Why it could be time to buy DroneShield shares

DroneShield Ltd (ASX: DRO) shares were sold off on Tuesday following the release of its half year results.

The counter drone technology company's shares fell over 8% to $1.17.

While this decline is disappointing for shareholders, the team at Bell Potter sees it as a buying opportunity for the rest of us.

What did the broker say about its results?

Commenting on the result, Bell Potter acknowledges that DroneShield's sales and profits were short of expectations. The latter was driven by larger than expected operating expenses. It said:

DRO recorded revenue from customers of $23.3m (+106% vs pcp) during the 1H24, – 3% below BP estimates. Gross margin (71.6%) was largely in-line with BPe however opex (-$22.7m) was materially greater than our estimates (-$18.5m) and was the primary reason for the miss at the bottom line.

This included share-based payment expenses of -$2.7 million, an increase of 207% relative to 1H23 of -$0.8m. DRO recorded EBITDA of -$5.2m (vs BPe -$1.1m) and a net loss after tax of -$4.8m (vs BPe -$1.6m), excluding the share-based payment expense the net loss after tax was $2.1m. The company had a cash balance of $230m as of 23-Aug-24, with no core debt or convertibles.

Is it time to buy DroneShield shares?

Bell Potter is confident that a stronger second half is coming. Particularly given its contracted backlog and huge sales pipeline. It said:

The company entered the 2H with a contracted backlog of $32m and sales pipeline of $1.1b, including 33 projects valued over $5m each and the largest valued at $213m. We remain confident the company will deliver a significantly improved 2H performance based on 1) the significant level of inventory on hand to facilitate rapid fulfilment, 2) the historical seasonality of the business with >80% of CY23 revenue recorded in the 2H and 3) numerous near-term sales opportunities, including recently announced military aid packages.

In light of this, the broker has reaffirmed its buy rating and lifted its price target to $1.35 (from $1.25). This implies potential upside of 15% for DroneShield's shares from where they currently trade.

Commenting on its buy rating, the broker said:

Our EPS changes are -6% and +2% in CY24 and CY25, respectively. We have reassessed our valuation assumptions and determined they are overly conservative considering the well capitalised balance sheet (we made no changes post the recent capital raise) and the recent re-rating of mid-cap defence peers. As such, we have increased the multiples we apply in our EV/EBITDA and PE valuations to 26x and 36x, respectively. The net result is an 8% increase in our PT to $1.35, which is >15% premium to the share price so we retain our buy recomm.

The post Why it could be time to buy DroneShield shares appeared first on The Motley Fool Australia.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended DroneShield. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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