DroneShield Limited

DRO Details

DroneShield Limited (ASX: ARX) is an Australian based publicly listed company with its head office in Sydney and teams in the US and the UK. The company specialize in Radio Frequency Sensing, Artificial Intelligence and Machine Learning, Sensors Fusion, Electronic Warfare, Rapid Prototype and MIL-SPEC manufacturing.

Q1 FY21 Update: For the period ending 31 March 2021, the quarterly customer receipts reached $1.7 million. DRO received ~$2.3 million of cash was received during the period from the Middle Eastern Ministry of Defense. The company is further pursuing the $60 million worth of orders from the same entity. There is a significant increase in operating expenses for the quarter pertaining to staff and administration and corporate cost ($2.26 million in Q1 FY21 vs. $1.40 million in pcp), which had impacted cash balance.

FY20 Balance Sheet Highlights: To facilitate the business operations and strengthen the balance sheet, the company raised cash in FY2020 of $17 million via Placement and Purchase Plane, which was oversubscribed. The COVID-19 impacted the operational efficiency by an increase in trade payables from FY 2019 of $1.58 million to $3.71 million in FY20, along with the rise in inventory levels from FY 2019 of $725.9K to $2.02 million, creating a shortfall in the system.

Recent Development: On 4 June 2021, DRO received a 2-year contract worth $3.8 million, with the military of a Five Eye country, out of which $2 million is scheduled for June and September quarters for the year 2021.

Product Sales (Source: Company Report)

Key Risks:

DRO is exposed to foreign exchange risks. It had revenues from the US and the UK and incurred forex losses in FY20. The company had high concentration risks with $60 million or more of orders were concentrated from the Sovereign entity. The counter-drone technology market is a niche segment and is exposed to regulations and patent risks.

Outlook:

The counter-drone market expects to reach $5.9b by the end of 2026, and the further increased budget by US Congressional research service to the US $500m gives Droneshield a better tailwind to expand globally. The high conviction pipeline is estimated at over $100 million, with a majority within the US, which prepared the company to increase the cash balance to $13.6 million on 31 March 2021. The management expects positive cash flows starting from 2Q21, which is subject to the inventory and other one-off expenses.

Stock Recommendation:

DRO has delivered 1-month and 3-months returns of ~-5.88% and ~+3.23%, respectively. The stock is trading marginally lower than the average of the 52-week low price of $0.100 and the 52-week high price of $0.250. On a TTM basis, the stock of DRO is trading at EV/Sales multiple of 9.7x compared to the Industry Median of 2.3x (Industrial), implying overvaluation. The management is hopeful of generating positive cash flows considering new orders. DRO's prices are sustaining below an upward sloping trend line, indicating the possibility of a downside direction. On the daily chart, the leading indicator RSI (14-period) is trading in negative territory at ~47.83 level and prices are also sustaining below the trend-following indicators 21-period SMA and 50-period SMA, further supporting a negative stance. An immediate resistance level for the stock is at AUD 0.195 while support is at 0.130 level. Considering the low profitability and intensively competitive environment, the current trading levels, valuation, we advise investors to book profits. We give a "Sell" rating on the stock at the current market price of A$0.165, up by 3.125% as on Jun 23, 2021, 10.37 AM (GMT+10), Sydney, Eastern Australia.

DRO Daily Technical Chart, Data Source: REFINITIV

Note: The yellow color line in the charts represents the trend line while the purple color line shows RSI (14-period). The green color histograms at the bottom of the charts represent volumes. The red and sky blue color lines indicate 21-period SMA and 50-period SMA respectively.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

• Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

• Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

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