DroneShield Ltd. (DRO:ASX; DRSHF:OTC) landed two more contracts recently, and to meet continued rising demand for its products, plans to expand its manufacturing and research and development (R&D) capacity, reported Bell Potter Analyst Daniel Laing in a July 17 research note. On DroneShield, Bell Potter raised its target price 46% but downgraded its rating, given its news and valuation.
"The value of contracts received year to date, about AU$175 million (AU$175M), is evidence of increased levels of customer activity, and DroneShield is well placed to meet this demand," Laing wrote. "We believe this momentum is likely to continue in calendar year 2025 and later periods based on the reported AU$2.4 billion sales pipeline."
This Australian company provides antidrone solutions that integrate proprietary artificial intelligence (AI) software with various hardware products used to detect, identify and defeat aerial, ground and maritime threats, described Laing. The company's customers primarily are military and intelligence agencies but also include law enforcement, critical infrastructure and commercial entities around the world.
8.3% Return Potential
Bell Potter's new target price on DroneShield is AU$3.80 per share, up from AU$2.60 previously. The target represents a less than 15% premium to the current share price, about AU$3.51 at the time of Laing's report. From here, the return to target is 8.3%.
The financial services firm's new rating on DroneShield is Hold, changed from Buy because "downside risk is prevalent at the current valuation," Laing wrote.
New Contract Wins
The analyst relayed that since DroneShield was awarded a set of three contracts for a European customer in late June, it secured two additional contracts. One, for AU$9.7M, is for a customer in Latin America. The other is an AU$11.7M follow-on, two-year R&D contract with a defense department of one of the countries in the Five Eyes alliance.
Expanding Capacity
DroneShield recently announced it plans to invest AU$13M in leasing and outfitting another facility in Sydney, slated to open this December, reported the analyst. This new plant will expand the manufacturer's annual production capacity to AU$900M by mid-2026. Plus, the company intends to expand its capacity even more by using contract manufacturers in Europe and the U.S.
Updated Forecasts
Laing reported that Bell Potter updated each valuation used in determining a target price on DroneShield to account for its earnings changes as well as market movements and time creep. Given these changes, Bell Potter raised its long-term revenue forecasts and materially increased operating expenses due to DroneShield's faster-than-expected operational expansion.
The net result was Bell Potter lowering its earnings per share by 19% for 2025 and by 17% for 2026 and 2027.
"We reiterate this is due to the efforts of DroneShield to scale its operations to meet increasing levels of customer demand rather than poor performance," Laing wrote.
Investment Thesis
Laing reiterated the components of Bell Potter's investment thesis on DroneShield. In addition to valuation and strong demand for the company's products, addressed earlier in the analyst's report, another factor is structural market growth, current and forecasted. What primarily is driving this, Laing noted, is countries around the world increasing their defense budgets in response to more and more geopolitical conflicts happening.
Lastly, DroneShield could grow business further by entering adjacent markets because it has robust experience with AI and machine learning in the counterdrone market.
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