In todays AFR: DroneShield: a capital markets plaything or the real deal?
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DroneShield: a capital markets plaything or the real deal?
Even as sceptics question its valuation, the drone detection and jamming group has a near $1 billion market capitalisation.
DroneShield, the drone detection and jamming technology group, seems to have it all: a rocketing share price (even after it halved), an impressive ability to raise equity and a whiff of geopolitical intrigue.
That alone has garnered it an enthusiastic investor following.
“It’s captured the zeitgeist perfectly,” says one small cap analyst, explaining how this near $1 billion company in market capitalisation terms (first-half revenue: $24.1 million) has attracted investor interest with products that stop drones flying over war zones, airports and stadiums.
It’s why an analyst call with chief executive Oleg Vornik, a former banker, spends as much time ruminating on global conflicts as the push to lock in recurring revenues. In one such call, Vornik covered Chinese drone surveillance, as well as Ukraine and US military spending cycles.
There’s secrecy too. Vornik told investors on the same call that competition risk was minimal, as many of their government contracts were too sensitive to be put out to tender.
DroneShield in technical language owns and sells the technology to stop unmanned aerial vehicles (drones) from communicating with their controllers. The products use sensors to detect drones and radio frequencies to stop them flying or transmitting images. The most popular product is its DroneGun, which can “fire” signals at drones, rather than be mounted on buildings and vehicles.
But scrutiny on the stock has kicked up another notch after last week’s surprise equity raising at $1.15 a share, well below the company’s $2.60 a share high in July.
And it was the group’s second trip to the equity market in just four months; the company raised $115 million back in April at 80¢ a share. DroneShield closed the week at $1.14.
Driving the debate in the sharemarket is this question: is DroneShield turning into another capital markets plaything, or is it setting itself up to be the real deal?
Even with the share price fall, DroneShield investors have had an incredible run. Shares in the micro-cap have increased more than six times since the start of the year, and then, even quicker, have halved in value.
The combined equity raises along the way put the company among the top 20 equity issuers on the ASX this year.
It is the second raising that has thrown some believers, fearful this may be another serial capital raiser.
The company said $20 million or so had been earmarked for acquisitions, while $90 million is for developing technology “due to anticipated increase in AI [software as a service] offerings and higher sales pricing for the underlying hardware”.
Hefty multiple
The SaaS offering is a key part of the group’s plans to generate recurring revenue, and the technology spend is aiming to use that for drone jamming equipment. Right now, the SaaS offering only applies to detection.
The existing tech sells well, and will continue to sell for the next several years, Vornik has said, but he wants to “skate where the puck is going”.
Whatever the pipeline, for detractors it’s hard to look beyond the top line: according to Capital IQ, consensus is for revenue in 2024 of $95.5 million. That’s expected to grow to $129.8 million in 2025.
The stock is trading at high multiples – 13.6 times forward revenue, 53 times forward EBITDA, according to Capital IQ.
But there may be another game afoot: index rebalancing.
The next index inclusions are due in the September quarterly rebalance. Often, investors try to front-run the potential promotions, knowing that index buying will inevitably follow any index entrant.
There’s another side, too – shorts often move in just as quickly, partly because more institutional investors means more stock is available to borrow and bet against. Investing wisdom also suggests many new entrants propelled into the big indices by retail enthusiasm flame out when faced with institutional scrutiny.
DroneShield is a possible contender for inclusion in the S&P/ASX 300. According to Wilsons, it’s the third pick to get into the 300 following coal miner Yancoal and biotech favourite Clarity Pharmaceuticals, which also just raised capital.
The broker anticipates there are at least 13 “strong removal candidates”, which include TerraCom, Renascor Resources and Grange Resources, boosting the case for new entrants.
Even if the valuation debate wasn’t a factor, the group’s rapid growth has put governance questions front and centre.
Like many other fast-growing companies, there is concern that the group isn’t moving quickly enough to accommodate its enlarged scale.
For starters, its board has just three members – Vornik, Jethro Marks, the co-founder of retailer Nile Group, and chairman Peter James.
Directors sell shareholdings
Vornik said in an email the company is looking for another director and several candidates were being considered. “We would be looking for experience in fast-moving technology environments and the ability to scale up; a good cultural fit, potentially with global experience,” he said.
All three board members were selling their shareholdings in late February, when DroneShield was trading closer to 70¢. Vornik sold 10.5 million shares over the following week, netting him $7.2 million. Almost half were loan-funded shares, with Vornik paying $1.6 million back to DroneShield.
Marks sold 1.3 million shares, also partly loan-funded, while chairman James sold 5.6 million, repaid a loan and banked $2.8 million.
Insider selling is always a market obsession, particularly if all board members act together.
But neutral observers point out that of even more concern from a governance perspective was the issue of options at the June 3 annual meeting at 80¢. The holders of those shares are sitting on instant paper profits of around $23 million based on the last traded price.
