A Quick Take on Kraken Robotics

Introduction

• Kraken Robotics (KRKNF) is a marine technology company specializing in underwater exploration devices, surveying equipment, automated underwater vehicles (AUVs), and batteries.

• The business is divided into three segments: sensors, batteries, and services.

Products

• Katfish: A towed synthetic aperture sonar system providing high-resolution seabed imagery and bathymetry.

• SeaPower: Pressure-tolerant battery systems for powering underwater vehicles.

• Aquapix: Miniature interferometric synthetic aperture sonar integrated into various platforms.

• Alars: Autonomous launch and recovery system for underwater vehicles, a new version was introduced late in 2024.

• Sub-Bottom Imager (SBI)

• Acoustic Corer (AC)

• SeaVision 3D laser system

• Robotics-as-a-Service (RaaS): survey & inspection services, renting & leasing of sonar and AUV systems, and general engineering & integration services.

Competitive advantage

• Kraken's SEAPOWER batteries have no known competitors that can match their depth of 6000m at the same energy density.

Growth drivers

• The global underwater robotics market has a CAGR of 14.59% between 2024 and 2032, reaching a value of $13.59B.

• Anduril is an important company, and they are building a plant for AUVs, with each one containing $3M of Kraken products ($2.5M in batteries and $500K in sensors and software). At full production, this would produce a $600M/y opportunity.

• Anduril is also producing larger AUVs (the Ghost Shark), which contain $8M of Kraken products per AUV. These are sums that quickly add up.

• The company just received a $34M order for its Seapower pressure batteries

CapEx

• The company is expanding its battery production facility in Nova Scotia. The expansion of Nova Scotia could triple its manufacturing capacity (and create 200 manufacturing jobs). The new facilities in Canada and its German counterpart will allow Kraken to increase its total subsea battery production to almost $200M annually.

Finances

• From the earnings report:

• Tables and figures are in CAD$.

• Q3 was disappointing due to lower KATFISH revenue and lower revenue related to the Remote Minehunting and Disposal System (RMDS) project. Revenue from subsea batteries and services (the latter growing by 121% to CAD$7M) remained strong.

• Adjusted EBITDA decreased 6% to $4,15M, a 21% adjusted EBITDA margin, which has been relatively constant the last several quarters (it’s 22% YTD).

• Operating costs are topping out:

• Cash flow has turned negative again:

Guidance

• From the earnings report:

Financings

• During Q2/24 the Company closed a bought deal equity financing for gross proceeds of CAD$20.1M by issuing 21.18M common shares at a price of CAD$0.95 per share.

• YTD (Q1-Q3), the Company received proceeds of CAD$1.3M upon the exercise of 2.5M stock options.

• In Q4, the company engaged in another financing producing CAD$51.75M through selling 32.34M shares sold at CAD$1.60 (including the overallotment option).

Valuation

• In addition, there are 3.3M exercisable options (on a total of 11.17M) so the fully diluted share count is 265.85M.

• At CAD$2.25 (US$1.55) per share, that’s a market cap of CAD$598M and an EV of CAD$549M (with net cash at roughly CAD$49M), which delivers a fairly steep FY24 5.8x EV/S (FY24 revenue of CAD$95M) and assuming FY25 25% growth the stock is still not cheap at 4.6x FY25 EV/S.

• FY24 EV/EBITDA is 26.1x, again, not cheap, even if a 20%+ EBITDA margin is pretty impressive.

Conclusion

• The company has unique tech suited for turbulent times, and it benefits greatly from the rapid expansion of Anduril.

• It has the funds to boost its production capacity as demand is far outstripping supply, especially for Kraken’s SeaPower batteries, with Anduril building a plant that could produce $600M/y of demand, not even including their larger Ghost Shark AUVs.

• The company produces impressive margins (GM 60%+ and 20%+ EBITDA).

• While the shares are not cheap, we think that US$1.50 (CAD$2.25) provides nice entry points for at least a first tranche.