Rising Defense And Public Safety Demand Will Support Long Term Satellite Communications Upside

Catalysts

About Ovzon

Ovzon provides secure, integrated satellite communication solutions for mission critical Defense, National Security and Public Safety customers.

What are the underlying business or industry changes driving this perspective?

• Rising geopolitical tensions, electronic warfare focus and higher Defense, National Security and Public Safety spending in Europe and NATO are increasing the need for resilient, sovereign satellite communications. This can support sustained demand for Ovzon’s networks and lift revenue visibility and earnings quality over time.
• The SEK 1.04b, 24 month Swedish Defence Materiel Administration contract, plus follow on terminal orders and a SEK 1.5b order book, give a multi year workload that can support higher utilization of Ovzon 3 and leased capacity. This can help operating leverage, EBITDA margins and cash generation.
• Greater use of Ovzon 3 and its On Board Processor in service delivery, combined with a mix of third party capacity, gives Ovzon more control over unit economics. This can support gross margin improvement and translate into stronger EBIT and profit after tax if capacity is filled effectively.
• Expanding terminal volumes, including On The Move and smaller form factors suited for manned and unmanned platforms, align with growing demand for always connected defense and emergency assets. This can support hardware revenue and recurring service contracts and potentially higher net margins as scale effects build.
• Management’s stated focus on disciplined industrialization, controlled OpEx, positive cash flow and refinancing of existing debt, combined with four consecutive quarters of positive EBITDA and a recent quarter with profit after tax, can support balance sheet strength and reduce financing costs, which flows through to earnings and free cash flow.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Ovzon compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Ovzon's revenue will grow by 2.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 23.1% today to 29.4% in 3 years time.
• The bullish analysts expect earnings to reach SEK 292.3 million (and earnings per share of SEK 2.62) by about July 2029, up from SEK 211.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK252.9 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 30.8x on those 2029 earnings, up from 21.8x today. This future PE is lower than the current PE for the SE Telecom industry at 33.5x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.34%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Ovzon relies heavily on Defense and National Security budgets, and management highlights that U.S. administration decisions on budgets, priorities and procurements are uncertain and change frequently. This has already coincided with a U.S. Department of Defense contract not being renewed, so extended delays or cancellations in U.S. orders could reduce service revenue and pressure earnings and cash flow.
• The SEK 1.04b Swedish Defence Materiel Administration contract is described as historic and a large part of the current order book. If follow on orders are smaller or not renewed once the 24 month term ends, Ovzon could face a step down in workload that affects satellite and terminal utilization, which would weigh on revenue visibility, EBITDA margins and profit after tax.
• Ovzon 3 and the broader system required substantial investment and the company is still working on refinancing existing debt and assessing funding for additional satellites. If refinancing terms are less favorable or funding for new capacity is expensive or delayed, interest costs and capital needs could limit the benefits of current growth on net income and free cash flow.
• Management emphasizes that Ovzon operates with a fairly small team and is moving from an investment phase into industrialization and scale up. If the company struggles to build terminal inventory, secure sufficient leased capacity or maintain high uptime as volumes grow, service quality could suffer and weigh on renewal rates, which would affect revenue and operating margins.
• The company positions itself at the very high end of mission critical satellite services while saying low earth orbit constellations are complementary. If alternative providers expand secure offerings, improve latency or bundle capacity at attractive pricing, Ovzon could face pricing pressure or slower new customer wins, which would affect revenue growth and long term earnings potential.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Ovzon is SEK69.0, which represents up to two standard deviations above the consensus price target of SEK68.5. This valuation is based on what can be assumed as the expectations of Ovzon's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be SEK993.8 million, earnings will come to SEK292.3 million, and it would be trading on a PE ratio of 30.8x, assuming you use a discount rate of 5.3%.
• Given the current share price of SEK41.16, the analyst price target of SEK69.0 is 40.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.