GILT - Why Gilat Satellite Stock Grabbed My Attention

2023-08-01 21:36:37 ET

Summary

• Gilat Satellite Networks is a $350-million market cap company, headquartered in Petah Tikva, Israel. It provides satellite-based broadband communication solutions worldwide.
• In Q1 FY2023, GILT showcased a strong operating performance with solid top-line growth across various business segments accompanied by improving gross margins.
• GILT's main focus end-market is expected to grow from $7.48 billion in 2023 to $21.03 billion by 2030, with a projected CAGR of 15.9%.
• Given GILT's EBITDA growth prospects, its enterprise value should be ~30% more in 2 years than today [at the current FWD EV/EBITDA of 8x].
• Despite some obvious risks, I rate GILT as a "Buy".

The Company

Gilat Satellite Networks ( GILT ) is a $350-million market cap company, headquartered in Petah Tikva, Israel. It provides satellite-based broadband communication solutions worldwide. They offer a range of products , services, and integrated solutions to various industries and customers, including satellite operators, governments, telecommunications companies, ISPs, and more.

In Q1 FY2023 , GILT showcased a strong operating performance with solid top-line growth across various business segments accompanied by improving gross margins, which reached an impressive multi-year high of 42% (by 998 basis points higher, than last year). The company's adjusted EBITDA also saw a phenomenal surge, surpassing $8.4 million, a remarkable triple-fold increase from Q1 FY2022. The company's early-year financial success shows it's becoming a preferred partner for satellite operators, including big names in various sectors (see the names on the above chart).

Total cash and cash equivalents by the end of Q1 were at $89.7 million, making the company's liquidity position quite stable amid debt-to-equity at 0:

Notably, GILT secured significant multimillion-dollar orders during the 1st quarter, underscoring the increased interest in the company's satellite communication solutions.

Another noteworthy stride was the strategic agreement forged with a prominent IFC service provider, presenting the potential of generating tens of millions of dollars in the foreseeable future, according to GILT's management words during the earnings call . This agreement should facilitate the development and supply of electronically steered antennas, further strengthening the company's presence in the growing IFC market.

IFC stands for " In-Flight Connectivity " and refers to the provision of internet connectivity and communication services on board commercial airplanes during flights. This market is expected to grow from $7.48 billion in 2023 to $21.03 billion by 2030, with a projected CAGR of 15.9%, according to third-side research firm [ Fortune and Business Insights ]. So the growth opportunities are indeed there.

Also, GILT took significant steps to bolster its defense offerings, including a key agreement to acquire DataPath Inc. , a U.S. defense integrator, aimed at enhancing its capabilities, particularly focusing on the U.S. Department of Defense. According to the statement, GILT is going to increase its combined revenue by a total of $50 million following the closing of the acquisition (that's over 20% of GILT's current TTM sales volume).

Building on established relationships, the company saw substantial orders during Q1 from satellite operators SES and Intelsat, receiving orders totaling tens of millions of dollars during the quarter. Additionally, GILT successfully ventured into the ESA market and made progress on potential projects for both ESA and IFC transceivers, unlocking new opportunities in the industry. In pursuit of excellence, the company introduced two innovative products for the defense market – the Endura modular hot-swappable high-power amplifier solution and the new satellite model SkyEdge IV, which was designed to be compatible with the existing SkyEdge II-c, allowing customers to protect their past investments while benefiting from the improved features.

This comprehensive approach enabled the company to secure substantial orders in the strategic cellular backhaul market from leading mobile network operators and satellite operators across Australia, Latin America, and Africa. Moreover, the company secured a significant win in the ESA market, partnering with a prominent IFC service provider, allowing them to venture into new market segments.

In addition, the company achieved a notable milestone in Peru by progressing with Pronatel, gaining acceptance for the network in the 5th project in the Ica region.

GILT has already received a payment of approximately $3.2 million for winning the initial arbitration. This brings the total amount received to around $29 million, which was awarded against Pronatel and the Peruvian Ministry of Communication.

Leaning on expanding the market and strong financials, GILT's management increased the GAAP EBIT guidance to $16-$20 million for the year, with an 81% YoY growth at the midpoint. Adjusted EBITDA guidance has also risen to $31-$35 million, representing a 31% YoY growth at the midpoint.

On July 20, 2023 , GILT announced that a Tier 1 global telecommunications operator has selected their SkyEdge II-c platform for satellite connectivity to serve a major utility company in Western Europe. The telecommunications operator will use Gilat's platform to provide crucial IoT telemetry services across remote sites on the utility customer's national network. In my opinion, this confirms once again that the company's turnaround is moving in the right direction after the difficult last few years. It only remains to be clarified how fair its valuation is - let's figure it out together.

The Valuation

According to the Seeking Alpha Quant System, GILT's Valuation grade corresponds to "B+", which means that the stock is undervalued by 30-65% in terms of many valuation metrics, compared to the median of the entire IT sector :

The company's EV/EBITDA ratio is just below 8x, which is about 2x below the company's average multiple over the last 10 years. However, the next-year EBITDA growth has also dropped significantly since the beginning of last year:

In my opinion, an EBITDA growth of 18.8% in 2024 is still too big enough for the EV/EBITDA ratio of ~8x, especially if we take into account how actively the company is growing in the markets it is interested in.

Assuming that EBITDA growth remains above 10% in 2025 and 2026, the fair value of GILT should be higher than today.

I propose to do a little experiment. Assume that GILT's EBITDA of $33M (guided mid-range for FY2023) grows 18.8% in FY2024 and by another 10% in FY2025. Then the firm should have an enterprise value of $345M. That's ~30% more than today in the next 2 years at a current EV/EBITDA of 8x. These are fairly conservative assumptions, but even with them, GILT seems to be underestimated.

The Bottom Line

Of course, investing in GILT seems risky enough when we consider how volatile the company's operating and net income was even before Covid-19:

Also, keep in mind that small-cap stocks like GILT don't tolerate the sell-offs of the broad market very well. If the technology sector is really overheated at any given time, the high correlation to that sector and the high beta of the stock will force it to stay in the current consolidation when Techs start to cool off. Historically, GILT does not take much getting used to:

But despite the risks, I like GILT. This company caught my attention because its business operations are actively recovering, the market environment and corporate actions look encouraging, and at the same time a potential investor would not overpay for the stock even after the YTD market runup we all saw this year. Perhaps this is because analysts have only now begun to pay attention to the company - it's still hidden from the general public.

All in all, I rate GILT stock as a "Buy" with an upside target of at least +30% in the next 2 years.

Thank you for reading!

For further details see: