ASX tech veteran Orbital flies high in game of drones

Orbital Corporation ASX OEC drone Ralph Sarich two stroke engine technology
Orbital has forecast revenue of $25-35 million for the year to June 2020, compared with $15 million in the 2018-19 year.

Almost five decades after being founded and 35 years after listing on the ASX, veteran technology stock Orbital Corporation (ASX: OEC) is poised to deliver meaningful revenues and consistent earnings to its patient investor base.

The Perth-based company is synonymous with the orbital engine invented by its founder Ralph Sarich but has long since moved into two stroke engine technology based on a patented fuel delivery system.

After failing to interest the car industry and also dabbling in non-engine related pursuits, Orbital turned to the $22 billion market for tactical military unmanned aerial vehicles (UAVs, or drones).

“Some products worked, and some didn’t, but some of the earlier breakthroughs are still used today,” Orbital chief executive officer Todd Alder said.

“The company has a proud heritage.”

Boeing connection

Underpinned by a long-term contract with Boeing subsidiary Insitu, Orbital is gaining traction with two engines in production and three more planned.

Mr Alder said the contract – along with a smaller one with military contractor Textron Systems – reflected Orbital’s initial approaches to the US defence sector a decade ago.

“To crack the US defence market, you need to be significantly differentiated, especially if you are coming from outside of the US,” Mr Alder explained.

Orbital’s patented injection method keeps the fuel and oil separate and sprays a fine mist directly into the combustion chamber.

This results in reliability, performance and maintenance advantages. With a wingspan of up to 5m, the drones need to be able to stay in the air for up to 20 hours and fly up to 7,300m.

The Orbital propulsion units only require an overhaul every 500 hours, compared with 50 to 100 hours for conventional models.

Worth up to $350 million, the five-year Insitu agreement involves manufacturing and servicing five different motors, three of them Orbital designed and two of them Insitu-designed.

Defence deals

In March this year, Orbital inked a deal with a large unnamed Singapore defence company to design and build multi-fuel UAV engines, initially at a low volume.

A month later the company followed up with a contract with US defence supplier Northrop Grumman Corp to develop two propulsion systems for a vertical take-off and landing UAV.

The company has not quantified the value of the deal, but said successful testing “has the potential to lead to additional commercial production opportunities”.

To bolster its US potential, Orbital in 2018 opened a manufacturing facility in Hood River, Oregon, to complement capacity at its Balcatta headquarters in Perth’s north.

While Insitu previously had carried out many flight-testing hours, the Orbital-powered drones have only just been rolled out for the first time in real combat conditions.

With the COVID-19 epidemic causing little disruption to Orbital’s business, the company has forecast revenue of $25-35 million for the year to June 2020, compared with $15 million in the 2018-19 year.

“We will meet that guidance,” he said. “We are now cash flow positive and maintain our guidance of profitability this financial year.”

Orbital lost $2.5 million in the first half of 2019-2020 and $5.9 million in 2018-19, but posted a $2.21 million net profit in 2017-18.

When it made its ASX debut in 1985, Orbital became Perth’s biggest listed company as the shares soared to $50.

More recently the company’s shares have traded between $0.15 (July 2014) and $0.90 (October 2016).

This week Orbital’s shares hovered around $1.00 and the company has a current market cap of around $80 million.

“The company in the past promised a little more than it could deliver,” Mr Alder admitted.

“We are able to tell a much more concise story now.”