Kraken Robotics keeps Buy rating with Beacon

A healthy backlog along with the prospect of some key contract wins upcoming should float the boat for investors interested in Canadian marine tech company Kraken Robotics (Kraken Robotics Stock Quote, Charts, News, Analysts, Financials TSXV:PNG). That’s according to Beacon Securities analyst Gabriel Leung who reviewed Kraken’s latest quarterly results in an update to clients on Tuesday.

Newfoundland-headquartered Kraken, which produces sensors, subsea batteries, underwater robotic systems and acoustic imaging solutions, announced its second quarter 2022 financials on August 30, coming in with revenue of $14.3 million compared to $1.9 million for the previous year’s Q2. Adjusted EBITDA for the quarter was $3.0 million compared to a loss of $0.2 million a year earlier.

Kraken said the big jump in revenue came from deliveries to the Royal Danish Navy for mine-hunting systems, delivery of its SeaPower battery products to a US defence contractor as well as contributions from PanGeo Subsea, the 3D imagining solutions business Kraken acquired last year.

With the quarterly results, management maintained its full 2022 guidance, which calls for revenue between $36 and $42 million and adjusted EBITDA to be between $5 and $7 million, which would compared to 2021’s revenue of $25.7 million and adjusted EBITDA of $2.2 million.

“We reported strong financial results in Q2 with solid contributions across our Products and Service business. We expect continued momentum with our Products business benefitting from increased demand in the defence world driven by upgrade cycles and geopolitical events,” said CEO Karl Kenny in a press release. 

“Our Service business is benefitting from our acquisition of PanGeo in 2021 and strong demand in both the offshore renewable and offshore oil and gas industries. Our contract pursuits pipeline is solid and we anticipate closing on significant opportunities in the coming months. As noted below, we re-iterate our continued delivery execution and solid financial guidance for 2022,” he said.

The Q2 2022 top and bottom numbers were better than expected, according to Leung, who was modelling $5.6 million in revenue and negative $164,000 in EBITDA compared to the realized $14.3 million and positive $3 million, respectively. 

Breaking down the revenue, Leung noted that Kraken’s Product revenue was $8.5 million compared to his estimate at $3.8 million and Services was at $5.8 million compared to his call for $1.8 million. Leung said the Product outperformance seemed to be due to delivery milestones achieves with a number of large contracts like the Danish Navy, along with battery and sonar orders. On the Services side, PanGeo is the main input, which appeared to be boosted by some large contracts including a $5 million decommissioning campaign with Couvillion Group, announced this March.

“PNG maintained its CY22 revenue and EBITDA guidance of $36–42 million and $5–7 million, respectively. We believe the company has a high degree of visibility to guidance given its results-to-date, along with its backlog of signed deals,” Leung wrote.

“We understand the pipeline of opportunities remains robust, which should help to drive growth in both PanGeo and PNG’s core Product business (over and above CY22’s expected record levels),” he said.

Other quarterly numbers included gross margins of 44.8 per cent, which is up from 39 per cent a year ago and up from 32.9 per cent for the previous quarter, with Leung chalking up the increase to PanGeo’s better margins. Kraken’s Q2 free cash flow was negative $405,000 and operating cash flow was $1.2 million, with capex at $1.3 million. Leung noted the company’s quarter-ending cash at $1.9 million compared to debt of $11.4 million and working capital of $6.2 million.

“Based on its product delivery schedule, Kraken expects ~$12.3 million in progress payments to hit its balance sheet over the course of CY22. Subsequent to the release of Q2 results, PNG also announced a $9 million follow-on contract to supply mine hunting systems to an existing NATO Navy customer (we believe it is the Polish Navy). We understand there could be a higher-than-usual deposit associated with this contract, which also helps with cash,” Leung wrote.

Kraken’s share price has dropped over the past year-and-a-half from about the $0.80 range to now between $0.30 and $0.40 per share. But Leung sees a return to higher heights for PNG, maintaining in his report a “Buy” rating on the stock and $0.85 per share target price, which at press time represented a projected one-year return of 115 per cent.

“We view new contract wins within its core Kraken product business and PanGeo sub-seabed survey services division as key catalysts for the stock,” Leung said.

On Tuesday, Kraken announced a follow-on contract for mine-hunting equipment with a leading NATO Navy, supplying its KATFISH-towed sonar tech and Autonomous Launch and Recovery Systems (ALARS). The company said in a press release that the war in the Ukraine with Russia “highlights the need for stronger national security” and that Kraken is seeing growth in business opportunities worldwide.