Phase Space AI

Valuation

Innovative Solutions and Support [ISSC]

ISSC — Valuation

Two horizons, two instruments. Both are required.

Spot $17.67 · 2026-07-29 (−7.9% on the day) · shares 17,892,747 · market cap $316.2m Net debt at 3/31/2026 $48.157m → EV $364.4m · pro forma for Aydin: net debt ~$72.7m, EV ~$388.9m TTM revenue $90.565m · EV/Sales 4.02x reported, 4.29x pro forma TTM EBIT $22.980m (25.4%) → EV/EBIT 15.9x reported, 16.9x pro forma · TTM net income $17.048m → P/E ~18.6x

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1. Implied-path test — the Valuation Criteria (5-year horizon)

1.1 The solve

The pro forma figure is the one to use, and it is deliberately conservative: it carries the debt of the fifth acquisition without any of its revenue, because the revenue has not been filed. When the 8-K/A lands (due ~2026-09-30) the required CAGR will fall.

1.2 The margin — demonstrated − required

Measured against the pro forma 17.6%:

The screen reported +38.8pp. The corrected range is −4.7pp to +1.5pp. The single best filed like-for-like number the company has ever published (+19.1%) clears the hurdle by 1.5 points. Every other filed like-for-like number does not.

1.3 Exit multiple — UNIDENTIFIED

Per criteria.md, an exit multiple may only be drawn from a comparator set whose growth brackets the subject's year-5 growth. No such set was assembled for a $90m-revenue avionics carve-out roll-up, and none was invented. The 14.0x is a stated assumption. The surface is the output.

Sensitivity over the exit multiple — the highest-variance parameter:

(a) As-reported EV $364.4m, WACC 12%:

(b) Pro forma EV $388.9m, terminal margin 24%, WACC 12%:

Sensitivity over WACC (24% margin, 14x exit, as-reported EV): 9% → 13.0% · 10% → 14.0% · 11% → 15.1% · 12% → 16.1% · 13% → 17.1%.

The base exit multiple does not sit below every stated anchor. ISSC trades at 15.9x EV/EBIT today (16.9x pro forma). Using 14.0x as the exit is a modest 12% compression from the current multiple, not a stacked haircut. The NTRA defect — a distant-year haircut piled on an already mean-reverted multiple — is not repeated here, and this is stated explicitly rather than applied silently.

1.4 Implied compression from today's multiple — stated as a number

Mild. The price is not asking for a re-rating; it is asking for 17.6% compounding. The question is entirely whether ISSC can grow at 17.6%, and the answer depends entirely on whether it can keep buying businesses.

1.5 Result

Valuation Criteria: PASS WITH ARGUMENT — marginal.

The price requires more than the organic business has demonstrated (17.6% required vs 12.9% company-stated organic), so a bare PASS is not available. The specific, evidenced reason required for PASS WITH ARGUMENT does exist and is not narrative:

A demonstrated, five-times-repeated mechanism for acquiring Honeywell/Sparton avionics carve-outs and operating them at a higher margin, with a filed like-for-like growth rate of +19.1% in the most recent half-year.

That is a named mechanism with a filed track record — exactly what the criterion demands, and materially better than the narrative arguments that usually accompany a PASS WITH ARGUMENT.

The countervailing fact, which the book must weigh: the mechanism runs on debt, and ~80% of the $100m facility is drawn pro forma for Aydin. A required 17.6% CAGR that depends on continued acquisition is a statement about financing capacity as much as about the business.

The margin is +1.5pp on the most favourable filed basis and negative on every other. It is not +38.8pp.

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2. Twelve-month target

2.1 Near-term revenue base

ISSC issues no revenue or earnings guidance. No consensus was obtained (Alpha Vantage quota). The base is built from filed run-rates.

The pro forma annualisation is the right base: the Autopilot line closed 2026-03-27 and contributed "insignificant amounts" to H1 FY2026, so it is a genuine forward addition. Aydin is pure upside to this number and is deliberately excluded.

2.2 Named events inside 12 months

Each appears in ISSC_Catalyst_Calendar.md with a date or an explicit "estimated" label.

• Aydin 8-K/A with financial statements and pro formas — due ~2026-09-30 (71 days from the 8-K). The single largest information event: it will quantify a business bought for $24.5m.
• Honeywell Autopilot line ramps to full run-rate — closed 2026-03-27, "insignificant" revenue in H1 FY2026, so FY2027 is its first full year.
• FY2026 results (est. late December 2026) — the first annual print showing whether organic revenue grew at all once the acquired backlog is exhausted. Backlog fell 13% in FY2025 on a 0.86x book-to-bill.
• A sixth acquisition, or its absence. ~$20.6m of undrawn facility capacity remains pro forma.

2.3 Multiple anchor — the name's own history, with the percentile

Point-in-time P/S (market cap ÷ TTM revenue), no look-ahead: each trading day uses only the TTM revenue and diluted share count filed by that date.

The post-carve-out window is the relevant one — the FY2024 10-K was the first annual report fully reflecting the 2024 Honeywell deals, and the revenue base before it is not comparable. Nineteen months is short but usable; the pre-2024 window spans a business roughly a third the size with a materially different margin structure.

ISSC trades at the 54th percentile of its own post-carve-out range — almost exactly its own median. Unlike EVLV, there is no mean-reversion tailwind here. Any twelve-month return has to come from revenue.

2.4 The target

NTM revenue $100.5m; shares ~18.1m in twelve months (Q2 FY26 diluted 18.30m; share count has grown ~1%/yr and the S-3 shelf is a risk to that).

12-month target: $19.00 — +8% to spot.

Range $14.20 – $22.90. Anchored on 3.40x P/S, the median of the post-carve-out window (current 54th percentile), applied to NTM revenue of $100.5m.

Why the median and not a higher percentile. The stock is already at its own median multiple, so there is no re-rating to harvest; and the two things that would justify a higher multiple — reacceleration of organic growth, and a sixth acquisition — are precisely the two things the balance sheet now constrains. The base multiple sits above the p25 and above the window's p10; no silent haircut has been applied.

Aydin is the identified upside not in the target. If it adds even $15m of revenue at the group multiple, the target rises to roughly $21.70 (+23%). That is why the 8-K/A due ~2026-09-30 is the most important dated event on this name.

2.5 External target check

No professional's target for ISSC is on file in this project. The sanity band is unavailable and no gap is reported. Stated as missing.

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3. The two outputs side by side

These agree, and their agreement is the finding. ISSC is fairly priced for what it is: a levered avionics carve-out roll-up growing in the mid-to-high teens like-for-like, at 16.9x EV/EBIT and 18.6x earnings.

It is not a 44.8% grower at a 38.8-point margin of safety. It is a ~15% grower at roughly zero margin of safety, with a genuinely good and genuinely constrained capital-redeployment mechanism.

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4. Reconciliation to the screen

Two distinct defects, and only one is the screen's fault.

1. The demonstrated CAGR measures a roll-up as if it were organic. XBRL contains us-gaap:Revenues and no flag saying "$31.0m of this was bought last September." The organic split exists only in MD&A prose; the pro formas exist only in a business-combination footnote. A screen cannot see this, and this is the generalisable calibration finding: any name with a BusinessAcquisitionsProFormaRevenue tag needs its demonstrated CAGR recomputed before it can be compared to a required CAGR. ISSC carries that tag.
2. The required CAGR differs from the screen's 6.1% by ~11 points, which on inspection is a difference in the terminal assumptions and discount rate rather than an input error — the screen's EV, net debt and share count all reconcile exactly. Because the exit multiple is formally UNIDENTIFIED, both figures are points on a surface, and the grid in §1.3 is the honest statement of what is known.