DRO (ASX) Ann: Strong Shareholder Support for Share Purchase Plan

Originally posted by Mayi: ↑

"I want to understand why we don't have and debt options as an alternative for capital building as i'd prefer to take on at least some debt, in lieu of repeat dilution."

Nice post!

As you know, I have been DROs biggest critic around their capital management so here are my thoughts on what the best capital strategy for DRO should have been. DRO was right to be careful with debt. Even though the tone here is that DRO is a certainty, banks will look at it as an unproven company that has never made a profit, and will charge very high interest rates (probably around 15%).

Despite this, if it were me, I would have to set up a line of credit facility of something in the range of $10-20 M in place of last year's CR because DRO has the advantage that the cost of growth is very low because it can turn around its products very quickly and does not require a huge capital injection in plant and materials. My hope would have been to avoid costly interest payments by not utilising the facility at a all ( and to buy time if required) and use the limited cash in the business to drive efficiencies in the use of capital. The plan would have been, if the company was forced to use the facility and the use was likely to be more than temporary (a few months), I would have then gone for a CR of around 10M if required (as was originally planned) - if it was required, it would have meant huge sales growth likely resulting an increased share price (there would have been still 400M shares on issue) and I'd hope to get away with selling 20 M shares to get the $10M.

Hindsight is 20/20, but if they used that approach, it's numbers show that DRO would have scraped through without requiring the facility at all, and would have avoided last years CR. Its situation before this CR would have been that it would have have $15-20M in cash rather than $55-60M (400 M shares on issue) and still have the loan facility of $10-20 M. DRO would have had a much higher share price than now because of the much lower number of shares on issues.

Even now I still would have not issued more shares unless I was sure that I'd dig into the loan facility as the company has enough scale and should be very close to funding its own growth. If I did need to issue more shares, I would have done a rights issue (not a CR) of somewhere between 1 to 10 and 1 to 20 which would have given all the new shares and associated profits to existing shareholders and probably would have been sold at above a $1 because of so few shares on issue for the same sized company.

The worst case scenario would have been issued capital of 440 M shares and $60 M in the bank compared to 800 M shares and $160 M in the bank (its cash per share would have not been that much different). Each share on issue would be entitled to nearly twice as much of the future profits and if institutional investors wanted a slice of the pie, they could buy on market and drive the share price higher for existing shareholders.

The market likes companies with good capital management as it means higher returns per share (around double in this case) and will be willing to pay for it. As it stands, DROs capital management makes the stock a sell for me.

Expand

Mayi,
in the near future the main clients of DRO are almost certainly going to be the major world militaries such as US DoD, Nato, 5 eyes, plus
other important ones in Europe and Asia.
Competitors of DRO include divisions of the main defence companies, LM, Thales, Raytheon, etc with massive financial resources.

In your theoretical scenario using minimal capital raises and virtually just financially "scraping through" as you say, what chance would DRO stand when a microscope was applied to it's financials by these potential clients regardless of the quality of the DRO tech?
Here the potential client would be taking a hard look at the longer term particularly as the purchase would require long term commitments from DRO for both ongoing maintenance and updates to software.

EB

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(20min delay)
Last $1.21		Change 0.020(1.69%)		Mkt cap ! $1.059B

Open	High	Low	Value	Volume
$1.18	$1.23	$1.17	$4.439M	3.699M

Ann: Strong Shareholder Support for Share Purchase Plan, page-71

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