So we can determine if it’s a buy or a sell drone delivery. Canada is a drone technology company focused on the design, development and implementation of its proprietary logistics software platform. The company’s platform is used in a sas model for government and corporate organizations. Globally. Sas stands for software as a service. The company is headquartered in ontario, canada and was founded in 2011.. It went public in 2018 and trades on the pink sheets. Ticker t a k, o f, take off the tsx venture and the deutsche bursa. Since canada is such a large country, it can be difficult to deliver packages to rural or remote areas. This company’s drones help deliver packages to those areas. Its technology can help. These communities receive essential items quickly, such as medical supplies, pharmaceuticals, e commerce, parcels and much more. There are a lot of locations that don’t have highway access, or even road access. Also, when there’s heavy snowfall or ice in the ground getting to some locations is really difficult and risky and can take a long time. Its drones can maintain temperature controlled cargo, allowing the transport of time sensitive, medical, pharmaceutical and biological goods. The applications are limitless during the midst of covet 19. Imagine how amazing it would have been to use drones to deliver covet tests or covet vaccines, especially to remote areas. In the oil and gas industry, drones have been proven to be an effective way to quickly deliver cargo between oil rigs on land and at sea.
It’S essential to ensure your operation stays up and running. Drones can help reduce operating costs such as fuel, labor, maintenance and storage, as well as decreasing the risk to pilots and captains by switching to autonomous delivery solutions. Air canada is an exclusive drone delivery service provider for this company. It recently got a contract with dsv, aaron c also having air canada as a partner gives them credibility. The company provides a complete turnkey logistics solution, which includes a software system called flight flight has hardware and professional services allowing for a safe and secure autonomous cargo delivery process. It produced the first delivery drone, which meant transport canada’s, compliant unmanned aircraft standards. It also helps companies with regulatory compliance, safety management, operational training programs and safety reporting processes. Flight is a cloud based flight management, software that allows for secure autonomous operations, monitoring commercial air traffic weather and other sensor. Data flight is a sophisticated logistics system that offers real time package tracking and delivery notifications scheduling a database of all shipments. It also tracks whether it’s, cold or hot, outside, because there’s some temperature sensitive cargo. It also keeps maintenance logs of all their drones, including their components. Also flight can be easily integrated with any company’s internal logistics software. Last month, the us senate voted 68 32 on approving a package of legislation intended to boost the country’s ability to compete with chinese technology. Hopefully, this new legislation will make it easier for drone manufacturers to operate in the u.
s. The united states seems to always push companies out of the country since it’s so costly to do business in america. If i wanted to fly a drone for personal use, i’m required to follow certain laws, i need to register my drone if it weighs more than 0.55 pounds and everyone, regardless of the size of the drone, must complete testing requirements also, depending on whether the drone flies Vlos ev, los or bv los, has different laws and permits. Vlos is visual line of sight. That means that drone is visible in your line of sight. Evlos is extended visual line of sight, so that goes a little further than vlos and the most extreme is bvlos beyond visual line of sight. Companies like this need to get permitting for bvlos the technology is available, but we need to get to a point where the regulations are allowing it. Canada is much closer to relaxing those laws in the us. Once the regulation eases. This company is in a great position to capitalize on it, we’re going to look at the ticker that trades on the tsx venture. So all the numbers in this video are on canadian dollars. Let’S get started with the model. This is a micro cap, company, 246 million market cap they’re trading at 110, a share and they have 223 million shares outstanding let’s, look at their financials. The way you value a company is, you estimate the free cash flows into the future, and then you discount those numbers back to today’s value that’s.
What we’re doing in this video and free cash flows cash flow from operations, minus capital expenditures, so they have really low revenue, so they have negative free cash flow and negative net income. Net income is the profit or loss on the income statement. It’S revenue, minus expenses. They receive their first revenue in 2020, 300 000. Then it jumped up to a half a million in the trailing 12 months. This is a company’s income statement. The top line is the revenue, the sales. It is really small, but they’re just getting started. They have a lot of contracts in place and letters of intent below that is the cost of revenue. These are the expenses directly related to generating the revenue revenue. Minus cost of revenue gives you your gross profit, which is positive each year, but below that is operating expenses which are pretty high because they spend a lot in research and development stock based compensation and marketing. So they have negative operating income each year and the bottom line of the income statement is their net income, which of course, is negative every year. This is the company’s statement of cash flows. The top line is operating cash flow that’s. How much cash the company loses from its operational business? You could think of operating cash flow as net income converted to cash because net income is your accounting profit or loss it’s, not actual cash, of course, they’re losing operating cash flow because they have a small amount of revenue.
At this point they do spend a little bit in capex each year it peaked in 2019, at 2.3 million capital expenditures are investments in property, plant and equipment operating cash flow. Minus capex gives you your free cash flow and, of course, that’s negative. Every year, they’re mainly funding their business on capital stock. They issued 9 million in 2019 and 21 million in 2020. they’ve been paying down debt the past few years. When a company has negative free cash flow and when they’re in growth mode in the early years, they should be using capital stock to fund their operations, not debt, because you have to pay the interest on your debt and, if you’re losing money. That means you go deeper into debt. The bad thing for investors about issuing capital stock. Is it to lose your shares, but the idea is the company grows faster if they have funding and also they won’t go bankrupt if they have cash coming in and if they grow bigger and bigger, they might buy back stock in future years. Let’S look at their capital structure; they have 40 million of equity, 400 000 of debt, they’re 99 equity, 1 debt and their whack. Their weighted average cost of capital, which is a blend of the cost of equity and cost of debt, is nine and a half percent and that’s a discount rate we’re going to apply to the future cash flows. We estimated seven years of future free cash flows.
We also estimated a terminal value which is all cash flows. Past year, seven that’s 731 million. We discounted those numbers back to today’s the weighted average cost of capital. We get a value of the company of 446 million dollars. We divide that by 223 million shares and we get a calculated stock price of two dollars: they’re trading at 110, so the trading at a 45 discount it’s a buy according to the model, it’s really difficult to value. A company like this because they just started bringing in revenue, although they do have a lot of contracts and letters of intent in the pipeline, it’s really hard to figure out how big they’re gon na be or, if they’ll be big at all. I try to look at other companies and the size of the industry. I took a simple approach. I estimated their revenue would be 500 million dollars by 2027. if it is and they convert 10 of that into free cash flow. They’Ll have 50 million of free cash flow in 2027, then my prior free cash flows just backed into that number. So if you don’t think they’ll hit 500 million by 2027, your valuation will be lower than mine and, if you think, they’ll hit more than 500 million of revenue, then your valuation will be higher than mine. Simply wall street is a lot higher than me. There are five dollars a share, so they’re saying the stock is 78 undervalued. Here is a stock price, since it started trading, so you can see, was really driven up right away the first couple weeks and then it slowly came down the next three years and then in the beginning of this year, was really driven off past its highest point.
Over two dollars a share, but then it’s been cut in half since then. This is a stock price, the last 12 months. So you can see it took a big jump in january. Then a major jump in february and this article talks about the surge mentioning february jumped up to all time highs. Then it came crashing down in march, and this is not just for this company. This is for almost all drone companies, including dragonfly and alpine4, and this company really hasn’t had much revenue. So there was no reason for the stock price increase. The jump in stock price is just based off of momentum and investor sentiment. At least a company like dragonfly has a decent amount of revenue, but still there’s, no reason their stock price should have doubled in a matter of weeks. Alpine 4 is a bigger company, so they do other things beside drones, so they have much higher revenue than the other drone companies. They work on aircraft, engines and cars. The article says you should be cautious with investing in this company just as its peers. The company will run out of cash soon and need new funding. Of course, that’s going to be the case, because they’re growing they’re always going to need new funding. So there is a risk if the capital markets freeze up. Companies like this will go bankrupt, but i do understand. People are not investing in this company based on their fundamentals, they’re investing in this company based off of the future, but the focus of this channel is talking about fundamentals.
This is a chart of the projected worldwide commercial drone market it’s supposed to go to up to 13 billion by 2025, and 2.7 million drones will be sold. But if you wan na you can google and find different projections for any company. This is just one of the projections i found this article talks about some of the major drone logistics companies and drone delivery. Canada is mentioned also workhorses mentioned. I did a video on this company, something you should consider. The limited battery life of drones acts as a key challenge to the growth of drone logistics companies, because if you want to use drones to deliver goods over a certain distance, you might not be able to this article says the commercial drone market in the us will Reach 11.3 billion dollars by 2028 and it mentions dragonfly the canadian company we talked about earlier ehong. I did a video on ihong gopro and some other companies. I think the chinese companies will dominate this industry, mainly because it’s so easy to fly. Drones in china, plus people in china can benefit a lot more than people in the us. The pollution is a lot higher in china, so if you could take people off the road to not deal with that pollution that’s a positive also, the infrastructure in the united states is so much more advanced than most countries. We have an amazing highway system. Our roads are well developed, there’s, not that many places in the united states that you can’t get to in china it’s a much different story and they have a pretty low beta 0.
52. So the stock moves half with the market moves it’s, not volatile. The stock has gone up 27 in the past 52 weeks, while the s p 500 went up 37, the 52 week low was 61 cents. The high was 255.. The stock is trading below at 50 day and 200 day. Moving average about half a million shares are traded each day on this stock. Almost all the shares outstanding are on float, seven percent are held by institutions and a little under one percent of the shares are shorted. If you invested ten thousand dollars into this company in 2018, when it started trading, you’d have seventy two hundred dollars today: that’s a twenty eight percent loss, the biggest shareholders, fidelity at six point two percent and then the next four shareholders own less than one half of One percent let’s look at their financial ratios. We can’t look at the pe because they have negative net income, they have really low sales, so they have a terrible price of sales ratio but i’m sure this will improve over time. They do have a good price to book ratio it’s between the market median and market average. The main reason is because it has a lot of cash on its balance sheet from the capital raises it’s done, and they do have 856 000 of intangible assets. So it looks like they’ve been acquiring other companies, since they have negative operating income. They have negative roic, negative interest coverage ratio and negative roe, and they have a really high current ratio because they have a lot of cash on their balance sheet and they have very little current liabilities.
This is pretty common for a young company in growth mode. They need a lot of cash because they’re burning so much trying to grow the business they do seem to be well capitalized. They had negative 12 million of free cash flow in a trailing 12 months, but 36 million working capital working capitals, current assets, minus current liabilities. So it looks like they do have enough funding to get through the next year or two without taking on any more debt or issuing more stock. The best way to look at ratios to compare them to companies in the same industry. I’Ve done videos of five other companies in the same industry as drone and if jerome has a number in red they’re worse than the average, if they have a number in blue they’re better than the average, their price multiples are much worse than average. Since they’re such a young company – and they just started bringing in revenue, they have a really high current ratio, negative roe. They have hardly any debt and they’re a really small company, 246 million market cap. I converted all the market caps to canadian dollars. So, to summarize, i have them trading at a 45 discount but, like i said, it’s almost impossible to value a company like this like over 20 years ago, when amazon just sold books, who could have predicted they’d, be worth almost two trillion dollars and there’s. So many companies that come into the market that have great leadership, they have a lot of cash and they don’t go anywhere so it’s hard to predict these things, but so far this company seems to be doing well and they have a lot of letters of intent.
Letters of intent, aren’t sales, but it’s a really positive sign that companies are interested plus they did show that they can get some sales, so some people are interested. They just need to make those customers happy and that will lead to more business, especially with air, canada. That’S a great relationship, they have so it’s really exciting to see how this company’s future will roll out. I rank their free cash flows, 1 out of 10, their revenue 3 out of 10 and their ratio is 2 out of 10.. So let me know what you think give this video like subscribe or comment below.