Anti-Drone Firm Flying High After Record Q4 2023

DroneShield Ltd. (DRO:ASX; DRSHF:OTC) is an Australia-based counter-drone tech company that I've profiled several times before. Focusing on radio frequency sensing, artificial intelligence and machine learning, sensor fusion, electronic warfare countermeasures, rapid prototyping, and MIL-SPEC manufacturing, the company provides artificial intelligence-based platforms for protection against advanced drones and autonomous systems.

As a specialist in counter-drone warfare, that company offers customers bespoke electronic warfare solutions and off-the-shelf products designed to suit multiple terrestrial, maritime, and airborne platforms.

DroneShield's products include DroneGun Tactical, DroneGun MK3, DroneSentry, DroneSentry-C2, DroneSentry-X, and RfPatrol.

The Catalyst: Great Q4 2023 Revenue, First Profitability

The company recently posted record cash receipts and grants for the December 2023 quarter of AU$48 million, some five times greater than the previous AU$10 million record in the September 2023 quarter.

Over 2023, DroneShield saw a new annual receipts record of AU$73.5 million, which is also roughly five times the equivalent figure for 2022. Revenues for 2023 also hit a record high of AU$55.1 million, triple what the company earned in 2022.

Bell Porter analyst Daniel Laing wrote, "This was a standout year for DroneShield . . . The net result is no change in our AU$0.50 price target, which is a >15% premium to the current share price, so we retain our Buy recommendation."

Additionally, DroneShield turned a pre-tax profit for the first time — some AU$4 million — which marks a significant turnaround from the AU$2.9 million before-tax loss it ate in 2022.

As CEO Oleg Vornik explains, "We are ready to deliver a strong 2024; after a record 2023, we are seeing continuing peak demand from our customer base globally, our competitive positioning and customer reputation are exceptional, and we are ready operationally to meet this demand."

In a January 16 research note, Bell Porter analyst Daniel Laing wrote, "This was a standout year for DroneShield . . . The net result is no change in our AU$0.50 price target, which is a >15% premium to the current share price, so we retain our Buy recommendation."

Darren Odell of Peloton Capital also gave the stock a Buy rating in a January 16 report, and Odell gave the company a target price of AU$0.84.

Why This Industry? More Conflicts = More Drones

As a recent, highly interactive article from The Wall Street Journal makes abundantly clear, drones are entirely changing how war is fought.

As the article explains, "Over the past decade, uncrewed aerial vehicles — and recently naval vessels — have put increasingly lethal and effective military equipment in the hands of insurgent groups such as Islamic State, Yemen's Houthi rebels and underdogs like the Ukrainian military. Kyiv used drones to slow Russia's invasion in 2022 and later sent longer-range UAVs to hit targets as far away as Moscow."

Darren Odell of Peloton Capital also gave the stock a Buy rating in a January 16 report, and Odell gave the company a target price of AU$0.84.

"When Hamas struck Israel on October 7, its attack began with strikes from hobbyist drones on Israeli surveillance posts. The Iran-backed Houthis are using drones to target Red Sea shipping lanes."

"The question for the U.S. and its allies now is how to defend against cheap drones without using expensive missiles."

Of course, that's where DroneShield excels, which bodes well for the company's future growth.

Why This Company? Growing, Repeat Customer Base

The growing threat of new autonomous vehicle actors has always been a strong indicator that DroneShield's customer base has much room for expansion. However, now that the company is pulling in eight-digit quarterly revenue, retention becomes as crucial as prospective growth.

Notably, 80% of the company's newly reported revenue came from repeat customers, which means that DroneShield isn't growing by constantly seeking new markets. Instead, it's serving those it's already captured and doing well enough to build that all-important repeat business.

With such a model, scalability is, of course, quite important. In June of last year, Dronesheild took the significant step of expanding its production and sales departments into the U.S.A. Such a considerable overseas expansion makes sense, as some 68% of the company's revenue originates in the U.S., while only 23% originates in Australia.

Both military and non-military federal agencies in the U.S. are expected to remain the largest market for DroneShield products in the near term.

Why Now? New Drones, New Facility

In addition to significantly increasing sales, DroneShield continued to innovate, developing seven new drones in 2023, with some destined to enter the market this year. The company is also set to complete another move into a larger facility in Sydney by the end of this month.

The new space will provide three times the space of the current production setup, more than enough to meet the growing demand, with the company targeting an annual production capacity of AU$300-400 million.

Analysts think that the company is moving in the right direction. Daniel Laing reported in November 2023, "With strong contract momentum continuing, DroneShield is expanding operations by moving to a larger facility before year-end."

"DroneShield secured around AU$80 million in hardware and R&D contracts over the past year that are expected to contribute AU$66 million to 2023 sales. The current backlog stands at AU$38 million, not including additional underlying revenue."

"Beyond current agreements, the analyst sees AU$400 million in near-term opportunities spanning North American and European defense agencies and commercial installations. This includes a multi-year U.S. military base security rollout projected to represent over AU$20 million in revenue."

"With its proprietary artificial intelligence driving continued innovation and demonstrated execution on large-scale deployments, Bell Potter believes DroneShield can establish itself as an industry leader in counter-drone security technology. Based on significant growth prospects, the firm maintains a Buy rating and increases its price target by 11% to AU$0.50."

In July last year, Darren Odell reported that "recent contract wins cement DroneShield's position as one of the key players in the global market for counter-drone solutions."

Odell pointed out that DroneShield's repeat contracts with the U.S. government have increased in value over two to three years. The first one was for AU$1M. The next was for AU$11M, and the most recent was for AU$33M. 

"We would expect this trend to remain for the U.S. and Five Eyes countries (including the North Atlantic Treaty Organization)," Odell opined. "The war in Ukraine has ensured elevated interest in the capabilities of the likes of DroneShield, which is not expected to dissipate any time soon."

Ownership and Share Structure

As of December 31, 2023, Droneshield had a cash balance of AU$57.9 million buffered by an AU$30 million order backlog and an AU$400 million sales pipeline.

Approximately 11% of DroneShield's stock is owned by management. CFO Carla Balanco holds 8.45 million (1.44%). CEO Oleg Vornik owns 8.18 million shares (1.40%), CTO Angus Bean owns 7.39 million (1.26%), and Independent Chairman Peter James owns 6.40 million (1.09%).

According to Reuters, 13.99% is owned by strategic investors. Independent Investor Charles Goode has 21.5 million shares (4.41%).

The largest single shareholder is Eprius Inc., which holds some 18.5 million shares (3.16%).

The company has introduced ten institutional investors as part of its February 2023 placement, but further details have yet to be released.

DroneShield Ltd. has a market cap of AU$110.32 million, with 585,179,443 shares outstanding and a free float comprising some 83.51% of traded shares.

Important Disclosures:

1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of [DroneShield Ltd.].
2. [Owen Ferguson] wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor.
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