Buy Merlin Labs for a double, this analyst says

Roth Capital Partners analyst Suji Desilva says Merlin Labs (Merlin Labs Stock Quote, Chart, News, Analysts, Financials NASDAQ:MRLN) is positioned for the aviation autonomy market, with early revenue visibility from major military program wins.

In a June 2  report, Desilva maintained his “Buy” rating and $15.00 target on Merlin Labs following a series of investor meetings with management.

“We believe the company represents a differentiated high-margin autonomy platform opportunity with initial revenue visibility from large military aviation program wins,” Desilva said. “Management was confident in the early program traction and significant revenue opportunity ahead as these programs ramp in the coming years.”

Desilva said Merlin’s aviation autonomy platform is gaining traction first in military markets, including program wins for U.S. Special Operations Command C-130J aircraft and U.S. Air Force KC-135 aircraft, with additional interest from commercial logistics companies.

The analyst said high pilot labour costs and staffing intensity per aircraft are helping drive interest in Merlin’s platform, which is designed to reduce crew requirements through autonomy. Merlin has equipped a small number of aircraft, secured several certifications and could become the first company with a certified fully autonomous takeoff-to-landing aircraft, Desilva said.

Near-term revenue is expected to come from task orders tied to Merlin’s $105-million indefinite-delivery, indefinite-quantity C-130J program, for which it is the sole provider. The program is in the critical design review stage after completing a preliminary design review several months ago.

Desilva expects the program to move into the next integration phase after the review is completed, with an initial C-130J aircraft to be outfitted with Merlin’s autonomous pilot platform while undergoing a scheduled heavy maintenance check.

While early adaptation and aircraft integration revenue is expected to carry lower margins, Desilva said the longer-term model could be supported by annual software licensing fees of $2-million to $3-million per aircraft at high SaaS margins.

Merlin had $183-million in cash following its recent business combination and private funding round, with estimated cash burn of less than $20-million per quarter, according to Desilva’s analysis.

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