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  Norsat gaining altitude

BENJ GALLANDER and BEN STADELMANN

Thursday, March 6, 2008

Oh, what tangled webs satellites can weave. Last month, the U.S. decided to shoot down an ailing spy satellite, its stated rationale being the prevention of a possible toxic leak of gas as it reentered earth's atmosphere. However, China and Russia questioned whether the U.S. perhaps had an ulterior motive for knocking off the spacecraft, perhaps testing their capabilities to destroy enemies' flying machines. This Mad magazine world of "Spy versus Spy" doesn't ever really change, does it?

 All this space-age stuff reminded us to review how our position in satellite communication manufacturer Norsat International is doing. Purchased at $0.65 per share, it has moved up smartly to the $1.15 range.

 As Norsat CEO and president Dr. Amiee Chan explained, the enterprise has adopted a new strategy. It is no longer chasing the $100 million mega-deals that rarely reach fruition, but instead, looking at smaller deals such as the $1.1 million contract signed with the Irish Department of Defence. The corporation is also pursuing more non-military contracts, particularly in shipping. She stated, "Data communication is no longer a luxury, it is a necessity."

 The company is also looking to expand its product line. Currently, the sales team is marketing the OmniLink and GlobeTrekker systems, but the goal is to have four new lines in place in the next five years. The research and development would cost approximately $16 million, yet even with this expenditure, part of which would likely be subsidized by government, Dr. Chan feels the company will remain profitable.

We could be dubious, given the company's chequered past. For many years it has been a perpetual tease, showing signs of progress with a significant contract here, an occasional good quarter there, and tantalizing reports of new gizmos to excite the imagination. Yet for all that, the overall pattern has been one of deep disappointment, with long-term shareholders getting burned.

However, since Dr. Chan took the mantle of CEO in September 2006, her focus on the bottom line, both via cutting costs and eliminating debt, while increasing revenues, makes us believe this turnaround is real. The company has had four profitable quarters in a row, and even this antsy board of directors — which has tended to change CEOs more often than Moore's announces a seasonal sale — should be impressed.

However, this time they knew well who they were hiring, as Dr. Chan had been with the company for about a decade. She has both an engineering degree and an MBA, plus three American patents in satellite technologies. She is also credited with turning around the microwave division from a 10 percent annual sales decline to growth of 25 percent in two years. She was VP of operations prior to taking the head-honcho position.

On a year-over-year basis, third-quarter revenues increased 26 percent to $4 million. Gross margin jumped to 50 percent from 23 percent, and the loss of $2 million turned into a profit of $0.2 million. The balance sheet is crisp and clean, unburdened by the convertible debt of better than $2 million last year.

 Looking to expand, the company recently opened two new offices, one in Brazil and another in South Korea. While it initially concerned us that the bottom line would be sullied by these costs, the associated expenses appear to be tightly contained, and based on prospective sales that are realistically within grasp.

Our initial sell target of $1.84 still remains a distance from the current trading price. During the high-tech craziness, the stock traded as high as $46. While that number has better odds of being hit than Ralph Nader being elected president, if the turnaround continues as efficiently as over the past year under the able stewardship of Dr. Chan, it would not surprise us to see this stock cruise past our target to perhaps $3. Of course, it would have to avoid the problems that bring satellites crashing earthward.


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