Defense Modernization And Regulatory Shifts Will Drive Long-Term Drone Ecosystem Expansion

Catalysts

About Volatus Aerospace

Volatus Aerospace designs, manufactures and operates advanced drone systems for defense, public safety, infrastructure, utilities and cargo customers across multiple geographies.

What are the underlying business or industry changes driving this perspective?

• Acceleration in defense modernization and UAV procurement across NATO and Canada, supported by sovereign MALE class manufacturing and expanding training engagements, can convert current engagements into larger long duration programs, lifting multi year revenue and asset utilization.
• Regulatory progress in beyond visual line of sight and complex large RPAS operations, combined with Volatus’ established remote operations network and training pillar, positions the company to capture higher value public safety and infrastructure missions, supporting service revenue growth and higher blended margins.
• Global realignment away from Chinese drone supply and toward NDAA compliant and domestically produced systems, alongside Volatus’ OEM partnerships and Mirabel manufacturing ramp up, should deepen equipment demand in North America and Europe and expand gross profit dollars despite a heavier equipment mix.
• Scaling of the 4 pillar ecosystem, particularly the shift toward higher equipment volumes feeding recurring services, maintenance and training, can enhance operating leverage so that incremental revenue above the breakeven range flows disproportionately to EBITDA improvement and earnings.
• Arctic and remote area applications, including specialized battery initiatives and Condor family platforms tailored for harsh environments, open new long distance logistics and ISR use cases that can extend contract durations and improve visibility into future revenue and cash flow.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Volatus Aerospace's revenue will grow by 41.2% annually over the next 3 years.
• Analysts are not forecasting that Volatus Aerospace will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Volatus Aerospace's profit margin will increase from -53.1% to the average CA Airlines industry of 5.5% in 3 years.
• If Volatus Aerospace's profit margin were to converge on the industry average, you could expect earnings to reach CA$5.2 million (and earnings per share of CA$0.01) by about December 2028, up from CA$-17.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 171.1x on those 2028 earnings, up from -20.9x today. This future PE is greater than the current PE for the CA Airlines industry at 31.5x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.15%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Volatus remains loss making and management acknowledges that breakeven and free cash flow depend on rapidly scaling quarterly revenue to between 13 million and 17 million dollars. If large contracts are delayed or cancelled, fixed costs at Mirabel and expanding defense programs could keep net income negative and pressure earnings.
• The growth strategy is heavily weighted to medium altitude long endurance defense platforms and Canadian rearmament, but Canadian procurement is described as slow, bureaucratic and unpredictable. If NATO and Canadian defense spending ramps more slowly than expected or priorities shift, defense manufacturing utilization could fall short and drag on revenue growth.
• The product mix is tilting toward lower margin equipment, now 53 percent of revenue compared to 16 percent a year ago. If services growth continues to lag and the heavier equipment mix persists, blended gross margins that are already drifting down from 34 percent to 33 percent could compress further and cap gross profit expansion.
• The 600 million dollar commercial pipeline is dominated by equipment with short sales cycles in highly competitive markets and management concedes that timing is slipping as large customers defer decisions. If conversion rates or pricing deteriorate as more players enter the NDAA compliant drone segment, this could weaken revenue momentum and erode operating leverage.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$0.97 for Volatus Aerospace based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$1.25, and the most bearish reporting a price target of just CA$0.8.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be CA$94.8 million, earnings will come to CA$5.2 million, and it would be trading on a PE ratio of 171.1x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of CA$0.56, the analyst price target of CA$0.97 is 42.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.