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Where next for DroneShield shares after disappointing half-year results?


ArvinIG

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Weak earnings could make DroneShield shares an interesting buying opportunity for investors with a healthy risk appetite.

asx
Source: Bloomberg
 
 

DroneShield (ASX: DRO) shares are hard to pin down. The penny stock has fallen by 26% since its Initial Public Offering in 2016 and by 15% over the past year. And it’s fallen by 19% to AU$0.17 over the past month alone, after delivering poor half-year results.

But the company is an intriguing proposition. It offers Artificial Intelligence-powered hardware and software solutions against unmanned threats from drones, selling them to governments, military, airports, and commercial venues across 120 countries.

And it believes that the Counterdrone industry is now a US$10 billion global market opportunity. Moreover, DroneShield shares spiked in 2017 and 2019 far above their current price level.

But as with all penny stock investing, the opportunity for high rewards comes with correspondingly magnified risks.

DroneShield share price: half-year results

Earnings made for fairly poor investor reading. Revenue fell by 45% compared to half-year FY21 to just $3.67 million, while loss from continuing activities after tax rose by a whopping 990% to $4.93 million.

Worse, the tech company’s cash and cash equivalents fell by 51% to $6.59 million as it posted a loss of $1.17 per share, up from only $0.12 per share for the same period last year.

The company plans ‘to move into the Software-as-a-Service (SaaS) space through the use of subscription pricing models on a range of products...the software/SaaS business is expected to account for the majority of the Group’s earnings.’

However, while hardware sales, which comprise the bulk of the company’s sales, fell from $4.23 million to $2.81 million, subscription revenue only rose from $58,000 to $140,000. This could be a risky plan that may not pay off.

At least one key risk has been addressed; it has invested in ‘substantial inventory acquisition to mitigate supply chain delay risks,’ maintaining $15 million of inventory at hand.

australia
Source: Bloomberg

Where next for DroneShield shares?

While war is always a human tragedy, increased geopolitical tensions are usually good news for defence stocks.

The ASX company acknowledged the ‘highly favourable macro environment for DroneShield due to increased macroeconomic uncertainties...war in Ukraine demonstrating extensive use of small drones by both sides, and rapidly increasing defence budgets globally including by the Australian Government’ as one of its key highlights in the results.

Moreover, as the risk of Sino-Taiwan conflict escalates, the need for DroneShield’s hardware is becoming ever more necessary in the modern theatre of war. In August, video emerged of Taiwanese soldiers throwing rocks at a Chinese drone; while Taiwan boasts strong defensive capabilities, this point could represent an Achilles heel.

Accordingly, despite the share price slip, DroneShield has a $250 million global sales pipeline, including $100 million of projects tracked to the end of 2022. Most significantly, it has agreed a $3.8 million 2-year long contract with the Australian Department of Defence in the Electronic Warfare/Signals Intelligence arena, and anticipates an expansion after its completion in mid-2023.

The company has also won a $2 million contract from a European government customer for its DroneSentry, a small tower that uses AI to detect and respond to hostile drones.

CEO Oleg Vornik argues that ‘this order continues our progression from developing the tech, to smaller sales, to repeat smaller size, to presently realising larger contracts...this contract reinforces our position as a global leader in the rapidly growing counterdrone sector.’

Further, it’s seen a ‘continued rapid increase in the US business, including signing a framework agreement with the State of Texas, receiving a counterdrone contract for protection of IRONMAN Texas, and DroneShield’s initial GSA order.’ And in the UK, it’s achieved UK MOD SAPIENT compliance, meaning it meets the country’s military standards.

Last month, Peloton Capital analyst Darren Odell argued that the ASX company is at ‘an inflection point.’ He expected 2022 revenue to reach between AU$20-30 million, before spiking to AU$170 million in 2023 as ‘governments worldwide...become increasingly concerned about the growing risks from drones.’

Of course, this optimistic prediction came before the disappointing half-year results. But for investors with a high-risk tolerance, DroneShield’s share price dip may be an ASX buying opportunity.

Charles Archer | Financial Writer, London
09 September 2022

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