Beacon Securities analyst Gabriel Leung has an improved outlook on Kraken Robotics (Kraken Robotics Stock Quote, Chart, News TSXV:PNG), raising his target price in an update to clients on Tuesday from $0.90 per share to an even $1.00.
Based in Newfoundland, Kraken Robotics is a marine technology company providing ultra-high resolution, software centric-sensors and underwater robotic systems. Kraken announced on Monday the close of its previously announced bought deal financing for $10 million in gross proceeds, involving 20 million shares at $0.50/share. The company said along with using the funds for general working capital and to strengthen its balance sheet it will put the financing towards acquiring PanGeo, a private Canadian services company specializing in high-resolution 3D acoustic imaging solutions for the sub-seabed with offices in St. John’s, Newfoundland and Aberdeen, United Kingdom. First announced in a binding letter of intent in April, that deal reached the definitive agreement stage on July 20.
Leung sees the PanGeo acquisition as a strong step forward for Kraken.
“We believe the acquisition of PanGeo represents a very important catalyst for Kraken in that it will add a stable base of recurring revenues into an otherwise lumpy, product-focused business,” Leung said in his report. “We believe this will help to drive greater earnings stability into Kraken’s business model, which could translate into a multiple expansion over time.”
The $23 million purchase price includes $3 million cash payable within 30 days, 12,068,965 shares issued at $0.58/share (Value: $7 million), a two-year, $4 million promissory note with a six per cent coupon per annum, with up to 40 per cent of principal payable in stock, and up to $9 million in earn-outs payable after 12 and 24 months. The earn-outs are payable 50 per cent in cash and 50 per cent in stock at Kraken’s options.
The transaction will also see Kraken inherit PanGeo’s debts, including $1.5 million in bank debt, $1.1 million in cash, and $688,000 payable to the Atlantic Canada Opportunities Agency (ACOA). Leung forecasts that the company will have $16.2 million in cash on hand on the deal’s closing compared to $5.7 million in debts.
Leung projects 2021 to be the year Kraken puts more positives in its financial figures, with the company’s EBITDA moving from negative $2.7 million in 2020 to a projected $3.2 million in 2021, which would represent a 12.3 per cent margin on the company’s projected 2021 revenue of $26.1 million. Leung expects those numbers to keep going up in 2022, projecting $38 million in revenue and $5.4 million in EBITDA, good for a 14.2 per cent EBITDA margin.
Kraken Robotics closed Tuesday trading at a price of $0.47/share on the Canadian Venture Exchange, roughly half a cent better than it opened. At the time of publication, Leung’s $1.00 target represented a projected 12-month return of 113 per cent.
Kraken has made a number of new contract announcements of late, including a contract to provide additional sonars for Teledyne Gavia, a contract with Danish company SH Defense to design and sell containerized mine countermeasure and other subsea surveillance sensor and robotic solutions, a $690,000 contract extension with the Canadian Department of Defence to provide upgrades, testing, and new hardware and software for the ThunderFish 300 Autonomous Underwater Vehicle (AUV) that DND acquired from Kraken in 2019, a $400,000 contract with a leading international defence contractor to provide development, maintenance, and training to the customer to enhance and modernize their sonar product and a $598,871 Robotics as a Service (RaaS) contract with Newfoundland and Labrador Hydro to deploy its KATFISH towed SAS sonar system including our Automatic/Remote Launch and Recovery System (ALARS) deployed on the R/V Ocean Seeker.
Commenting on the PanGeo acquisition, Kraken president and CEO Karl Kenny said in a press release, “Since plans for our OceanVision project started in 2018, we have been preparing our industry leading Synthetic Aperture Sonar and 3D underwater laser scanning technologies to be used in a robotics/data as a service (RDaaS) business model as opposed to a product-only strategy.”
“While customers in the defense industry generally purchase this technology, in the commercial market customers are more focused on the provision of services by capable third-party companies. We expect that PanGeo will complement Kraken’s existing products and services with a stronger base of recurring revenues,” he said.
Kraken last reported its financials in late May where the company’s first quarter 2021 featured revenue down to $3.6 million compared with $6.4 million a year earlier. Last year’s Q1 topline included among other items the delivery of a KATFISH 180 system along with the sale of subsea batteries and acoustic signal processing software. Adjusted EBITDA for the 2021 Q1 was $0.1 million compared to $1.3 million a year earlier. Kraken said it had $8.1 million in previously awarded funding to draw upon from government agencies and, at the quarter’s end, it had cash and restricted cash of $10.0 million compared to $13.9 million as of December 31, 2020.
“With a strong backlog driven by wins last year with the Danish and Polish Navy, we are on track to meet our 2021 financial guidance. This would represent more than 100 per cent organic revenue growth,” said Kenny in a press release.