OK, my valuation of $1/share from only 3 months ago is now looking overly conservative -- or, as many have pointed out, the current market pricing is rather exuberant..

I'll leave the previous rationale below, but let's try a super optimistic valuation just to test how much growth is needed to justify the current price ($2.56)

Droneshield have said for a while that they have a FY2028 target of $300-$500m.

Let's assume they exceed the top end of that range and do $600m. Let's also assume the do a very healthy 15% net margin.

That gives a FY28 NPAT of $90m, which based on a fully diluted share count of 818.5m shares is an EPS of 11cps.

Now, if we wanted a 10%pa capital gain between now and the end of FY28 (remembering they report on a calendar year basis), we'd need the share price to be $3.93 at that point in time. And the company's market cap to be ~$3.2b.

If the EPS is 11c, then we need a FY28 PE of at least 35.

Yeah, all that is possible. But again, it rests on a 20% beat to the top end of already aggressive revenue targets, high net margins and a decent PE.

For context, the average net margin for the major listed military hardware companies is usually less than 10% (eg Raytheon and Lockheed are at ~10%, BAE Systems is 8%)

At present, these companies are all on a PE of less than 25 at present. Most less than 20. Ok, maybe they dont have the same growth potential as a much smaller company with a longer runway, but it is notable.

If, for contrast, we apply a 10% net margin and PE of 25 to our $600m FY28 revenue target for DRO, and then discount back by 10% per annum, we get a current valuation of $1.20 -- less than half the current price...

The point isn't to suggest these assumptions should be relied on -- maybe DRO is doing $700m in revenues at a 20% net margin in FY28! -- but it does show that we need to see a lot of things go right for the current price to make sense.

Remember too, we're only demanding a 10% compound annual return with these valuations. So the company absolutely knocks it out of the park and my return is essentially on par with the long run market average...

It's just not that appealing to me, and I think the only way you can rationalise a big position in DRO right now is if you expect some combination of significantly higher than forecast revenues & margins, and/or the market maintains a very high earnings multiple (which, btw, happens all the time -- but it's not something I like to reply on)

For the sake of drawing a line in the sand for my Strawman valuations, I'll go with FY28 revenues, margins and PE of $500m, 10% and 40 (respectively) to get a valuation of $1.60

OLD VALUATION FROM APRIL 2024

Time for an update on this 8 month old valuation. (41c previously, based on FY28 revenue of $300m, a 5% net margin and terminal multiple of 35)

As i said at the time, there's a rather wide range of trajectories here, but given recent wins, sales momentum and order book growth, I'm probably justified in baking in more optimistic assumptions.

I'll take the mid-point of their FY target of $400m in sales. Last year they were already on an underlying net margin of 5.7% (once you take away R&D incentives and tax deferred tax benefit), so at scale this should improve. For the sake of conservatism i'll go with 7.5% to get a FY28 NPAT of $30m.

Given the implied growth, a terminal earnings multiple of 30 doesn't seem outrageous, and that gives us a market cap of $900m, or $1.32/share.

Discounting back to today, at a 10% discount rate, and remembering they operate on a calendar year basis, that's a valuation of 82c. Exactly double the old valuation!

For the sake of argument, if Droneshield hits the top of their revenue target ($500m) and did a 10% net margin, you'd get a valuation of $1.37 with everything else held steady.

Or $400m in revenue and a 10% net margin and a PE of 35 gets you $1.27.

As you can see, and is often the case fort high-growth companies, it's rather easy to produce a valuation you want without tweaking things too aggressively.

As someone who very much prefers the "roughly right" approach to valuation, what it really boils down to for me is that Droneshield is probably somewhere around 'fair value' IF you have any confidence in their medium term revenue aspirations, and that they can operate at a reasonable margin.

Of course, a major acquisition or a single large deal could change everything very quickly. But so long as we continue to see genuine progress in orders, sales, earnings and cash flows, it's a "hold" for me at the current price ($1.10), and i'll nominate a nice round $1 valuation as my current best guess of fair value.