Ladenburg Thalmann analyst Glenn Mattson initiated coverage on Red Cat Holdings Inc. (RCAT:NASDAQ) with a Buy rating and a price target of US$4.00, according to a research report published on June 14, 2024. The analyst believes that the company is well-positioned to benefit from the growing use case for small unmanned aerial vehicles (UAVs) and has attained key government approvals, paving the way for participation in large contracts.
"Red Cat Holdings Inc. (RCAT) has attained key government approvals, paving the way for participation in large contracts. The company's lead unmanned aerial vehicle (UAV) the Teal, is now in the second and third generation of development," Mattson noted. "The product is portable by rucksack and can give soldiers in the field situational awareness in the form of intelligence, surveillance, and reconnaissance (ISR) as well as provide offensive capabilities in the form of loitering munitions delivery systems."
The analyst highlighted that the Teal 2, Red Cat's lead product, has been designated as Blue UAS certified by the Defense Information Unit (DIU), a subsidiary of the U.S. Department of Defense (DoD). This certification allows U.S. armed forces to rapidly prototype and deploy UAS technology.
Mattson also discussed the impact of the American Safety Drone Act (ASDA), which was passed as part of the December 2023 National Defense Authorization Act (NDAA). The ASDA requires that no federal dollars can be used to purchase drone technology from certain adversarial nations, and the U.S. government has stated that one secondary goal of the program is to accelerate the development of the U.S. drone industrial base.
"Along with these government mandates, the DoD has significant large programs of record such as the short-range reconnaissance (SSR) and the Replicator program. The SSR is in the final selection stages, and RCAT is one of two companies down-selected for a likely multi-hundred million program," Mattson stated.
The analyst's financial model suggests that Red Cat's top-line growth is more dramatic than it appears, given the recent divestitures of the consumer divisions.
"Essentially the Teal 2 has gotten to a nearly US$30 million run rate in revenue up from zero over just the past 12 months. We model more than 50% top-line growth in F:25 (April) given swelling demand across the NATO and NATO friendly countries," Mattson explained.
Ladenburg Thalmann's valuation of Red Cat is based on a multiple of the company's projected revenue run rate. "We use 5x our 4QF:25 exit run rate revenue, to achieve our price target of US$4 per share and initiate coverage of RCAT with a Buy rating," Mattson stated.
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Disclosures for Ladenburg Thalmann, Red Cat Holdings Inc., June 14, 2024
ANALYST CERTIFICATION I, Glenn G. Mattson, attest that the views expressed in this research report accurately reflect my personal views about the subject security and issuer. Furthermore, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views expressed in this research report, provided, however, that: The research analyst primarily responsible for the preparation of this research report has or will receive compensation based upon various factors, including the volume of trading at the firm in the subject security, as well as the firm’s total revenues, a portion of which is generated by investment banking activities. Additional information regarding the contents of this publication will be furnished upon request. Please contact Ladenburg Thalmann, Compliance Department, 640 Fifth Avenue, 4th floor, New York, New York 10019 (or call 212-409-2000) for any information regarding current disclosures, and where applicable, relevant price charts, in regard to companies that are the subject of this research report.
COMPANY BACKGROUND Red Cat Holdings, Inc. engages in the provision of various products, services, and solutions to the drone industry. It built infrastructure to manage drone fleets and fly, and provide services remotely, navigate confined industrial interior spaces and dangerous military environment. Red Cat Holdings, Inc. is based in San Juan, Puerto Rico.
VALUATION METHODOLOGY We use a 5x multiple on our 4QF:25 exit run rate revenues to achieve our $4 price target.
RISKS Risks to our rating and price target include but are not limited to the following: The company has incurred net losses since inception and may need additional capital to fund its expanding operations until it reaches profitability. Lack of long-term purchase orders and commitments from customers may lead to a rapid decline in sales. The company's products require a continuing investment in research and development and may experience technical problems or delays, which could lead the business to fail. Product quality issues and a higher-than-expected number of warranty claims or returns could harm the company's business and operating results. The company's products will likely experience declining unit prices, and the company may not be able to offset that decline with production cost decreases or higher unit sales. The company's operating results may be adversely impacted by worldwide political, economic, and public health uncertainties and specific conditions in the markets the company addresses. Acquisitions and divestitures could divert the attention of key personnel, be difficult to integrate, dilute the company's existing shareholders, and adversely impact the company's financial results. The company's failure to effectively manage growth could harm the company's business. The company's products are subject to lengthy development cycles. The company's operations may be adversely affected if the company loses its rights under third-party technology licenses. The company could lose the services of key management personnel of the companies that the company has acquired, which could adversely impact the company's ability to operate and execute its subsidiaries effectively. The company's facilities and information systems and those of the company's key suppliers could be damaged as a result of disasters or unpredictable events, which could have an adverse effect on the company's business operations. The company relies on third-party suppliers, some of which are sole-source suppliers, to provide components for the company's products, which may lead to supply shortages, long lead times for components, and supply changes, any of which could disrupt the company's supply chain, increase the company's costs, and adversely impact the company's operating results. The company faces competition from larger companies that have substantially greater resources, which challenges the company's ability to establish market share, grow its business segments, and reach profitability. The company may not be able to keep pace with technological advances in the drone industry. Cybersecurity risks could adversely affect the company's business and disrupt the company's operations. U.S. government contracts are generally not fully funded at inception and may include provisions that are not favorable to the company, which could adversely impact the company's cash flows and results of operations. A decline in U.S. government budgets, changes in spending priorities, or delays in contract awards could adversely affect the revenues of the company's Teal subsidiary. The company's work for the U.S. government could expose the company to security risks. The company is subject to extensive government regulation, and the company's failure to comply with these regulations could subject the company to penalties that may adversely impact the company's ability to operate its business. The company's management has voting control of the company. Th company's failure to maintain effective internal controls over financial reporting could have an adverse impact on the company. The company has never paid dividends, and the company does not expect to pay dividends for the foreseeable future. The company's Board of Directors may authorize and issue shares of new classes of stock that could adversely affect current holders of the company's common stock. The market price of the company's shares of common stock is subject to fluctuation. The drone industry is subject to various laws and government regulations, which could complicate and delay the company's ability to introduce products, maintain compliance, and avoid violations, which could negatively impact the company's financial condition and results of operations. The company's results of operations may suffer if the company is not able to successfully manage its exposure to foreign exchange rate risks. The company's international operations, including the use of foreign contract manufacturers, subjects the company to international operational, financial, legal, political, and public health risks, which could harm the company's operating results. The company is subject to governmental export and import controls and economic sanctions laws that could subject the company to liability and impair the company's ability to compete in international markets. Changes in trade policy in the United States and other countries may have adverse impacts on the company's business, results of operations, and financial condition. The company may collect, store, process, and use the personal information of its customers, which subjects the company to governmental regulation related to privacy, information security, and data protection. Any cybersecurity breaches or the company's failure to comply with such legal obligations by the company or by the company's third-party service providers or partners could harm the company's business. The company's products could infringe on the intellectual property rights of others. The company's intellectual property rights and proprietary rights may not adequately protect the company's products. The company’s principal manufacturer of HMDs is located in China and is owned by a related party which could create conflicts of interest. If significant tariffs or other restrictions are placed and maintained on Chinese imports or any related countermeasures are taken by China, the company’s revenue and results of the company’s Consumer operations may be adversely impacted.
COMPANY SPECIFIC DISCLOSURES
Ladenburg Thalmann & Co. Inc. intends to seek compensation for investment banking and/or advisory services from Ondas Holdings Inc. within the next 3 months.
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