Droneshield Limited

Secured Several New Deals in 2018 - Growth Catalyst for Future: Droneshield Limited (ASX: DRO) is a small-cap stock with the market capitalization of circa $31.86 Mn as of December 12, 2018. It provides drone security solutions which protect people, organizations and critical institutions from intrusion from drones. The company has world-class proficiency in engineering and physics, which is blended with deep experience in defense, intelligence, and aerospace.  The company got listed on ASX in 2016. Recently, the company has received an order from a Central American government security agency for its DroneSentry drone mitigation system and DroneGun Tactical jammer products after getting approval from the U.S. regulator. It represents that the company has a positive outlook in years to come on the back of brands awareness, increasing footprints, and decent potentiality to tap the market within the counter-drone industry. Besides this, the company also received an initial order for its counter-drone equipment from Zain, which is one of the largest Middle Eastern telecoms. However, the value of the order is not material to DRO’ overall revenue and represents an important step in the evolution of the company’s relationship with Zain. Further, Zain group has confirmed that the establishment of its Zain Drone business will serve governments and enterprises in Kuwait, with a plan to extend its business gradually across Zain’s regional footprint. Zain selected DroneShield because the company’s product range provides exactly what Zain’s customers are looking for. Over the period, the company also sold a significant amount of anti-drone equipment to one of the gargantuan Middle Eastern ministries of Defence. The company also teamed up with Thales on serving Thales anti-drone needs in Spain. In our view, the company will scale up its business through aforesaid deals which support footprint expansion across the globe and ensure top-line growth in future.

From the financial front, the company has posted decent results with revenue from continuing operation coming in at $236,758 in 1HFY18 compared to $225,343 in 1HFY17, representing decent growth of 5% on PCP basis. However, the net loss of the company grew by 21.3% to $3,565,389 in 1HFY18 as compared to the previous corresponding period (PCP). It was mainly impacted by the rise of product development expense and increase corporate and support expenses during the same period. The company achieved cash inflows from customers of $467,389 for the half-year, an increase of 79% relative to the previous half-year. As at 30 September 2018, DroneShield had a combined cash balance of $855,000. And, it has secured a $1,885,000 non-convertible credit facility. On the balance sheet front, the Group had consolidated net assets of $2.37 Mn (1HFY17: $2.91 Mn) which included the cash reserves of $2.05 Mn (1HFY17: $2.36 Mn). As at 30 June 2018, the current ratio and quick ratio stood at 2.07x and 1.91x, respectively. In our view, the future could be better than the preceding years as the group gained several deals over the period.

1HFY18 Financial Highlights (Source: Company Reports)

Year to Date, the stock has generated a negative return of 7.89% and is trading below the average of 52-week High and Low level. Given the back drop of aforesaid deals and current trading scenario, we maintain our “Hold” recommendation on the stock at the current market price of $0.190 (up 8.571% on December 31, 2018).
 

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