Oleg's 20 minute presentation at the recent ASX Small and Mid-Cap Conference September 2024 is now available on Youtube

ASX Small and Mid-Cap Conference September 2024 | DroneShield Limited (ASX:DRO)

In the AFR Street Talk yesterday morning:

https://www.afr.com/street-talk/droneshield-readies-120m-equity-raise-bells-shaws-on-ticket-20240731-p5jxuy

Divisive small cap DroneShield, which plunged 43 per cent within a week after having its valuation questioned in a news interview, was out rattling the tin on Wednesday morning.

Street Talk understands Bell Potter, Macquarie Capital and Shaw and Partners were shopping a $120 million placement at $1.15 per share, which was a 17.3 per cent discount to the last close and 18.9 per cent lower than the five-day volume-weighted average price. It represented 13.7 per cent of shares on issue.

Term sheets sent to fund managers said DroneShield would spend $90 million on its technology development plan and $20 million on strategic bolt-on acquisitions. It has said it has a $1.1 billion pipeline, and is capitalised at $1 billion on the ASX – but only made $55.1 million revenue and $9.3 million profit last year. Bids were due 5pm Wednesday.

The raise would take DroneShield’s cash balance from $146 million to $266 million. Shares in the drone detection and defence company last traded at $1.39 apiece to be up 266 per cent this year.

It last raised $100 million at 80¢ a share, which was a 28 per cent discount to the last close and 19 per cent lower than the five-day volume-weighted average price. That raise, done in April, was used to accelerate delivery of its counter-drone systems to meet customer demand.

Some strong numbers from Droneshield today -- but not strong enough for the market, which has already priced a lot of growth in.

Contrasting Q1 and Q2, we saw $16.4 million vs $7.4 million, respectively, in terms of revenue. This could be due to timing of large orders or contracts.

Cash receipts were a lot stronger ($7.1m vs $14.2), reflecting the lift in Q1 sales.

From a SaaS perspective, we saw Q1 $561k vs Q2 $721k, showing continued growth in recurring revenue.

Cash Balance up massively, due to the >$100m cap raise in the quarter.

Inventory was up 75% as the company prepares future sales.

Likewise, we saw significant team expansion: In March we had 120 team members (95+ engineers), now 151 team members (114 engineers)

As well as more manufacturing capacity: going from $400m pa to $500m pa.

Sales Pipeline growth was massive -- pretty much doubled to $1.1 billion. The contracted backlog was about the same though suggesting steady order intake and delivery rates.

The operating cash outflow (going from -$10.7 million to -$18.9 million) seems to reflect the inventory build-up and team expansion.

You can see the full preso here.

My take remains the same -- the company seems to be enjoying incredible growth and the future looks bright -- but that (and more) is already captured in the price.

Last night I was jamming with a mate and some kids I'm going on a surf trip with later this year. One of them, Ando - a sparkie who has just finished his apprenticeship, tried to pitch me Droneshield. He was a little light on detail, in fact he misquoted the name of the company, but he'd been tipped into the stock by a mate of a mate and he assured me it was "a sure thing".

Now Ando is a lovely kid. I've got a lot of time for him. But he's a country bogun. When the Ando's of this world are pitching me a stock, I'm going to assume the top is in.

Yesterday, I had the incredible opportunity to attend the Dubai Airshow, where Droneshield showcased its cutting-edge technology at the Australian pavilion. The presence of CEO Oleg Vornik and Business Development Manager Louis Gamarra added a personal touch to the event as they openly interacted with the enthusiastic crowd. As a shareholder, I had the privilege of engaging in a detailed conversation with Louis for nearly an hour, gaining valuable insights into the business.

The exhibition featured the impressive DroneGun Mk4 and RFPatrol Mk2, both meticulously manufactured in Australia. It was emphasized that every component is sourced locally to comply with regulations for sales to Five Eyes countries and others. Their commitment to security was evident, with a keen interest in understanding the background of those exploring their products, particularly if they appeared to be Chinese nationals. This vigilance took on added significance when later in the day, I discovered another company, Skyfend (https://www.skyfend.com), with a seemingly identical product line to Droneshield. Interestingly, this Chinese company exhibited products strikingly similar to those of Droneshield. Below Pictures I took of SkyFend Pavilion at 2023 Dubai Airshow

In my inquiry about the differences between the two, the only response from the Skyfend representatives, who were Chinese nationals, was a claim that their product was superior. This raises intriguing questions that warrant further investigation. However, it's worth noting that Droneshield's strategic advantage lies in its accessibility to Five Eyes countries, and given the current global environment, Western countries may be hesitant to embrace Chinese technology in this sector. The competitive landscape promises to be a compelling area for future exploration.

To further underscore Droneshield's commitment to innovation, I learned that the company currently boasts a team of 85 full-time engineers. According to Louis, Droneshield is deeply entrenched in the realm of hardcore engineering, a testament to their dedication to pushing technological boundaries. During our conversation, he provided valuable insights into the intricacies of their technology. Notably, he mentioned that due to stringent regulations in Australia, they conduct their new tech testing exclusively in Virginia, USA.

One prevailing theme that emerged from our discussion was the apparent reluctance of many Western countries to swiftly acknowledge or address the evolving threat posed by drones. This hesitation underscores a substantial opportunity, particularly in safeguarding critical infrastructures such as airports. As the world grapples with the increasing sophistication of drone technology, Droneshield's expertise and forward-thinking approach position them as a key player in mitigating these emerging threats. The company's emphasis on rigorous engineering and global testing reflects a commitment to staying at the forefront of this rapidly evolving landscape.

Wow! Yet another $11M order, i.e. worth more than the record breaking 2021 total revenue. And that revenue is expected to be realised in the March and June quarters.

By my back of the hand calcs, expected revenue is already twice the record set in 2021 financial year and should easily be more than 2022, even with that also expecting to be a record year.

Talk about growth! And I expect this to just be the start.

Here's my thoughts, but I do like the space.

Looks like it could drift for a week or two, but should hold 19.5 or 20. If it breaks that would sit on my hands. The last time it had a decent run, it wouldn't go on with it, so would be a buy on a swing/shorter term basis at 21.5 with some volume coming in.

From a global perspective, I wonder if the lustre will fade should there be a ceasefire in Ukraine. There is no doubt the war has put drones front and centre in people's minds. The prison and airport business will continue but I see this as a secondary to the military which is probably where the big bucks are.

Just a few quick notes following our meeting with Oleg while they are still fresh in my mind. I would encourage you to watch the recording if you missed it (see meetings page).

I'll be honest, I last looked at this company a few years ago and pigeon holed it as a serial capital raiser, always bleeding cash and always on the cusp of something big. Yes, the technology seemed cool, but what could a tiny ASX company really bring to the table when you (i assumed) have some huge military-industrial giants likely in the same space?

So the first thing to note, taken Oleg at his word, is that Droneshield is the global leader in this very fast growing space. It sounded like they were well ahead of competitors, with a decent first mover advantage and a far more holistic product set.

Contract negotiations -- especially with defence agencies -- can be very protracted, but then tend to be very sticky. Given their existing partners in this space, they seem to be very well placed to win a lot more work here. Indeed, Oleg certainly suggested that they expected a lot more orders in the coming years.

Another noteworthy fact is that they have essentially doubled revenues each and every year in recent times, and Oleg suggested that they would again get close to doing that in FY23 (ends Dec31) -- although there can be a month or so delay between contracts signed and revenue recognised. He said that things could triple in the following year.

What really stood out was that they achieved cash flow positive status in the 3rd quarter and expect this to be the case each and every quarter going forward. With $7.5m in the bank, assuming this is true, they should avoid any capital raise. And while it's true that the global economic picture isn't pretty, this is a business that is seeing some strong tailwinds -- such is the state of the world :(

Oleg mentioned that the cost base was pretty well established and could handle 10x revenue here -- at least from an engineering perspective. There could be some additions in terms of sales. The use of contract manufacturers to help provide some elasticity to their own capacity seems smart given the lumpy nature of orders. It was also prudent, it seems, to bulk up on inventory given chip and component issues in the global supply chain.

At present 70% or so of revenue is hardware based, but Oleg expects that SaaS subscription revenue will grow to about 50% in the coming years.

Assuming (conservatively) that they do $15m in sales this year, the company is on about 3x sales. Doesn't seem that onerous for a CF +'ve company with expectations for continued strong sales momentum.

I don't own at present.