H1 21: business remains tough
EARNINGS/SALES RELEASES
FACT

Note: as of June 2021, Delta Drone’s management would like it to be known that our report and associated analytics are the views of AlphaValue only. We nevertheless believe that guesswork is better than no figures.

After searching for various ways to penetrate the drone market, Delta Drone has finally found its business model: to “dronify” the existing industries of Security, Mining and Inventory Monitoring. It is willing to penetrate the Security market through the acquisition of Weesure Group, a “classic” security company, where Delta Drone plans to develop mixed teams with drones and humans with obvious benefits. It has developed a drone called “Countbot” to develop its inventory services segment and has a subsidiary in Australia named Delta Drone International which contributes strongly to the mining activities.

However, this business model is witnessing difficulties. Firstly, the Weesure Group acquisition has been postponed from 31 July to still an unknown date. This is worrying as there are no concrete reasons behind this mutual decision. As a consequence, we will have to remove the consolidation of Delta Drone and the Weesure Group from FY21 to FY22, heavily decreasing the sales for FY21. Secondly, this business model is not only capital-intensive in terms of R&D to better constantly the drones’ technology, but also heavily capital-intensive due to the acquisitions of the companies that Delta Drone is aiming to “dronify”. This will inevitably lead to more stock dilution to find the necessary financing for these potential acquisitions.

Delta Drone is also promoting the fact that it obtained profits for its H1 21, a first for the company and a rare exception for the Drone industry. Nevertheless, unlike how the company discloses this, the positive net result is actually the consequence of a one-off and is not sustainable. The switch to IFRS to homogenise the reporting structure of the group has resulted in the addition of the value of Delta Drone’s financial portfolio (composed of small caps with high potential) to the P&L. Since it has not been accounted for previously, due to French GAAP norms, the addition of the totality of its portfolio’s value is somehow justified. However, next year’s contribution to the P&L will only be the surplus (or loss) that the portfolio has generated. Therefore, we are wary of this positive profit, as removing this one-off would lead to profits similar to those last year.


ANALYSIS

Delta Drone’s half year earnings suffer from a combination of delayed business (lasting COVID-19 impacts on orders) and delayed booking of acquisitions (Weesure, pushed back). Reporting is now under IFRS as opposed to French Gaap back in 2020. This has an impact on the earnings derived from non-consolidated units.

Essentially, flat sales at c. €7m are matched by an operating loss at €-4.3m vs. €-3.9m a year ago. We now believe the number of drones sold organically to this business has been over-estimated, and we now expect c.40 ISS Spotter drones sold in FY22 vs 72 drones previously, and roughly the same amount as in FY20 for FY21 due to the delay in the Weesure Group acquisition. This has significantly impacted the gross margin, as the high level of drone volumes would have been very profitable.

The bottom line is nevertheless breaking even thanks to the booking of a €5.3m gain on the fair value of investments. The limited auditors’ review points towards this item as it is a non-cash one and liable to swings as these are start-up assets. The assets underpinning this fair value are minority interests in ELISTAIR, DONECLE, DIODON, SIGHTEC, AERO41 and SLX TECHNOLOGIES. They are booked under IFRS 9.

The cash flow generation of operations remains a loss at €-5.3m (€-4.2m in 2020) offset by €5.7m in new equity capital so that the closing cash position is €5.4m, up €0.6m. The net debt position is close to zero.

EPSs are suffering from heavy dilution with the number of outstanding shares standing at 1,225m vs. 504m in June 2020 and the fully diluted number reaching 2,058m.

This is a reflection of the ongoing cash flow needs covered by equity-line type funding (dubbed ORNAN) as needed. A poor half year performance and massive dilution explain the extraordinary slippage in the share price to less than €0.01.


IMPACT

Our 2021 projections have been wrong-footed by the H1 developments … except, sadly, for the surge in the number of shares. Sales initially seen at €34m including Weesure Group (€13.9m expected) must be slashed to €16m to allow for both delays in organic growth and the late consolidation of Weesure Group (postponed to FY22 instead of halfway through FY21). We also allow for H1 losses with the view that they may not be stemmed by H2 as the hoped for cost controls and synergies are derived from a baseline of business that has been absent. In all, we see a FY2021 not too different from 2020, while 2022 would hopefully be showing the sort of transformation expected in 2021. Assuming cash consumption continues in H2 at the H1 pace, the group is heading for 2bn shares or another 60% increase.