AlphaValue Corporate Services Fundamental Analysis FR
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Drone Volt

CR
Bloomberg   ALDRV FP
Aerosp. & Defence Equipt.  /  France  Web Site   |   Investors Relation
Contract execution for a potentially record year
Target
Upside 107%
Price (€) 0.09
Market Cap (€M) 23.6
Money Making

Voluntarily reducing the development of Distribution

In its aim to shift its cash generation sources, the Distribution segment is voluntarily left slightly behind. Indeed, Distribution’s core activity of sole assembly and distribution of third-party products didn’t allow high margins to be generated (gross margin of c. 20%), as the added value was minimal, the drone parts being available from other supply sources. Indeed, third-party drones rely on an already integrated platform from Chinese maker DJI, which provides almost ready-to-fly machines. These machines can be heavily customised in detail, but even in this case most of the components are currently sourced from existing manufacturers (mostly from China), limiting the margin potential and creating a dependency on the suppliers’ commercial policies: should they increase their prices or develop similar solutions to Drone Volt’s and propose them at a lower price, then the margin level would plummet, jeopardising the very existence of the segment.
Still, this segment offers a way for cross-selling, penetrating markets thanks to it allowing Drone Volt to propose its services and training as well as to introduce its own offers.

Regaining control of the value added

Thanks to the combined set-up of a dedicated R&D team for the assembly line in 2016, and the acquisition of Aerialtronics, Drone Volt has created its own capabilities to sell in-house designed drones as well as cameras embedding artificial intelligence solutions, which can be customised to suit customer needs. A better control will be permitted by a “fabless” model: instead of building manufacturing chains, Drone Volt focuses on the sole design and assembly of the parts, the manufacturing itself being subcontracted. Although transferring part of the added value to an external partner, this will allow greater flexibility and better overall margins due to the relatively small volumes expected compared to those necessary to amortise fully a factory, as the planned in-house production of the internally-designed machines is likely to remain limited in volumes. Drone Volt, however, keeps full control of the flight management systems, as well as artificial intelligence software. This allows the company to control both pricing and profitability. We estimate the gross margin of its drone at slightly below c. 50%, while intelligent cameras might be well above 70%.

The power of turnkey solution

Addressing professional customers has permitted the development of an integrated offer, which binds the machine to services such as training and administrative registration, thus leveraging margins. The training of the operator is required by the DGAC, and Drone Volt has thus set up an Academy to provide the teaching of the theoretical and practical requirements for pilots, with the advantage of using the same machine that will be used during commercial operations. Moreover, thanks to its proven relation with the DGAC and its full knowledge of regulations, the company can ease the heavy administrative process necessary for commercial drone operations. With the growing complexity of regulations, these services are bound to represent a growing contribution to earnings (carrying an estimated gross margin c. 70%), as the end customers generally want a platform operational as soon as possible. The services are mostly bundled in the purchase price of the machines, as this integration allows for a substantial commercial leverage.

Optionality to diversify further away from hardware

On top of this, an additional part could be added to the current business model but is currently more at the consideration stage and has yet to prove its viability. This is related to computer vision capabilities developed in-house by Aerialtronics, which could, at some point, become a fully-fledged business. Indeed, the software could be implemented on other platforms (not only the Pensar camera) and be customised for a wide range of uses. However, due to the great uncertainty in terms of commercial development of this business, we have based our estimates solely on the prospects of the first three businesses described above.

Projection 2020-22

Looking at 2020, and after the shock of the pandemic, we expect a significant rebound in the activity for the second half of the year, with c. €4m revenue in H2 20. Part of the sales missed in 2020 should be shifted into the next two to three years. This outlook is reinforced by the company’s backlog, which remained at c. €15m, while no cancellations were recorded due to the COVID-19 pandemic.
For the next three years, we anticipate two different scenarios for the two Drone Volt segments. Not being part of the core development strategy, we anticipate the Distribution activity to decrease by 13% on average by 2022. At the same time, the strong pipeline acquired by Drone Volt Factory for in-house designed solutions should fuel growth by c. +70% on average over 2019-22. This includes the ramp-up of the Hydro-Québec partnership, which is expected to start at the beginning of 2021 with a higher ASP (c. €350k per unit for the line drone).
On top of this, the two promising announcements (i.e. the Aquiline Drones’ LOI followed by the Hungarian LOI) play a significant part in our earnings estimates.
First, we have integrated the Aquiline Drones contract in our estimates with a degree of cautiousness. Still, the potential impact could be a game-changer for the company. We anticipate the contract to kick off in 2021 with an average of 1,000 units per month (compared to 3,000 in the LOI), growing to 1,500 by 2022 and 3,000 in 2023, on its way towards 7,000 units by 2026. This licensing agreement could represent c. €2m in 2021 and c. €3.3m/€7.4m in 2022/2023, with a direct impact on profitability.
Secondly, we have integrated (yet to be confirmed and accounted for in Drone Volt Factory) the Hungarian contract for the supply of at least 275 Hercules 20 drones over three years. Here again we take a more prudent approach than the company, leaving the number of units unchanged but we anticipate a price discount due to the size of the order, relying on a price per unit of €15k vs €20k. Under these assumptions, this could bring additional revenue of c. €1,375k per year from 2021 to 2022.

In terms of profitability, we anticipate the gross margin will expand, driven by: i) volume and production gains for drones, while both Services and Training should take-off, lifting the margin upwards, and ii) the strong relative impact of the licencing revenues. Distribution’s gross margin should remain flattish at above 20% on average, while we anticipate Drone Volt Factory’s gross margin to improve to 52% by 2022, driven by the product mix and the higher level of value (fuelled by higher technology embedded in the drone as well as the Pensar camera). Altogether, we anticipate Drone Volt to be EBIT positive by 2021.

Change 21E/20 Change 22E/21E
  12/20A 12/21E 12/22E 12/23E €th of % total €th of % total
Total 1,711 3,725 5,802 9,546 2,014 100% 2,077 100%
Drone Volt Factory 1,064 1,463 2,056 3,041 399 20% 593 29%
Distribution 393 592 391 352 199 10% -201 -10%
Consumer
Professional
Training
Royalties 254 1,670 3,356 6,153 1,416 70% 1,686 81%
Other/cancellations
 
12/20A
12/21E
12/22E
12/23E
 
Total
29.3%
37.4% 42.5% 50.4%  
Drone Volt Factory
51.7%
33.6% 30.5% 31.7%  
Distribution
11.1%
15.0% 11.0% 11.0%  
Consumer
 
Professional
 
Training
 
Royalties
100%
100% 100% 100%  
       
Changes to Story : 08/12/2021, Changes to Forecasts : 08/12/2021.