Volatus Aerospace Corp. (VOL:TSX; VLTTF:OTCQB) beat expectations in Q2/23 and should post a strong H2/23, reported Echelon Capital Markets analyst Rob Goff in an Aug. 29 research note.
"Given the tough Q1/23 results, we are pleased to see the improved quarter over quarter (QOQ) and solid results," Goff wrote. "We remain very bullish towards [the company's] shares."
257% potential gain
Echelon lowered its price target on Volatus to CA$0.75 per share from CA$0.90 to reflect the "significantly higher cost of capital facing the shares," explained Goff.
Compared to the CA$0.75 target, the Canadian drone company's current share price is CA$0.21. The gap between these two figures implies a significant return for investors, of 257%.
"We look for the shares to be positively revalued with demonstrated positive EBITDA and free cash flow along with the company securing additional financial flexibility," Goff commented. "We see scenarios with large contract wins from its pipeline representing significant positive catalysts beyond our baseline forecasts."
Volatus remains a Speculative Buy.
Expectations exceeded
Goff presented Volatus' Q2/23 financial highlights, pointing out that revenue, gross profit and EBITDA all were a beat.
Revenue was CA$8.7 million (CA$8.7M) versus Echelon's estimate of CA$7.5M; gross profit was CA$3M versus CA$2.4M; EBITDA was (CA$1.1M) versus (CA$1.6M).
Goff made two points about these numbers. First, the mix of product sales in Q2/23 was lower QOQ, at 51% compared to 63%. The gross profit outperformance reflected this change.
Two, Volatus' Q2/23 financial results did not include any revenues or gains from fleet sales, as no such transactions were made either during the quarter or during H1/23.
Also, management continued cutting costs in Q2/23, some of the effects of which will be seen in Q3/23 but most, in Q4/23, Goff indicated.
"Management cited moves to realize additional cost reductions where the annualized rate is now at CA$3M, up from $1.5M," the analyst added.
Improved financial flexibility
The Echelon analyst discussed Volatus' financial situation, highlighting it is amply cashed up for H2/23.
During the quarter, Volatus increased working capital by CA$0.6M, primarily via accounts receivables and prepaid expenses. Plus it added a CA$2.25M revolving line of credit. Ultimately, the company ended Q2/23 with CA$1.3M in cash.
Working in Volatus' favor is its sales pipeline, the robustness of which portends that the company's H2/23, exit from 2023 and entry to next year will be strong.
"We are optimistic that [Volatus] will secure significant wins," Goff wrote
Given its current financial situation, "[Volatus] has sufficient funds where we forecast a modest free cash flow (FCF) drain of CA$0.7M in 2024," wrote Goff. While we believe the company has sufficient funds available through FCF, we could see it raise additional debt or capital to fund more aggressive growth."
A look ahead
Goff provided the financial outlook for Volatus for the rest of 2023, which is positive.
Echelon estimates a working capital drain of CA$0.5M in Q3/23, dropping to CA$0.35M in Q4/23.
The equity research firm forecasts revenue of CA$12.7M in Q3/23, increasing to CA$14.3M in Q4/23. Similarly, it projects gross profit of CA$3.8M in Q3/23, rising to CA$4.3M in Q4/23.
As for EBITDA, Echelon expects it to be (CA$0.2M) in Q3/23 and improve to CA$0.3M in Q4/23.
"We look for Volatus to turn to positive EBITDA and FCF from operations along with the company securing additional financial resources as positive revaluation catalysts," Goff wrote.
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