The Middle East conflict this year has demonstrated just why defence spending is on the rise.
And in particular, why counter-drone technology is an area where significant capital is flowing.
Bell Potter has been looking at the sector and believes current trends bode well for the likes of DroneShield Ltd (ASX: DRO) and Electro Optic Systems Holdings Ltd (ASX: EOS).
Image source: Getty Images
What is the broker saying?
Bell Potter highlights that there have been significant changes in modern warfare in recent years, with relatively cheap drones being used extensively. It said:
The Middle East conflict is a pivotal moment for the global C-UAS (counter-drone) industry and defence strategies in general. Lessons learnt in Ukraine are being repeated: Using up to US$4m missiles to take down US$35k drones is unsustainable. We expect there will be broad adoption of C-UAS technologies alongside advanced hypersonic defence capabilities to improve on this equation.
Bell Potter also named four reasons why it believes counter-drone technology spending is poised to grow materially in the near term. It said:
(1) Shahed drones have and continue to attack civilian infrastructure such as oil facilities, airports, data centres, and hotels, necessitating the need for C-UAS protection beyond military applications; (2) C-UAS procurement timelines have compressed with contractors receiving several orders from the Middle East and the US soliciting information on C-UAS detection and effectors;
(3) Ukrainian interceptor drones have emerged as a key effector in mitigating the threat of Shahed loitering munitions; and (4) a boots on the ground scenario in Iran remains a possibility which could see the emergence of tactical UAS / C-UAS warfare, creating further awareness of the need for portable RF jammers and Remote Weapon Systems (RWS).
Should you buy DroneShield and EOS shares?
According to the note, Bell Potter has a buy rating and $4.80 price target on DroneShield shares.
Based on its current share price of $3.88, this implies potential upside of approximately 24% for investors over the next 12 months.
As for Electro Optic Systems, Bell Potter currently has a buy rating and $9.70 price target on its shares. Based on its current share price of $8.46, this suggests upside of approximately 15% for investors between now and this time next year.
Commenting on the two companies, the broker said:
We expect recent events in the Middle East to drive an accelerated global demand for C-UAS technology. DRO, with its RF detection, defeat and C2 suites and EOS, through its gun-based kinetic systems and High Energy Laser Weapons (HELW), are both well-positioned to capture this growth.
