Buy Kraken Robotics for a 154 per cent return: Beacon

Beacon Securities analyst Gabriel Leung is staying bullish on marine technology company Kraken Robotics (Kraken Robotics Stock Quote, Chart, News TSXV:PNG) after the company’s latest quarterly report.

Leung reviewed Kraken’s third quarter financials in an update to clients on Tuesday and reiterated his “Buy” rating and $1.60 price target, which translated to a projected 12-month return of 154 per cent at the time of publication.

Newfoundland-based Kraken Robotics, which makes software-centric sensors and underwater robotic systems, announced its Q3 2019 on Tuesday, showing revenue for the quarter of $7.8 million compared to $1.6 million a year ago and EBITDA of $989,000.

The company said that the majority of the revenue for the quarter came from the delivery of subsea batteries to seabed exploration company Ocean Infinity and the delivery of a KATFISH underwater vehicle to ThayerMahan.

“This was an extremely busy quarter for Kraken,” said Karl Kenny, Kraken’s President and CEO, in a press release. “Working with our strategic partners, we made significant deliveries of subsea batteries to Ocean Infinity and their initial endurance testing resulted in them conducting an unprecedented mission length of over 100 hours without recharging.”

“Over the coming months, we will continue to deliver batteries to Ocean Infinity and others, work to close a major international mine hunting sonar contract announced subsequent to the quarter, complete the contracting phase with the Ocean Supercluster and stakeholders, and prepare for an expected strong ramp of business activity in 2020 – including military and commercial contracts,” Kenny said.

Leung said that the top line results for the quarter were expected, as Kraken had pre-announced its Q3 revenues in mid-October. Gross margins for the quarter were 40 per cent, down from 47 per cent in the previous quarter and 43 per cent in the Q1, a reduction which Leung chalked up to discount pricing for its deep-sea battery sales.

The analyst noted that management maintained its 2019 revenue guidance of $15 million.

“The company did, however, pull its expectation of being net income positive for 2019. We believe additional non-cash expenses (like stock- based compensation) and the push out of the closing of certain contracts (e.g., Ocean Supercluster) were key drivers for the change in the view. For the purposes of our model, we had not factored positive net income in 2019,” wrote Leung.

“Operating cash flow was negative $3.5 million with working capital a drag of $4.8 million,” Leung wrote. “Quarter-ending cash was $2.7 million, which was down from $5.4 million last quarter. In speaking with the company we understand a significant portion of receivables (which closed at $4.8 million in Q3) were received, which should give cash a healthy boost in Q4.”

Looking ahead, Leung sees a number of potential catalysts for Kraken, including: additional navy wins; additional battery orders from Ocean Infinity; and the finalization of previously-announced contracts (the three-year, $20-million Ocean Vision project, a $35-40-million unnamed international navy contract and a $35-million contract with ECA Group).

Leung thinks PNG will generate fiscal 2019 revenue and EBITDA of $14.8 million and negative $0.7 million, respectively, and fiscal 2020 revenue and EBITDA of $28.0 million and $3.2 million, respectively.