Now could be the time to snap up DroneShield Ltd (ASX: DRO) shares.
That's the view of analysts at Bell Potter, which have just upgraded the counterdrone technology company's shares.
Bell Potter notes that DroneShield recently released its third quarter update. It acknowledges that the update fell short of its expectations. It explains:
DroneShield released its Q3 investor update and Appendix 4C, which, given the high market expectations, detailed a disappointing performance for the first 3 quarters of CY24. DRO recorded $31.1m in revenues to 30-Sep-24 (-20% vs pcp), however it should be noted the 3Q23 figure included a one-off $33.0m contract. Cash receipts to 30-Sep-24 were $30.5m (+20% vs pcp) and the operating cash outflow was -$49.0m, which was expected considering the significant inventory investment throughout the year. DRO had a cash balance of $238.3m at 30-Sep-24, with no core bank debt.
In light of the above, the broker has taken an axe to its earnings estimates. It said:
Based on the level of contracted revenue, we have downgraded our CY24 revenue forecasts by -20% to $65.8m. We have also made less significant downgrades to our CY25/CY26 revenue forecasts due to the $18m of already contracted revenue for CY25 and anticipated growth in the broader market. The subsequent downgrades to bottom line earnings are more substantial due to the forecast increase in opex as the business continues to scale. Our EPS changes in CY24/CY25CY26 are -57%/-28%/-26%, respectively.
Despite the above, Bell Potter remains positive on DroneShield and its shares, especially after recent weakness dragged them down to an attractive entry level. It adds:
Whilst DroneShield's revenue YTD has been disappointing, we view this as an opportunity to reset market expectations, which were overly optimistic for CY24. However, DRO remains a high-quality technology company, operating in a rapidly growing market and is well capitalised to maintain its market leading position. We believe the current SP provides an attractive entry point considering DRO's strong runway into CY25 ($18m contracted rev.), robust market demand and appealing long-term growth outlook.
Bell Potter sees potential for some market-beating returns over the next 12 months.
According to the note, the broker has upgraded DroneShield's shares to a buy rating (from hold) with a trimmed price target of $1.20 (from $1.35).
Based on its current share price of 96.5 cents, this implies potential upside of 24% for investors.
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