant opportunities for space companies. In this report, I will be discussing the prospects of Redwire (RDW).

I will provide a brief description of the activities of Redwire, its most recent financial results and provide a price target for the stock.

Redwire: A Pure Play Space Company

Redwire Corporation was founded in June 2020 by AE Industrial Partners which combined its Deep Space Systems segment with Adcole Space. The company presents itself as a pure play space company with three focus areas, namely:

1. Integrated Mission Enabler
2. Explore, Live and Work in Space
3. Multinational Mission Support

Those are not focus areas that really give you a feeling of familiarity, but its customers are better known and provide a mix of civil space agencies, aerospace and defense contractors and national security agencies. Some examples include Boeing (BA), Lockheed Martin (LMT), Airbus ( EADSF ) Blue Origin, NASA, EASA and the Space Development Agency.

Redwire’s products include, power generation, antennas, deployable solutions, star trackers and camera systems with an estimated 5-year addressable market of $100 billion to $140 billion for the first focus area. In the second focus area the company can provide microgravity payloads and in-space manufacturing capabilities with a 5-year TAM of $5 billion to $10 billion while multinational missions have an addressable market of $10 billion to $20 billion.

Generally, most value is held within the Integrated Mission Enabler area but the addressable market for exploring and living and working in space has significant potential once space commercialization and exploration for inhabitation purposes takes off in beyond the 5-year mark.

Redwire: Is The SPAC IPO A Risk?

Redwire went public in in September 2023 via a SPAC deal. Generally, I am somewhat reserved regarding investment companies that went public as most of those companies heavily depend on executing an investor funded growth profile and those growth prospects often are steep as significant scaling tends to be a prerequisite for positive free cash flow.

Looking at Redwire’s liquidity, we see that it has been stable in Q1 and Q2 with a decline in Q3. The company’s cash flow statement shows that it is able to successfully issue debt, which certainly is not the case for all companies that go public via a SPAC and we also see limited dilution of shareholders to raise cash. At a cash burn of $6 million per quarter, the company would run out of cash in roughly five quarters but that is not the accurate way to look at it due to the scaling effect. The capital expenditures that we see now facilitate future organic growth and the free cash flow burn for 2023 is expected to be $18 million followed by around break-even in 2024 and positive in 2025. Those are analyst estimates which are significantly lower than the $200 million in free cash flow.

Dilution due to liquidity is a risk that I deem to be smaller than with other companies that went public via a SPAC and were covered by me previously. However, there is a dilution risk due to the convertible preferred stock connected to the $80 million the company raised to purchase Space NV. At current standing, the conversion would require the issuance of 30.2 million shares. With 64.8 million shares outstanding and a 13% in-kind dividend per annum, the dilution risk is real and the company also has nearly $80 million in long-term debt of which most will be due in 2026. So, I would not quite say that Redwire has a favorable dilution risk profile compared to other companies that went public via a SPAC.

Redwire Corporation Grows Through Organic and Inorganic Growth

Redwire Q3 revenues grew 68% and while that is good, the organic growth covered around 47% of the revenue growth and inorganic growth accounting for 57% of the growth. Year-to-date organic growth was 31% and the inorganic growth accounting for the remaining 37% with a strong diverse mix of customers. Unfortunately, Redwire did not provide organic growth figures for other key performance indicators such as EBITDA and free cash flow. However, we do see significant improvement in operating income and adjusted EBITDA was $4.9 million which is $6.4 million higher year-over-year. So, we do see significant year-over-year improvement in results although we are not given a good indication of how much is driven by acquisitions and how much is organic growth. While I believe, Redwire will be able to ramp up free cash flow generation its cash flow generation profile is rather lumpy and sequentially we saw adjusted EBITDA increase around 11% which is strong but not strong enough for a business. So, my fear is mostly that the strong year-over-year improvements are driven by inorganic growth with only little improvement driven by scaling or legacy revenue mix.

What Is Redwire Corporation Stock Worth?

Valuing Redwire is quite challenging. Using an EV/EBITDA valuation based on the company EV/EBITDA median yields no useful result, because that multiple is negative for Redwire. A valuation in line with the peer group would yield a $3.77 price target for FY2024 providing around 30% upside.

Conclusion: Redwire Corporation Stock Is A Hold

I certainly do like the prospects that space provides due to the combination of space exploration and space applications in service of national security requirements. I also believe that Redwire could play an important role. However, assuming that the conversion from preferred stock to common shares will be on cashless basis it provides a dilution risk beyond the dilution that conversion of preferred convertible shares would induce as the company also faces maturing debt towards 2026 that is unlikely to be covered by the cash flows and in the quarters ahead, we should be seeing how much organic growth Redwire can achieve. As a result, I mark Redwire stock a Hold/Speculative Buy opportunity.

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