Is Kraken Robotics finally emerging from underwater?
Disclosure: I am long Kraken Robotic shares. Nothing here constitutes investment advice or solicitation to buy or sell securities and is my own opinion based on my research.
The intent of this blog post is to share my notes, highlights of the business and summarise some of my thoughts on Kraken Robotics has improved and could present an interesting opportunity.
I would refer you the two below links to understand what does Kraken Robotics and to get a better understanding. This blog post intention is to act as a complement. I will try not to repeat what has already been covered, however it is possible I do highlight important aspects of the business to me. If you feel I miss something and think there is anything that could help me further research the company and industry, please do not hesitate to comment at the bottom of this article or send me a message. I don’t pretend to know anything and this research was done based upon my best understanding of the business and industry.
Presentation :
Write up:
Introduction:
Kraken Robotics is driven by innovation in a niche industry with a high barrier to entry. I have invested in the business back in 2019 and met the CFO Joseph MacKay back in January 2020. The business has an history of dilution during the startup phase and shareholders pretty much had a flat 5 year despite the volatility if you look at the chart. I lost patience at the time due to the frequent dilution and redeployed my capital elsewhere, but always kept an eye on what the company was doing. The business was executing despite the dilution and met and exceeded my expectations and the discussion I had with management on the business development and operation side.
The last few years, I kept an eye on the revenue CAGR, revenue per share improving despite the dilution, the momentum of contracts and industry dynamics. The business has been improving in my opinion and it seems like it is turning profitable and transitioning to a self-funding business. The startup days seems to be behind and the business model looks poised for operating leverage.
I ended up starting a position back in 2023 especially after noticing this big contract: Kraken Awarded $50+ Million Navy Contract for Royal Canadian Navy Minehunting Program. My plan is to add upon execution and hopefully average up depending of the few next few quarters
Highlights of the business:
Competitive Advantage:
You can read more about Competitive Advantage in the write up mentioned at the beginning: Kraken Robotics (TSXV: PNG) by Whiteout Capital
It explains really well the competitive advantage of the business and the competition offering. I have nothing else to add, but just highlighting the two below points on the SAS and Deap sea battery products. Kraken has been winning contracts against bigger players and has also been selling their batteries to competitor.
SAS – Kraken’s sonar technology competes with other manufacturers of SAS products, including Kongsberg Gruppen ASA (Norway), Exail Technologies (France), Northrop Grumman (US), the Thales Group (France), Atlas Elektronik (Germany) and Raytheon Company (US). Unlike the Company, the majority of competitors do not sell their SAS products as stand-alone products, but rather sell them only as a component part of a UUV, meaning that the cost of acquiring SAS products from these competitors can run into the millions of dollars. Further, the Company’s SAS product currently sells at a discount to comparable stand-alone products sold by larger competitors. Kraken also believes the ability of its systems to do real time data processing onboard the underwater vehicle is a competitive advantage and significantly reduces post mission processing times versus the competition. The end result is better data, quicker, and cheaper.
Deep sea batteries – In this niche market, KPG competes with companies such as Southwest Electronic Energy Group, General Atomics, SubCtech, and Icteneu. Kraken believes its pressure tolerant gel encapsulation technology allows customers to increase power density at lower costs than competitor products. Ocean Infinity, a Kraken customer, has noted that in using Kraken batteries they receive more than a 50% increase in energy density in the same footprint as compared to competing solutions.
Source: 2023 NOTICE OF ANNUAL GENERAL AND SPECIAL MEETING OF SHAREHOLDERS
Collaboration:
I always like to see a business securing relationships with customers, potential customers and actors in the industry in a collaborative effort. It usually yields good outcomes longer term from my working experience during my career.
Kraken Robotics Supports Multiple Countries at NATO Exercise
Kraken Robotics Inc. (“Kraken” or the “Company”) (TSX-V: PNG, OTCQB: KRKNF) is pleased to announce its recent participation at Exercise REPMUS 23 in Portugal. The Robotic Experimentation and Prototyping with Maritime Unmanned System (REPMUS) is focused on capability development and interoperability, and the 2023 Exercise involved 15 NATO partners, as well as Sweden and Ireland. Kraken’s field support team was onsite throughout the exercise, working closely with three NATO navy teams (the US, UK, and Netherlands) utilizing three generations of HII’s REMUS unmanned underwater vehicles (UUVs), all of which were retrofitted with Kraken’s Man-Portable Synthetic Aperture Sonar (MP-SAS). The UUVs included MK18 Mod 1, REMUS 100 NGR, and REMUS 300 underwater vehicles, showing the versatility of MP-SAS and its capability to be used across multiple platforms.
Industry tailwind
The global autonomous navigation system market size was valued at USD 2.88 billion in 2022 and is set to expand from USD 3.17 billion in 2023 to USD 7.24 billion by 2030, exhibiting a CAGR of 12.5% over the estimated period. The surge in the demand for these systems is due to the growing product usage in a range of applications such as robots, self-driving cars, unmanned aerial vehicles, and others.
Strong Contract Momentum Building and Sales Pipeline:
Since January 2022, we have captured more than $120 million of contract wins
Source: Kraken Robotics Corporate Overview May 2023
I have compiled a graph to see the last 12 month orders by date. Don’t know if the same pattern will be repeating itself, but it will be interesting to follow moving forward.
The company was pursuing a sales pipeline of $300M+ in 2022 and the momentum seems to keep building up on the Navy Sonar Program and Susbea battery side for more than $500M+ of opportunities:
Source: Kraken Robotics Inc. (TSX-V: PNG) (OTCQB: KRKNF) Webcast | Planet MicroCap Showcase: VANCOUVER 2023
Source: Kraken Robotics Corporate Overview May 2023
The SeaBed and Sub-Seabed however as gone down from $100M+ to $50M+ due to interest rates and wind shore energy has reduced CAPEX spending but one could assume survey and inspection would still be going on.
Business Development and Sales teams
The company recently announced a lot of management update on the business development side to establish leadership and key role to support key customers and program, NATO countries and navies which expose Kraken Robotics to different opportunities geographically. I like to see new changes on the US Sales Team as well.
Financials:
We can see signs of improvement in the business in their financials as the company has been turning FCF positive last few quarters and turned profitable last quarter. You can also note the revenue per share actually increased despite the dilution over the years.
Source: Koyfin
Guidance:
Here is the guidance from management based on known contracts for 2023. Management has an objective to expand their EBITDA margin into the 25%+ range in the next years and grow at a 40% CAGR. Of course anything can happen, so we always need to take this with a grain of salt, but management seems pretty confident they will meet these targets at this point and the strong sales pipeline could suggest so.
Funding:
The company has benefited from different funding programs and grants all of which could support the idea of the industry tailwind and collaboration between different actors across the industry.
OCEAN SUPERCLUSTER TOPS UP 16 PROJECTS WITH $23 MILLION TO DRIVE COMMERCIALIZATION
Source: KRAKEN ROBOTICS INC. MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED December 31, 2022
Here are the latest financial contributions awarded per the last MD&A from June 30th, 2023 to give an idea.
Source: KRAKEN ROBOTICS INC. MANAGEMENT DISCUSSION AND ANALYSIS FOR THE THREE AND SIX MONTH PERIOD ENDING JUNE 30, 2023
Capital Structure:
The business has 206.1M Outstanding Shares and 8.3M Options Outstanding according to the KRAKEN ROBOTICS INC. MANAGEMENT DISCUSSION AND ANALYSIS FOR THE THREE AND SIX MONTH PERIOD ENDING JUNE 30, 2023 pictured below:
There was a warrant overhang of 9.6M warrants back in July 2023 which is now behind as they expired worthless.
Source: KRAKEN ROBOTICS INC. MANAGEMENT DISCUSSION AND ANALYSIS FOR THE THREE AND SIX MONTH PERIOD ENDING JUNE 30, 2023
Insider Ownership:
Management seems well incentivised in my opinion:
Greg Reid, the PRESIDENT & CHIEF EXECUTIVE OFFICER owns 7,862,749 shares 3.9% of O/S.
David Shea, the CTO & EXECUTIVE VICE PRESIDENT, PRODUCTS owns 1,037,500 shares.
Insiders also bought in the open market this year in the 0.60$ range if you look at the insider fillings.
The ex-CEO and board member Karl Kenny retired and started selling his stake of 21M shares approximately 9.7% of the O/S part of some private transactions and on the open market.
The current CEO Greg Reid bought 3M shares in a private transactions:
Source: SEDI Insider Filings
The rumours I heard was that he had ~7M shares left as of August 30th. Will he sell all his shares? Keep some? No clue. The ex-CEO is retired and is out of the picture. I have no opinion and I think the business is well positioned. It just created pressure on the stock and probably is an opportunity.
Institutional Ownership
The largest shareholder is Ocean Inifity who invested $2.3M as part of a Private Placement back in 2018 as part of a strategic alliance between the two companies. A win win relationship in my opinion.
Kraken CEO Comments:
Karl Kenny, Kraken’s President and CEO, said, “Today’s announcement of an investment by industry innovator Ocean Infinity is yet another solid step in our journey to build our maritime robotics platform. We are excited to partner with Ocean Infinity, a current customer, as we focus our combined energies serving a broader range of customers with industry-leading solutions. Ocean Infinity has clearly demonstrated their ability to apply their considerable resources and expertise to not only enter but also transform the ocean survey and exploration industry.”
Ocean Infinity CEO Comments
Oliver Plunkett, Ocean Infinity’s President and CEO, said, “At Ocean Infinity, we work diligently to understand our customers’ needs and invest in innovation to ensure success. Our relationship with Kraken represents a powerful opportunity to develop important new sensor, system and data analytics capabilities for our industry.”
Ocean Infitity has also exercised their warrants for $2.3M eventually which strengthen Kraken Robotics balance sheet at the time. They now hold 10.3% of the Outstanding Shares.
Source: 2023 NOTICE OF ANNUAL GENERAL AND SPECIAL MEETING OF SHAREHOLDERS
There is almost no funds owning shares of Kraken Robotics per the fillings. A mutual fund recently bought 500k shares in August 2023:
Source: Fintel
Management salary and Incentive Plan Awards:
Here is the management salary and incentive plan. I personally think it is reasonable for a business of this size at this point and based on other public comparables, but I will let you be the judge.
Source: 2023 NOTICE OF ANNUAL GENERAL AND SPECIAL MEETING OF SHAREHOLDERS
Share consolidation
The board approved for share consolidation during the 2023 Annual and Special Meeting of Shareholders
Approving a consolidation of the common shares to occur as and when determined by the Board of Directors based on a ratio of between two to seven pre-consolidation shares for each post-consolidation share
This could eventually open the door for an up listing to a major exchange instead of the TSX-V and would probably help the business valuation.
Comparable Valuation:
The business currently trades at around an EV/EBITDA of ~6-7x for 2023 when comparable trades up to 3x times higher.
Looking forward 1 and 2 years out factoring in guidance of management of 40% CAGR with a midpoint revenue guidance of $72M., Kraken Robotics would trade around ~4x EV/EBITDA for 2024 and ~3x EV/EBITDA for 2025
The business has a much higher revenue growth and EBITDA margin profile than some of the above companies.
Industry transactions:
Acquisitions were done at an average of 12x EV/Sales PRE COVID. Kraken Robotics currently trades 1x NTM EV/Sales 2024
There has been a recent acquisition in 2023 at ~3.5x Revenue for a business on track to grow by more than 20%: Nauticus Robotics to Acquire 3D at Depth in All-Stock Transaction
Recent Private Acquisitions and some industry dynamics:
Rockwell Automation Inc. has agreed to buy Waterloo, Ont. autonomous robot maker Clearpath Robotics Inc., in a deal that could exceed US$600-million in value. They ''forecast sales of about US$90-million from Clearpath next year.’’ Despite not being in the same exact industry, the growth profile is very similar and revenue are close to projected revenue for Kraken Robotics in 2024.
One of the sources said Clearpath is currently generating revenue at an annualized rate of US$50-million to US$75-million, based on the rapid growth of its eight-year-old OTTO division, which focuses on selling to the automotive, consumer packaged goods and home appliance manufacturing sectors. The division’s customers include global manufacturing giants General Electric, Toyota and Nestle.
Terms were undisclosed for this recent acquisition in October 2023 in the industry: VideoRay Acquires Blue Ring Imaging's AI Capabilities to Vastly Improve the Efficiency of Unmanned Systems
A customer of Kraken Robotics on the subsea battery side, Defense Startup Anduril Is in Talks to Raise More Than $400 Million From Investors:
(Bloomberg) -- Anduril Industries Inc. is in talks to raise $400 million to $500 million in funding from investors in a deal that could take the form of a convertible note, according to people familiar with the discussions.
The defense technology startup is seeking a valuation of about $10 billion, said two of the people, who asked not to be identified discussing private information. Instead of raising a traditional funding round, Anduril could raise the money as debt slated to convert to equity at a $10 billion valuation in the future, in the event of a new financing round or other deal. The talks haven’t been finalized and the details of the convertible note could still change, the people said.
Conclusion:
You are basically buying a business at an EV/EBITDA of ~6-7x 2023 and ~4x NTM EV/EBITDA that should grow at a CAGR of 40% and expand its EBITDA margin to the 25%+ range if you think management will execute the plan here. There is not that many businesses with these kind of metrics and prospects on the Canadian micro cap space in my opinion. If you do have others, please let me know!
I am expecting a multiple re-rating upon business execution and continued growth for the foreseeable future that should provide an interesting return from here.
What do the return looks like from here? If we take management midpoint of $72M for 2023 and a CAGR of 40% for the next two years with an EBITDA margin of 25%, we are looking at $141M of revenue for 2025 and $35M EBITDA.
Let’s take a multiple of 10x EBITDA for this example (comparable trades higher with lower growth and EBITDA margin profile as seen previously): $35M EBITDA x 10 = $350M mkt cap / ~206.1M O/S = $1.71 per share which is 3.5x higher the current share price of $0.48 at the time of wrapping up this article within a 2 year time frame. Could it command a higher multiple? I don’t know what the market will assign honestly.
To summarise a few key points that Kraken Robotics should benefit from:
An upgrade cycle of UUVs beginning on the defense side
Geographical expansion, more business with navies and NATO countries
Winning contracts vs much larger peers
Kraken Robotics competitors buying their batteries for their own UUVs
The ex-CEO selling, the overall market sentiment and small cap valuation in the ground creates a buying opportunity at this time in my opinion.
Do you think Kraken Robotics will emerge from underwater?
Thank you for your time reading my notes if you got to this point and appreciate your comments below!
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Disclosure: I am long Kraken Robotic shares. Nothing here constitutes investment advice or solicitation to buy or sell securities and is my own opinion based on my research.