Counter Drone Co. May Be Acquisition Target

Counter-Drone firm DroneShield Ltd. (DRO:ASX; DRSHF:OTC) has been going on the offensive in recent months by landing two separate multi-million dollar contracts and increasing its reach and capabilities to over 100 "friendly" countries. Investors have been taking notice of late as the firm's shares have traded to a new 52-week high on much higher average volumes over the last 30 days.

The company utilizes a multi-layered artificial intelligence (AI)-based solution for monitoring, detecting, and defeating intruding and increasingly hostile unmanned aerial systems (UAS), including unmanned aerial vehicles (UAVs), unmanned ground vehicles (UGVs), unmanned surface vehicles (USVs) and unmanned underwater vehicles (UUVs). The core focus of all of its counter-and-anti-drone product solutions is the integration of AI and sophisticated signal jamming technology as its core non-kinetic defeat component.

The firm has developed a suite of proprietary counter-UAS solutions that can work independently or as part of a highly effective network of light-weight handheld, mobile, and towered coordination centers such as its DroneSentry unified responsive platform together can repel, eliminate and redirect attacks upon opposing forces.

The firm notes on its website that the US$10B (billion) counterdrone market is growing rapidly and advises that it is a market that did not even exist as recently as ten years ago. In the defense business, demand for effectiveness and battlefield superiority is tantamount, so while there is always a cost/benefit consideration applied to securing tactical defense systems, a company that can meet the challenges thrown at it can command high prices. For DroneShield, this allows it to obtain high gross margins on its contract sales. According to The Wall Street Journal, during the fiscal quarter that ended June 30, 2022, DroneShield achieved gross margins of 72.78%.

With the continued rise in global demand for UAVs which are now mainstays of most nations' weapons and defense systems, the demand for systems to counter these increases are growing in unison.

Opportunities Beyond Military Use

In addition to the obvious military applications, the firm's products are well-suited to a myriad of other practical uses for protecting national borders, airports, corporate campuses, event and stadium venues, government offices, energy and utility infrastructure, shipping ports, and prisons facilities from intentional and unintentional intrusions by UAS.

One recent high-profile real-life use case was the successful deployment of the company's DroneGun Tactical™ counterdrone/C-UAS system that reportedly was successful in neutralizing four suspicious drones that were heading on a course toward the President-elect of Brazil during that country's presidential inauguration event.

Potential Acquisition Target

Between the rapid development and deployment of high-performing counter-drone networks, securing multiple new large dollar contracts for anti-drone products and software, and attracting strategic investors, DroneShield appears to be executing flawlessly on all fronts, which may be raising some eyebrows throughout the defense industry.

Torrance, Calif.-based Epirus Inc., a large U.S. defense electronics company, invested AU$3.7M (~US$2.5M) in the company in November 2022. With that investment, Epirus became the second largest single investor in the company owning approximately 4.1% of the firm's outstanding shares.

Louise Weihart, an independent journalist based in Sydney, and Vivian Wong, who provided analytics, wrote an article today that was published by Mergermarket.com (an ION group company) entitled "DroneShield contract wins, and Epirus' investment may trigger takeover interest – industry experts."

Analyst Daniel Laing commented that "DroneShield has got off to a flying start in the New Year with the announcement of another AU$11M purchase order for several different types of the company's counter-drone/C-UAS equipment." 

In the article, Weihart pointed out that "according to two industry experts, significant contract wins in recent weeks and an investment from U.S. peer Epirus could become a trigger of takeover interest for DroneShield."

Specifically, Weihart referenced a U.S.-based industry expert who noted, "Epirus' investment in DroneShield could well be the catalyst for a deal, which could happen any time from now."

The unnamed expert commented that due to the nature of the company's operations, any purchase by a foreign entity would certainly require approval from Australia's Foreign Investment Review Board (FIRB) on the grounds of national security. The same expert indicated that "there are many strategics like Lockheed Martin Corp. (LMT:NYSE) and other US-based defense players that could be interested."

Weihart added that according to Alex Jamieson, Founder of advisory firm AJ Financial in Melbourne, "A takeover of DroneShield down the road, either as a cash or share deal, is likely as the capital required to scale this type of technology over time will be beyond its capacity."

Jamieson indicated that while Epirus and Lockheed Martin are both considered to be among potential bidders for DroneShield, "the most obvious buyers include Australia-based shipbuilding and defense prime contractor Austal Ltd. (ASB:ASX), which could leverage DroneShield's networks to diversify its own portfolio, and US-based Lockheed Martin."

The Catalyst

Adoption of the firm's counter-drone products is showing an uptrend, as evidenced by the two large recently awarded SECRET contracts from the Australian government. Many other allied nations in the EU and elsewhere, along with the members of "the five eyes" intelligence alliance comprised of Australia, Canada, New Zealand, the U.K., and the U.S., are all prospective customers of DroneShield.

Louise Weihart, an independent journalist pointed out that "according to two industry experts, significant contract wins in recent weeks and an investment from U.S. peer Epirus could become a trigger of takeover interest for DroneShield." 

All these nations, in one way or another, are ramping up defense spending and expanding their tactical defense systems. Any demonstrable superior performance results related to the company's currently deployed assets could serve to be a strong catalyst for new and even larger orders.

The company invested early on in its own in-house development and equipment. As a result, increases in orders are not expected to require significant capex spending.

The company's CEO and Managing Director, Oleg Vornik, commented in a recent interview with The Market Herald that due to the path the company has taken, the margins on its contracts are very high and provide for both product and reoccurring subscription revenue for things such as maintenance and software updates. Gross product margins are as high as 70%, and since the company owns all of its technology and pays no license fees, a large portion of any new and incremental revenues should have a positive effect on the company's bottom line.

During the latter part of CY/22 and continuing into CY/23, the company successfully implemented numerous strategic and financial actions, all offering the potential to expand DroneShield's worldwide presence and generate solid revenue growth in CY/23.

These actions included:

• Securing two separate AU$11M (million) contracts from Australian authorities.
• Obtaining U.S. Department of Defense approval for deploying Counter-UAS as a Service.
• Completing the Australian DoD Defence Innovation Hub project.
• Deploying the first system at an unnamed U.S. airport.
• Receiving several additional orders valued at more than AU$1M from U.S., European, and other Government customers.
• Receiving an AU$3.7M investment from U.S. defense technology firm Epirus Inc.

Expert Opinions

In a January 9 news release, Bell Potter Securities Ltd. Analyst Daniel Laing commented that "DroneShield has got off to a flying start in the New Year with the announcement of another AU$11M purchase order for several different types of the company's counter-drone/C-UAS equipment." Laing explained that this order was in addition to a separate unrelated order for AU$11M from an unnamed Australian government agency signed less than three weeks prior on December 22, 2022.

Analyst Laing added that the orders should aid in "establishing a solid revenue foundation for CY/23." Laing noted that a positive takeaway is that the orders received were from different customers, which demonstrates "significant demand for the company's products from a variety of sources."

In conclusion, Bell Potter indicated that it was maintaining its "BUY" recommendation on the company and that based upon its improved confidence in DroneShield's sales pipeline, it is raising its 12-month price target for the company's shares from AU$0.32 to AU$0.34.

Independent Technical Analyst Clive Maund stated in a recent article that as military conflicts have resurfaced and appear to be escalating, "companies like DroneShield, which make military class drones and also drone defense technology, look set to do very well indeed."

Maund commented further that "the price/volume action in DroneShield is very bullish indeed, and the fundamental outlook for the company could scarcely be better, adding that it is therefore believed to be just beginning a major bull market that should take it to much higher levels."

January 24, 2023, Gerard of the National Inflation Association said, "DRO hit a new 3-year high this morning in ASX trading of $0.42 per share for a gain of 110% from NIA's suggestion price. Click here to see NIA's initial April 3rd DRO alert!"

To read more of what these experts are saying, click "See More Live Data" in the data box above.

Ownership and Share Structure

Approximately 11% of DroneShield’s stock is owned by management, with CEO Oleg Vornik claiming 8.1 million shares at a majority stake of 1.8%. Other internal stakes are maintained by CFO Carla Balanco at 3.2 million shares, as well as board member Peter James with 6.3 million.

13.99% is owned by strategic investors.

Without any institutional shareholders, the remaining 79% of DroneShield’s outstanding shares are retail.

A micro-cap, DroneShield currently boasts an approximate AU$171 million market cap on 451 million outstanding shares (and 36 million options) spread across more than 8,000 investors. Approximately 378 million shares are free-floating. In addition, as noted by analyst Daniel Laing of Bell Potter Securities, DroneShield operates without bank debt and has an estimated AU$7 million in cash available as capital expenditure.

DroneShield Ltd.'s shares trade on the Australian Securities Exchange under the symbol "DRO" and last closed for trading at AU$0.38/share on Wednesday, January 25, 2023. The shares have traded in the 52-week range of AU$0.155 to AU$0.420 per share. The company's shares are also listed in the U.S. under the symbol "DRSHF" and trades on the OTC market.

Disclosures:
1) Stephen Hytha wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. He or members of his household own securities of the following companies mentioned in the article: None. He or members of his household are paid by the following companies mentioned in this article: None.

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