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Rocket Lab
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== Summary == Deutsche Bank regards Rocket Lab as the highest quality space asset to enter the public market so far, having established itself as a clear leader in small rocket launch and having garnered strong momentum in satellite buses and related components, enabling access to space in multiple ways. Looking forward, the company will certainly need to execute across several fronts especially development of its larger Neutron rocket, which is slated to fly in 2024. Deutsche Bank thinks management generally guided out-years conservatively, leaving room to beat in the mid-term as backlog rolls on and the pipeline grows rapidly. More broadly, Deutsche Bank continues to be very bullish about the prospects for the Space sector. While the "space" industry has existed for many decades, public interest diminished toward the latter part of 20th century and entrepreneurs mostly avoided the sector due to high barriers to entry, regulation, and limited deployment opportunities. However, in recent years, Deutsche Bank believes the emergence of a new "Space Race", both between industry titans (Musk vs. Bezos vs. Branson) and nations (the US vs. China), ensures that this will likely be the next frontier for growth investment, and progress should accelerate dramatically in the next 5-10 years. Unique to space, Deutsche Bank believes it is becoming evident to society that for human civilization to truly progress, we must explore the cosmos (<600 people have been to space), and the upcoming innovation will revolve around developing business models to support this endeavour. In the coming years, Deutsche Bank could envision multiple “space hype cycles” where valuations soar, but Deutsche Bank reminds investors that the path forward will likely be volatile. === Sizing the final frontier TAM === The overall “Space TAM” is generally agreed upon by industry participants and investors to be large and growing (i.e., $350-400bn now with potential to be over a trillion by end of the decade). Deutsche Bank takes a more precise approach by focusing on the launch services portion, which is the most near-term and direct revenue stream for companies such as Rocket Lab. Space launch services involve the delivering of satellites and other equipment into orbit - all the design, manufacturing, and testing related to the rocket. To achieve a successful launch, a rocket must not only make it into space but also carry a payload to a certain destination and deploy a satellite into orbit. Other missions involve providing supplies to a space station or landing on the Moon (NASA Artemis Program). For 2021, Deutsche Bank estimates the global launch market will come in at around $8bn and this will likely grow to $38bn by 2030, representing a 20% CAGR. Importantly, Deutsche Bank expects the market to be supply constrained for the rest of the decade as demand from corporates and governments increases. A clear leader in small rockets, Rocket Lab has focused on small rockets since its inception, successfully launching its Electron rocket 19 times out of 21 attempts into space, leading to 105 satellites deployed and even recovering 2 rockets, which can be reused in the future after refurbishment, reducing costs. Rocket Lab is the second-most frequently launched private company after SpaceX. Moving forward, Rocket Lab announced plans to build a larger rocket called Neutron, which will have a 8,000kg payload capacity vs. Electron's 300kg, and be designed to be a constellation launcher while also being able to carry humans onboard. Positioning-wise, Deutsche Bank regards Rocket Lab as the clear #2 behind SpaceX, with a more practical focus on being "Gatekeeper" to orbit starting with small rockets (pathfinder and national security missions), and then expanding into medium-class rockets (constellations). Beyond the launch business, Rocket Lab is also striving to become a satellite platform, fully leveraging its ability to provide customers access to space. This includes selling its Photon family of spacecraft, a portfolio of standalone components, engineering/design services, and on-orbit constellation management services. === Growth accelerating, underpinned by robust backlog/pipeline === With industry launch demand continuing to outpace supply, Deutsche Bank believes Rocket Lab is well positioned for growth given its strong track record of reliability and diverse business streams. Backlog (contracted revenue) exited September worth >$170m vs. just $60m at the end of 2Q20. Rocket Lab can turn around a launch in about 2 weeks at its site in New Zealand, constrained mainly by staffing/procedural limitations and more recently, COVID-19 lockdowns. Recent prominent wins include a 5-launch deal with Kineis to deploy a fleet of IoT constellations beginning in 2023 and a 3 Photon spacecraft tie-up with Varda Space where internal components will also be used. Customer mix is split 50% commercial, 20% civil, and 30% national security. Looking ahead, management sees a $4.4bn active pipeline opportunity across a broad range of customers and verticals, up significantly from just $2.2bn in March. Deutsche Bank believes Rocket Lab was on track to beat initial 2021 management forecasts set out in March before the very stringent COVID-19 lockdowns in New Zealand halted launch activity. However, this should set-up 2022 to mechanically outperform and Deutsche Bank expects 2023-24 to demonstrate solid growth as launch activity and component wins pick up momentum. === Premium valuation well deserved; could see share price volatility soon === All in, Deutsche Bank initiates with a Buy rating and an $18 price target using a blended approach of 12.5x/27.5x 2025E Sales/Ebitda (using a haircut on Virgin Galactic's current multiples; implies a $19 stock price), and a ~$7.5bn market cap (equivalent to a $17 stock price) based on private and public comparables. Similar to many other SPACs, Rocket Lab has experienced considerable volatility in its share price.
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