Orbital Corp may rev up growth via acquisitions on back of strong balance sheet, CEO says

23 November 2020

Orbital Corporation [ASX:OEC], the Western Australian tactical unmanned aerial vehicles (UAVs) engine designer and maker, may consider acquisitions to secure its supply chain “amid a COVID environment”, CEO Todd Alder said. 

 

The company, which has a market cap of AUD 86m (USD 63m), could seek to buy critical suppliers to ensure its production is not disrupted in the current market environment, Alder told Mergermarket

 

“We may (pursue M&A), although we don’t need to at this stage,” the CEO added. 

 

Alder did not disclose a deal budget nor target segments of the supply chain, but noted the firm, which supplies engines for military drones, has a strong balance sheet to propel its growth strategy. The CEO added that over the next 10 years propulsion systems could be a strategic market segment to focus on for growth. 

 

Orbital’s revenue for FY20 recorded a jump YoY and was AUD 33.8m, compared to AUD 15m in FY19. The company’s revenue guidance for FY21 is between AUD 40m and AUD 50m. NPAT was just AUD 1.9m for FY20. It currently has cash and cash equivalents of AUD 8.7m, according to its AGM presentation on 13 November. 

 

Orbital has a “pretty good handle” on the main players in its supply chain and is therefore unlikely to need external advisors to assist with M&A, he said. 

 

Meanwhile, Orbital is holding “maturing negotiations” with potential tier-1 US customers, Alder said, without elaborating. 

 

Orbital is a designated primary supplier to Insitu Inc., a Boeing [NYSE:BA] company that designs, develops and manufactures unmanned aerial systems (UAS). Orbital will supply five engines for military drones in a long-term agreement with Boeing. Two engines are currently in production and a third is poised to be built this financial year, the CEO said. 

 

Orbital’s tier-1 client base includes defence giant Northrop Grumman [NYSE:NOC], and Textron Systems, a Providence, Rhode Island-based subsidiary of industrial conglomerate Textron [NYSE:TXT], as per a company document. 

 

According to Alder, Orbital does not have direct peers but noted that globally, UK-based rotary engine technology firm UAV Engines, and Germany-based engine manufacturer Rotax are competitors to some degree. 

 

Orbital’s patented fuel injection system enables advanced spark ignition using heavy fuel, a requirement for military applications due to fuel, logistics, defense policy and site safety, as per the document. Tactical UAVs are used by global defence forces for gathering intelligence, surveillance, and reconnaissance, and are worth between AUD 3.5m and AUD 6m per system. Worldwide, military UAV production is worth AUD 128bn, the document also notes. 

 

Orbital’s major shareholders include JP Morgan Nominees Australia (31.43%) and Citicorp Nominees (12.51%), according to its latest annual report. 

 

The company uses PwC for auditing. 

 

– by Adam Orlando in Perth 

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