RADA — Growth inflection point

RADA Electronic Industries (US: RADA)

Last close As at 21/11/2024

11.57

0.00 (0.00%)

Market capitalisation

568m

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Research: Industrials

RADA — Growth inflection point

Short-range airborne threats, particularly from drones, are becoming increasingly severe. RADA’s primary growth engine products are light-weight, software-defined tactical radar systems that can detect and target airborne threats and have proved highly effective in active combat. Active protection and short-range air and missile defence for mobile forces have been identified by the US and other militaries as urgent priorities. Over the past two years, RADA has seen initial pilot orders for new defence programmes. The recently increased guidance of 54%+ revenue growth in 2019 reflects the conversion of initial orders to more significant ones. RADA also has a legacy product line of avionics systems.

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Industrials

RADA

Growth inflection point

Aerospace & defence

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28 August 2019

Price

$4.77

Market cap

$179m

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Code

RADA

Listing

NASDAQ

Shares in issue

38.1m

Business description

RADA is an Israel-based defence technology company whose primary growth engine is tactical software-defined radars for the manoeuvre force.

Bull

Early growth stage of large potential market.

Geographical expansion as appreciation of threat from drones becomes global.

Margin upside as US manufacturing comes online and revenues escalate.

Bear

Given the nascent tactical radar market, take-up could be slower than expected.

Competition could close the technology gap.

Customer concentration as a large portion of revenues will come from a few customers, which can lead to revenue lumpiness.

Analysts

Will Manuel

+972 (0) 54 978 4802

Andy Chambers

+44 (020) 3077 5700

Short-range airborne threats, particularly from drones, are becoming increasingly severe. RADA’s primary growth engine products are light-weight, software-defined tactical radar systems that can detect and target airborne threats and have proved highly effective in active combat. Active protection and short-range air and missile defence for mobile forces have been identified by the US and other militaries as urgent priorities. Over the past two years, RADA has seen initial pilot orders for new defence programmes. The recently increased guidance of 54%+ revenue growth in 2019 reflects the conversion of initial orders to more significant ones. RADA also has a legacy product line of avionics systems.

An urgent threat

On 18 July the USS Boxer, an assault ship in the Strait of Hormuz, destroyed two threatening Iranian drones with a soft-kill electronic warfare weapon. RADA’s radars were pictured in the press on top of a navy vehicle as part of the US Marine Corps LMADIS system, which successfully tracked and targeted the drones. The low cost and ease of acquiring a drone that can deliver a deadly payload combined with the difficulty of tracking them have made them ideal offensive weapons.

RADA’s radars form the heart of active protection systems including Iron Fist by Elbit Systems/IMI, which recently won an Israeli army tender. Upcoming catalysts include the Bradley APS, Stryker M-SHORAD and USMC LMADIS becoming US DOD Programs of Record, leading to an expected significant ramp up in orders to equip brigades rather than small numbers of units, which has been the case so far. Management estimates its addressable market at ~$5bn with less than 1% of that currently served. It believes its technology is 18 months ahead of competition.

Significant growth expectations ahead

Recently increased guidance expects 2019 revenue of over $43m (up 54% year-on-year). Given the importance of the current US programmes that RADA serves and the significant potential to expand sales globally, management expects strong growth to be maintained into 2020. While profitable in 2017 and 2018, RADA strategically ramped R&D and opened a US manufacturing subsidiary to meet the demand, bringing it to report a net loss so far in 2019, although opex should level out at year-end 2019. In addition, note that RADA had $15m cash on the balance sheet at the end of Q2. Given the revenue growth and stable gross margins it expects, this implies a return to profitability in 2020, with strong profitability in 2021.

Consensus estimates

Year
end

Revenue
($m)

EBITDA
($m)

EPS
(c)

Net cash
($m)

P/S

(x)

12/17

26.2

3.5

0.06

12.4

6.9

12/18

28.0

1.9

0.01

20.8

6.5

12/19e

42.2

N/A

(0.07)

N/A

4.3

12/20e

54.8

N/A

(0.04)

N/A

3.3

Source: RADA reported data, Refinitv estimates

EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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Frankfurt +49 (0)69 78 8076 960

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60325 Frankfurt

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London +44 (0)20 3077 5700

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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney, NSW 2000 Australia

Tel Aviv +972 (0) 3 607 4717

Azrieli Centre, Triangle Building, 38th Floor, Tel Aviv

Israel

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney, NSW 2000 Australia

Tel Aviv +972 (0) 3 607 4717

Azrieli Centre, Triangle Building, 38th Floor, Tel Aviv

Israel

General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney, NSW 2000 Australia

Tel Aviv +972 (0) 3 607 4717

Azrieli Centre, Triangle Building, 38th Floor, Tel Aviv

Israel

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney, NSW 2000 Australia

Tel Aviv +972 (0) 3 607 4717

Azrieli Centre, Triangle Building, 38th Floor, Tel Aviv

Israel

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