A junior marine technology stock to buy

Newfoundland-based Kraken Robotics is a marine technology stock providing ultra-high resolution, software-centric sensors and underwater robotic systems. Kraken was founded with the objective of commercializing a software-centric version of Synthetic Aperture Sonar (SAS) to compete with more hardware-dependent and expensive SAS solutions.

Marine_Technology_StockThe underwater robotics industry has traditionally been characterized by high costs for bespoke custom designs, low reliability, and products being too expensive to operate and maintain.

However, technology in this sector has benefited from better endurance, miniaturization, and enhanced payloads, product capabilities and reliability. Likewise, pricing has declined, all of which should help drive adoption helping to lift the maritime robotics market to approximately US$5 billion industry by 2020.

St. John’s, NL-based Kraken Robotics Inc.’s (TSXV—PNG) strong product portfolio consisting of sensors and robotic systems (and soon robotics-as-a-service), which are based on Synthetic Aperture Sonar (SAS) technology (versus traditional sonar tech) has benefited from extensive R&D and have been shown to be more efficient, provide better coverage, and cheaper than competing platforms.

(SAS is an advanced imaging technology, which dramatically improves seabed surveys by providing ultra-high resolution imagery at superior coverage area rates as compared to traditional Side Scan Sonar technologies.)

Toronto-based Beacon Securities technology research analyst Gabriel Leung says the company’s strong IP represents a key competitive differentiator versus larger peers. Mr. Leung gives the technology stock a ‘buy’ rating and $0.75 target share price.

The analyst goes on to highlight: “Kraken’s technology has seen strong validation by the likes of Defence Research and Development Canada, the US Navy’s Sea Systems Command and the UK Ministry of Defence, which have all made initial purchases. The recent $2.8 million equity investment by Ocean Infinity, a new well-funded entrant to the commercial ocean survey and exploration industry, along with $12 million in orders also supports our view.

Revenue growth poised to surge

“With research and development and missionary selling now behind it, we believe Kraken is on the cusp of meaningful revenue growth as evidenced by its trailing-twelve-months bookings of approximately $20 million (2018 revenue guidance is for $7 million, up from $3.5 million in 2017). Kraken is also dealing with a huge pipeline comprised of approximately US$200 million in opportunities with military and about US$150 million in commercial. There are several large global Navy RFPs [requests for proposal], for which Kraken has been shortlisted and could be announced over the near-term, which could be key stock catalysts.

“From a revenue perspective, growth has been relatively modest over the past few years running in the $2 million to $3 million range driven largely by SAS sensor sales to defence customers. However, over the past 12 months, Kraken has booked approximately $20 million of business (including SAS sensors, Katfish and batteries), which should help the company to hit approximately $7 million in revenues in calendar 2018. Furthermore, based on the pipeline of opportunities, we believe the company is well positioned to continue to show positive bookings growth.

“Product gross margins are currently in the 55 per cent to 80 per cent range given the niche and high value nature of the company’s products. The company is cash flow breakeven in the approximately $10 million revenue range.

“Looking ahead, we believe Kraken is also dealing with a very strong US$350 million-plus pipeline within both its military (US$200 million) and commercial (US$150 million) markets. Notable pipeline opportunities include: Active defence industry contract pursuits with several North American and international navy opportunities with contracts ranging up to $60 million. The company has been shortlisted on a handful of these opportunities with decisions expected in the next 12 to 18 months.”

This is an edited version of an article that was originally published for subscribers in the  November 23, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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