Kraken Robotics Inc (KRKNF)

[joelawyer]

Additional evaluation and commentary by Sean Peasgood of Sophic Capital:

Kraken Robotics [PNG:TSX-V, KRKNF:OTCXB] - Taking A Deeper Dive on Record Q3 Results

We believe investors should look at Kraken Robotics [PNG-TSX-V; KRKNF-OTC], on the back of the Company reporting Q3/23 results this morning. While the stock has moved off the lows and is already up 33% since the middle of November, strong Q3 results and the reiteration of guidance for Q4 2023 provides very good visibility into how undervalued the stock remains compared to peers.

PNG is currently trading at 9x 23 EV/EBITDA vs the peers at 17.5x. If Kraken Robotics were to trade inline with the peers on 2023 EV/EBITDA multiples the stock would be $1.09 (81% upside) and using $20M in EBITDA for 2024 would be $1.41 per share (135% upside). See Comp table below for details.

Kraken Robotics is an underwater drone technology company that has been growing at a 63% CAGR over the last five years and is projecting to grow revenue by 70% in 2023. At recent investor conferences, management has also signalled that they anticipate continued growth of ~40% annually for the foreseeable future.

In this September 6, 2023 presentation, Kraken Robotics CEO Greg Reid explains the Company’s products, the geopolitical backdrop of why the Company has grown and should continue to grow, as well as financial guidance and expectations going forward.

The timing to purchase Kraken Robotics shares is more compelling than it has been in several years. Why?

1. Kraken Robotics is now profitable has a strong balance sheet and just reiterated its strong 2023 guidance and these growth expectations are anticipated to continue into 2024;

2. The Company reiterated 2023 guidance, meaning Q4 results are going to be very strong to end out the year and likely another record high revenue quarter, we believe coming into Q3 results the market did not believe the Company’s 2023 guidance;

3. The business has solid bookings for continued growth into 2024 and beyond with several large contracts in the pipeline that could be announced in 1H/24. Also 2024 should be less back-end loaded like the last few years meaning selling after Q4 won’t be a good strategy this year;

4. Geopolitical factors are driving a very strong tailwind and in the Company’s investor deck they call out $300 million (or over 4x 2023 revenue guidance) of opportunities they are working on;

5. Kraken Robotics is trading at 9x 2023 EV/EBITDA versus comps that trade between 17.5x; and 6.3x 2024 (assuming $20M EBITDA) versus comps at 14.7x.

6. Overhangs on the stock have all recently been removed with $0.60 warrants now all expired and more recently Ocean Infinity selling 21 million shares on November 23, which was all placed with long only fundamental institutional accounts.

Kraken Robotics 3 year Stock Chart


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Valuation and what is this stock really worth? Kraken Robotics is trading at one-half the multiple of comps

Kraken Robotics’ top line has now grown to where the Company is now Net Income and EBITDA positive.

Management has said they expect to grow 40-50% annually, meaning that assuming they hit their guidance for 2023 (mid-point of $69M), in 2024 Kraken Robotics could generate revenues of ~$95+M. Management has also said that EBITDA margins should be 20-25% going forward, meaning EBITDA for next year could be ~$19M (20%) - $24M (25%).

Assuming a stock price of $0.60, Kraken Robotics is currently trading at 9.3x EV/EBITDA for 2023, and assuming EBITDA of $20M in 2024, its stock is trading at 6.3x 2024 EBITDA. Below are comp tables from Raymond James Defense & Government Market Intel Report published in November 2023 that illustrates Defense Technology stocks are trading at 17.5x 2023 EV/EBITDA and 14.7x 2024.

If Kraken Robotics were to trade inline with the peers on 2023 EV/EBITDA multiples the stock would be $1.09 (81% upside) and using $20M in EBITDA for 2024 would be $1.41 per share (135% upside). There is no reason that given Kraken Robotics’ leadership in synthetic aperture sonar (SAS) and pressure tolerant batteries as well as the fact the Company has won several NATO Navy bids in the last few years, that the Company should be trading at a discount.

Comp Table for Defense Technology

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Source: Raymond James | Defense & Government Investment Banking November 2023

Finally, Kraken Robotics could be a strategic take out candidate for several large defense companies. Two key technologies that could be strategic for several buyers are:

Kraken Robotics is one of a handful of Companies that have the capability to provide synthetic aperture sonar (SAS) technology. Kraken Robotics not only uses its SAS on its own Katfish towed-fish product but also sells SAS technology to several Companies in the industry. While other defense companies have SAS, only one other (Northrop Grumman (NOC-NTSE)) sells it to other UUV providers, and SAS is now becoming the standard required on all defense and commercial RFPs. Large companies without this capability may want to lock down their own technology to be able to win and potentially block out others in these deals.

Kraken Robotics’ pressure tolerant batteries have seen strong demand over the last several years after illustrating being able to almost double endurance when replaced from traditional battery systems. Kraken Robotics has sold batteries to the U.S. Navy for testing, as well as other defence companies and recently sold several large orders to Anduril. While originally Kraken Robotics would sell between $1M-$1.5M in batteries for the mid-size unmanned underwater vehicles, recently several defense companies have announced programs to build extra large unmanned underwater vehicles, which would require $7M - $10M in batteries per vehicle. As the race for underwater dominance, as well as a desperate need to upgrade naval technology around the world, Kraken Robotics’ battery technology could look very strategic inside a larger defence company to lock down this increased endurance and performance when bidding on multi-billion programs.

While a strategic player could come in at some point and is worth highlighting, the thesis on buying Kraken Robotics now is supported by its valuation and growth opportunities. In the future it is possible that a premium valuation may be warranted if others in the space are looking to secure key technology aiding them in winning multi-billion dollar defence contracts.