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MDA keeps its eye on the sky Add to ...

In early 2008, it seemed obvious. The real-estate software arm of MacDonald Dettwiler and Associates Ltd., where revenues were surging, was the future of the company. The company's space systems division, on the other hand, was stuck in slow motion.

So MDA chief executive officer Daniel Friedmann orchestrated a $1.3-billion deal to sell the space business to Alliant Techsystems Inc. of Minnesota. The plan was to plow the cash back into real-estate software. Investors celebrated: The stock jumped 15 per cent.

Then Stephen Harper intervened. The Conservative federal government, in an extremely rare move, blocked the deal, concluding it wasn't a net benefit to Canada. Prime Minister Harper didn't want MDA's new Radarsat-2 satellite, built with Canadian government money and considered an important tool in asserting Arctic sovereignty, owned by an American company.

Mr. Harper wasn't trying to save MDA, based in the Vancouver suburb of Richmond, from a bad business decision. However, the timing couldn't have been better. The real-estate side of MDA turned out to have hit its peak and has plummeted since. Meanwhile, the space division finally generated momentum and scored a series of big contracts.

With an accidental assist from the Prime Minister, MDA has declared a new business strategy, "where every piece of the business pulls its own weight."

"We now have a more balanced strategic growth plan," Mr. Friedmann told investors and analysts this month on the company's quarterly conference call.

Investors still somewhat rue the lost sale but have largely endorsed MDA's new plan. The stock has more than doubled in the past year and has made up all the ground lost since the market implosion last year.

"Perhaps management underestimated the opportunities for the systems business but at the same time they were being offered an incredible price," said Tim Caulfield, a vice-president at Bissett Investment Management, one of MDA's largest shareholders.

Bissett first bought the stock two years ago and has steadily accumulated shares, especially as the stock plunged last year. What Mr. Caulfield sees is a company underpinned by the strong and steady space division and powered, eventually, by a real-estate business that has built bases in Britain and the United States. Its software runs essential services such as title searches.

"There's so much focus on the severe, cyclical downturn," Mr. Caulfield said. "We're much more focused on three to five years from now, not three to five quarters."

For now, MDA is scoring success far above the surface of the earth. Mr. Friedmann had claimed the business could not succeed because its Canadian status mostly froze it out of lucrative contracts with the U.S. government. But recent wins have been in places far beyond Washington.

The biggest one was a $200-million-plus contract to supply the technology for two communications satellites for Russia. A similar deal with Ukraine, worth $254-million, is in the works but MDA hasn't officially disclosed it. (The company declined interview requests.) Another new high flier for the company is its surveillance business for unmanned planes. Ten thousand metres above Afghanistan, Israeli-made planes laden with MDA surveillance technology are part of Canada's war effort against the Taliban insurgency. MDA won the two-year, $95-million deal with partner Israel Aerospace Industries Ltd. last year. Its additional significance, for MDA, is the service element: About 20 MDA employees are stationed at Kandahar airfield and their duties include overseeing takeoff and landing of the aircraft.

MDA also forged deal in September with the Royal Australian Air Force.

"We have a lot of interest out there, both in Afghanistan and outside Afghanistan, in the military, in drug interdiction, borders, commercial things like oil-pipe monitoring. We're just getting started," he told investors and analysts.

The ascent of MDA's space business has made the company more profitable. The division, though its revenue growth had been slow, generally delivered profit margins of more than 20 per cent, whereas in software it was around 15 per cent. Now, with space a larger part of the overall mix as that unit's revenues rise and software's falls, MDA's operating profit margin in the first nine months of this year was at 19 per cent, well up from 16 per cent a year earlier.

And even as company revenue fell 14 per cent, operating profit rose 3 per cent, bolstered by cash from the space division.

Additional profit growth is ahead, said analyst Sera Kim of GMP Securities LP, who this week forecast the 2010 margin will exceed 20 per cent. She boosted her one-year stock target to $50 from $40, and upgraded her rating to "buy" from "hold," on the strength of the space business. Beyond the Russian satellite contract, she also highlighted a $46-million contract this month from the Canadian Space Agency to develop technology for future space missions, which could lead to more work if the federal government allocates cash to the agency's long-term space plan.

Part of the reason MDA tried to sell the space division was to become a company more easily understood. Today, it remains an unusual hybrid: warplanes and space satellites married to real-estate software, a combination that analysts say puts off some investors.

"You do need to get your head around it," said Steven Li, analyst at Raymond James.

Follow on Twitter: @davidebner

 
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