Shaw and Partners analyst Abraham Akra initiated coverage on DroneShield Ltd. (DRO:ASX; DRSHF:OTC) with a Buy recommendation and a price target of AU$1.40, according to a research report published on May 31, 2024. The analyst believes that DroneShield is well-positioned to benefit from the rising global defense spending and the increasing focus on counter-drone (C-UAS) capabilities.
"DroneShield is a market leader and early mover in counter-drone (C-UAS) tech. DRO specializes in advanced AI-driven counter-drone and electronic warfare solutions for terrestrial, maritime, and airborne platforms. Products can support fixed and mobile deployment," Akra stated. "DRO customers include the military, intelligence communities, government agencies, law enforcement, critical infrastructure operators, and airports globally."
The analyst estimates the total addressable market for C-UAS technology to exceed US$10 billion (B), with the military accounting for approximately 37% of the addressable market and less than 1% market saturation.
"We expect DRO's 10-year track record, certifications, product suite across mobile and fixed site CUAS will facilitate sales growth to exceed market growth rates," Akra noted.
Akra highlighted the rising global defense spending driven by escalating geopolitical tensions and advancements in military technologies.
"The U.S. Department of Defence (DoD) is expected to increase its budget by 4% Y-Y in FY25 to US$850B. NATO member nations are also projected to boost defense spending by 10% Y-Y to US$380B in CY24. We expect DRO to benefit, as have comps, from a focus on C-UAS," the analyst stated.
The analyst also pointed out that DroneShield is part of a select few C-UAS systems approved by the US DoD in mobile and fixed site defense.
"The usage of DRO products and systems in Ukraine, as well as the ability to rapidly deliver equipment from existing inventory, separates DRO from its competitors," Akra commented.
Moreover, the recent NATO agreement clears regulatory hurdles for European adoption, de-risking DroneShield's revenue base. "This is the first-ever procurement framework agreement for C-UAS in NATO's history. This agreement simplifies the procurement process for DRO products across NATO member countries by streamlining and unifying their requirements," Akra explained.
Shaw and Partners' valuation of DroneShield is a blend of discounted cash flow (DCF) and sum-of-the-parts (SOTP) analysis. "We see DRO reaching an inflection point in sales and profitability with the NATO agreement supplementing the DoD recommendation and solidifying DRO as a market leader in C-UAS," Akra stated. "The valuation is attractive, with offshore comps trading at 16x FY24 EBITDA. DRO turned FCF and EBITDA positive in FY23 and exhibits a strong medium-term growth profile."
The analyst identified several key catalysts for DroneShield, including the C-UAS Airservices Australia Tender, quarterly financials, material contract announcements, and NATO orders post-agreement.
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Disclosures for Shaw and Partners, DroneShield Ltd., May 31, 2024
Shaw and Partners Limited ABN 24 003 221 583 (“Shaw”) is a Participant of ASX Limited, Cboe Australia Pty Limited and holder of Australian Financial Services Licence number 236048.
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