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"Our forecasts may prove to be conservative, as we have assumed UUV only captures 0.5% of the addressable market by 2025. If we were to assume UUV captures 1% market share, our valuation jumps to $1.08/sh. This highlights the blue-sky potential should UUV successfully deploy its sales and marketing teams and accelerate market penetration."

Investment Highlights
 UUV Aquabotix Ltd (UUV) is an Australian and USA based underwater drone manufacturer, that is already generating revenue despite having limited capital and sales support prior to its IPO. We believe the investment into sales and marketing, in the hope of capturing a significant portion of this growing market, will be highly positive and expect it to generate substantial revenue and EBITDA growth. Thus, we initiate with a target price of $0.40/sh and a Speculative Buy recommendation.
 Segment Leading Products: UUV is one of the limited number of manufacturers of cost-effective commercial-grade underwater drones, and the only manufacturer of Hybrid underwater drones available to consumers, governments and asset owners. It has grown its product suite to four lines and 10 models and has sold over 300 drones and over 850 AquaLens (underwater cameras) thus far. The products range in price from US$1,500 (for an AquaLens) to US$150,000 (for a high-end drone).
 Growing Underwater Drone Market: There have been huge strides in the unmanned land and aerial vehicle (drone) industries, but the underwater robotics industry has lagged typically by six to ten years. The unmanned underwater vehicle (UUV) market is projected to grow from US$2.1 billion in 2016 to US$4.84 billion by 2019. The user operated market is expected to have a compound annual growth rate (CAGR) of 20.11% while the automated market is expected to have a CAGR of 31.95%.
 Financials set to grow: UUV is already generating income from the sale of its underwater vehicles, with A$1.1m in revenue reported for the year ended 31 December 2016. We note that this was achieved with a limited sales and marketing team. We expect that UUV should be able to achieve revenues of at least A$2.0m based on historic growth and late 2016 run-rates, showing positive growth above market rates. In May 2017, UUV also announced the sale of an underwater drone to the US Navy for A$0.12m.
 Healthy Balance Sheet: As at 31 December 2016, UUV had $0.35m in cash and c$0.52m in debt, In April 2017, UUV raised $7.0m by issuing 35m shares at $0.20/sh in an oversubscribed IPO. Thus we estimate that UUV currently has c$6.2m, after settling debts and the cost of the IPO.
 Upside in our Valuation: Using a discount rate of 14.1% and the fully diluted share capital of 236.4m shares (assuming all options and preference shares are exercised), we have valued UUV at $94.0m, or $0.40/sh. A 2018 sales multiple of 10 times derives a value of $0.40/sh, which aligns with our current target price.
OVERVIEW
UUV Aquabotix Ltd (UUV), based in Sydney, Australia and Massachusetts, USA, manufactures and sells underwater drones and cameras for commercial and military applications. The Company was established in 2011, and has since grown its product suite to four lines and 10 models. Sales of its underwater drones has increased year on year, with $1.2m in revenue reported for CY2016. UUV has sold over 300 drones and over 850 AquaLens (underwater cameras) thus far.
UUV is focused on the commercial drone market, its end customers include defence, law enforcement and public safety, marina and boat underwater inspection, marine inspection and construction, port security, pipeline inspection, potable water management, power plant management, fish farming and aquaculture, research and marine biology, undersea mining, and the consumer space. The underwater drone market currently lags the aerial drone market and there is little competition in the smaller commercial underwater drone segment.
UUV’s drones are stated as simple to use and relatively inexpensive; they also have the competitive advantage of having a hybrid product (user controlled and autonomous functionality). The drones can also be mass produced and can have accessories attached for added functionality.
UUV’s short-term objective is to establish a multi-faceted and multi-product underwater unmanned vehicle (UUV) and remote operated vehicle (ROV) technology company with sufficient resources for quick development and response to market requirements.
Customers who have purchased Aquabotix’s products include the United States Navy, the United States Coast Guard, the United States Department of Homeland Security, BP, Shell, Pittsburgh Tank, Virginia Institute of Marine Science, the University of Notre Dame, Broadspectrum Ltd and ConEdison
Its mid-term objective is to become the “DJI of underwater drones”. DJI is the largest consumer and commercial aerial drone company, accounting for c50% of drone sales in 2016. This would place UUV as market segment leaders, allowing it to be the first to dominate the UUV industry by mass producing the product, staying ahead of the limited competition, and creating an aggressive sales/marketing force. While the Company is currently focused on the commercial ‘middle’ market; we believe it may look into manufacturing and selling a lower cost, consumer focused underwater drone.
PRODUCTS
Aquabotix is one of the limited number of manufacturers of cost-effective commercial-grade UUVs, and the only manufacturer of Hybrid UUVs available to consumers, governments and real asset owners. It has grown its product suite to four product and 10 models and has sold over 300 drones and over 850 Aqualens (underwater camera) to date. The products range in price from US$1,500 to US$150,000.
Endura
The Endura is a user controlled remotely operated underwater drone that can be used for a wide range of underwater applications. It is powered by five high torque motors, giving the vehicle Six Degrees Freedom of Motion, that allows both swimming like manoeuvrability plus micro-positioning.
It comes equipped with a HD camera and high intensity LED lighting. It can also dive 100m and carry a 1.8kg payload; which can be upgraded to 300m depth and a 3.6kg payload. The remote tether can also be up to 1km in length. This means range is similar to line of sight of an aerial drone.
The Endura is stated as simple to set-up, from box to configuration to ready for water in 3 minutes, and easy to use, with driver competency stated as 3 hours. The base model includes software for self-diagnostics, repair and troubleshooting.
There are currently 5 models of the Endura being sold, ranging in price from US$17,000 to US$100,000. We believe the average price for the Endura would be cUS50,000.
HydroView
The HydroView is a user-controlled remote operated underwater vehicle that records live video and captures still photos in high definition. The HydroView can be controlled by the on-screen controls from an iPad, a laptop keyboard, or with a video game controller.
Three high torque motors allow HydroView similar manoeuvring underwater to that of a plane. The equipped HD Live Video feed can be used for boat and mooring inspections, underwater explorations, as well as for educational purposes. The HydroView does not have the same manoeuvrability or range as the Endura, with its tether available for only up to 100m.
There are currently 3 models of the HydroView being sold, ranging in from price from US$5,900 to US$9,000. Again, we believe the average price for the HydroView would be in the mid-range of this price band.
Hybrid ARV
The Hybrid ARV can be both user-controlled or operate autonomously, and is the first hybrid UUV designed to be used specifically for shallow water tasks. The Hybrid ARV searches wide areas using the autonomous mode and conducts detailed inspections using the user-controlled mode. The autonomous mode is preprogramed into the Hybrid ARV (for example: running sweeps of a 100m by 100m zone, then transferring the video images back to the user when done).
It is also equipped with a HD camera and high intensity lighting. Like the Endura, it has five high torque motors that allow Hybrid ARV similar manoeuvring underwater to that of a helicopter. It is also capable of transferring and carrying 3.6kg of payload. The standard model has a 100-meter depth rating, but can be upgraded to reach 300-meters.
The Hybrid ARV sells for US$25,000 to US$150,000 depending on the level of customisation or upgrades opted for. We believe the average selling price with be cUS$80,000.
AquaLens
The AquaLens is a commercial-grade underwater camera system that captures HD quality video and stills via the click of a button. It can transfer live feed video to the surface on the user’s iPhone, iPad, or Laptop computer through Wi-Fi or Ethernet connection. It can be used individually, or deployed as a network of underwater cameras (network size up to 32 cameras). Images and video can be viewed on one screen through the UUV proprietary operating system.
The standard depth rating is 100m, but can be upgraded for up to 300m, while all cameras include a pan and tilt of 120 degrees with an 8X digital zoom. There is also a large number of modular accessories and upgrades available including: optional sensors; orientation sensor; leak detection; depth sensor; temperature sensor; and environmental sensors.
The AquaLens sells for US$1,495, excluding accessories.
MARKET OVERVIEW
The unmanned aerial vehicle (drone) global market has increased from US$2.9bn in 2005 to US$7bn by 2015 at a CAGR of 9.2%, and is projected to increase to US$21.23bn by 2022 according to MarketsandMarkets. The market leader in the low cost aerial drones space, DJI, recorded c.US$1.5 billion in sales in 2016.
There have been huge strides in the unmanned land and aerial vehicle (drone) industries but the underwater robotics industry has lagged. Underwater technologies typically lag land and aerial technologies by six to ten years
The Unmanned Underwater Vehicle (UUV) market is projected to grow from US$2.1bn in 2016 to US$4.84bn by 2019. The user operated market is expected to have a CAGR of 20.11% while the automated market is expected to have a CAGR of 31.95%.
UUV views its industry as split into three broad segments:
 At the “top end” are the much more expensive military-grade solutions for unique and critical missions, such as unmanned submarines. As a practical matter, these are likely to be available largely only to governments and defence agencies. These are much larger vehicles and cost closer to the million dollar per vehicle range.
 In the “middle market” are cost-effective “every-day workhorse” solutions for government and commercial users. The end customers include defence, law enforcement and public safety, marina and boat underwater inspection, marine inspection and construction, port security, pipeline inspection, potable water management, power plant management, fish farming and aquaculture, research and marine biology, undersea mining, and the consumer space.
 The “lower layer” consists of consumer-grade products largely unsuitable for commercial use. This is a currently underdeveloped segment of the market, with few off the shelf products (like DJI aerial drone) available at big box retailers. UUV may look to enter this segment at a later stage.
UUV currently focuses on the “middle market”, where there exists a substantial potential government and commercial end-user market, with the market participants having the capacity to purchase systems and post-sale support on an ongoing basis.
UUV has historically generated sales to this market through a combination of direct sales to end-users and sales through dealers, distributors and independent representatives. Geographically, while Aquabotix has sold its products to clients in 45 different countries, North American sales have historically predominated. We note that these sales occurred despite UUV not having a dedicated salesforce of its own, highlighting the demand for the product. Part of the IPO funds are stated to be used to employ sales, marketing and business development teams.
The Company has highlighted 12 unique market verticals in which it believes there is, or will be, demand for UUVs. Some of the more exciting verticals include the 6,300 aquaculture establishments (which currently employ divers), the 57 US Universities with Marine Biology programs (Education is historically an early adopter), the 8,100 Marina Operators and the 15 Navies currently heavily invested into UUV technology.
The latter is a near-term opportunity for UUV, with the US Navy having stated that it will look to employ smaller and cheaper assets from outside the military, should the products fit the Navy’s need. UUV has already seen some success in this vertical, with the A$125,000 order received from the US Navy (announcement 2 May 2017).
COMPETITION
Historically, the underwater drone industry focused on the high end expensive systems, which was positioned commercially for military use. This is typically a high margin, low volume segment which is first tapped by emerging technology companies. Thereafter, the trickle down in technology happens to the middle market and then the lower consumer market; with the latter being a lower margin but much higher volume segment. Additionally, there are many companies focussed on the aerial and land drone market, however these manufacturing companies do not seem to possess the technology needed to manufacture underwater drones. The technology of land, air and sea drones appears to be vastly different and thus specialisation is required.
So, while there have been huge strides in the unmanned land and aerial vehicle (drone) industries; the underwater robotics industry has lagged. Underwater technologies typically lag land and aerial technologies by six to ten years. UUV is thus well placed in the relatively nascent industry, and is one of the early movers in it. The Company is also one of the few low cost commercial grade underwater drone manufacturers with proven products and sales to date.
Additionally, while some small UUV competitors have developed products that are either ROVs (controlled underwater drones) or AUVs (autonomous underwater drones), they have not developed hybrids. UUV is thus the first in the industry to develop a Hybrid product that offers capabilities of both being remotely operated and autonomous in underwater environments. Another key differentiator is the modular nature of the drones, which can have various sensors for different applications fitted.
Key Differentiating Factors
 Hybrid Autonomous/Remote Vehicles (ARV or Hybrids)
o Competition has not yet developed or commercialised a competing product.
o Hybrid allows users to search wide areas using autonomous mode and then conduct detailed user-controlled inspections.
o The hybrid facilitates flexibility of two products in one to use for various applications.
 Remotely Operated Underwater Vehicles (ROVs)
o UUV’s products are competitively priced, and cheaper when compared to direct peers.
o Offer a greater level of support in terms of remote viewing and control
o Has six degrees’ freedom of motion to allow for superior manoeuvrability
o Has greater power and thrust capabilities
o Greater range than peers
 Underwater Cameras
o Cheaper than Peers
o Supports remote viewing and control
o Has full high definition resolution
o Cloud service recording functionality
o Can be networked to prove wider and connected coverage
VALUATION
UUV is actively targeting the “middle-market” or commercial segment of the UUV market (particularly Navies
and aquaculture establishments). We note that this segment is highly profitable, but does have a longer sales
cycle. Typically, the end-users place a small proof-of-concept order, then if the product is to their liking, will
place a much larger order. UUV is already generating income from the sale of its underwater vehicles, with
A$1.1m in revenue reported for the year ended 31 December 2016. We note that this was achieved with a
small sales and marketing team.
UUV has also stated that revenue for the month of January 2017 was cA$0.19m, or A$2.2m annualised,
showing positive growth above market rates. In May 2017, UUV also announced the sale of an underwater
drone to the US Navy for A$0.12m. We expect the funds raised from the IPO to bolster its sales, marketing
and business development teams, and thus substantially increase its revenue.
We believe our forecast is conservative for 2017, predicting revenue of $2.2m, a gross profit margin of 70%
and an EBITDA loss of $0.4m. We have then modelled significant growth in subsequent years: forecasting
revenue of $4.9m, $8.7m and $14.1m; and forecasting EBITDA of $0.5m, $3.0m and $6.6m in 2018, 2019 and
2020 respectively. We maintain our gross profit margin assumption of 70%, despite the addition of software
revenue.
Software revenue is defined as the revenue derived from the Aquabotix analytics platform and operating
systems, which it hopes to implement in the medium-term to provide added value to its modular accessories,
upgrades and sensors available. We have assumed 10% of revenue from 2018 (growing by 2.5% p.a.), is
attributable to software.
Using a discount rate of 14.1% and the fully diluted share capital of 236.4m shares (135m ordinary shares and
101.4m options and performance rights), we have valued UUV at $94.0m, or $0.40/sh. Using a 2018 sales
multiple of 10 times derives a value of $0.40/sh, which aligns with our current target price. We initiate with a
Speculative Buy recommendation.
Our forecasts may prove to be conservative, as we have assumed UUV only captures 0.5% of the
addressable market by 2025. If we were to assume UUV captures 1% market share, our valuation jumps to
$1.08/sh. This highlights the blue-sky potential should UUV successfully deploy its sales and marketing teams
and accelerate market penetration.
We also note that UUV may look in the medium term to introduce a cheaper consumer focussed UUV to
market. This would be akin to DJI’s current offering for the aerial drone market. We believe this could
substantially increase the Company’s market perspective and its total addressable market. Thus, we highlight this as a major medium term catalyst

CAPITAL AND BALANCE SHEET
As at 31 December 2016, UUV had $0.35m in cash and c$0.52m in debt. In April 2017, UUV raised $7.0m by
issuing 35m shares at $0.20/sh in an oversubscribed IPO. We estimate that UUV currently has c$6.2m in cash
after settling debts and the cost of the IPO. The Company now has 135m shares on issue, with 100m being
placed in escrow for up to 2 years from the date of the IPO.
UUV also has 56.4m options, of which 35m are listed options (exercisable at 22c within 2 years) and 11.4m
are directors’ options (exercisable at 30c within 3 years) and 10m are joint lead manager options (exercisable
at 22c within 3 years). UUV also has 45m Performance Shares outstanding, spread over 3 tranches and
hurdles (shown in Figure 11 below).
Figure 11: Options and Performance Shares
The Company expects to use a majority of the funds from the IPO to establish and expand its sales, marketing
and business development team ($4.7m). It has also budgeted for a $1.4m in further Research &
Development, $0.7m for ongoing intellectual property and administration costs and $0.7m for working capital.