$0.55 Valuation detail

Key Assumptions:

• Entertainment is ignored (sales excluded and cash on sale is upside)
• Based on FY30 Sales and NPAT% estimates (with matrix of value at different NPAT% & PE also shown)
• High margins (80%) are maintained and with scale an NPAT% of 21% can be achieved (workings below). This includes margin impacts of distributors where I assume the ~20% commission (thanks @Wini) is matched by SG&A savings for the associated sales.
• ARR estimates the company supplied are used as revenue estimates based on level of market penetration into the different market and region segments.
• Assumed that by FY27 the company has 1% of the US Law Enforcement (LE) market and hence has taken 6 years to achieve this, after which I assume an increase by 0.25% each year (same for other market segments).
• ROW LE market penetration is assumed to be accelerated to 4 years to reach 1% due to already established product and with a start in FY26.
• Military US and ROW starts in FY27 and grows at the slower rate of 6 years to reach 1% similar to the initial LE market. Note I realise the company had military sales well before this in Australia, but the first sale to the US and a NATO country in H2 FY26 as well as the introduction of the MR-1 product are a more substantive step in this market.

By FY30 sales of A$151.7m result from a market penetration of just 1.75% in US LE, 1.25% ROW LE and 0.37% for both US and ROW Military. We should see quicker take up in the new markets as the tech and company is more established than when it first started in FY22 with OP-1, a new product in a new category. As such I see these market penetration rates as modest, none the less the value can be recalibrated over time to real rates.

Below are the workings, I have picked FY30 as the valuation point, balancing where sales start to approach scale and we don’t have to look out too far. Values increase with later valuation points due to the large growth headroom on offer, adding some margin of safety.

If you add in the cash generated through to FY30 to this valuation then it is over 10x the current price which is a very big call, I realised. However, XRG is a clear leader in a new market that is only just being tapped, and they have a tiny fraction so far. Their market and product range is expanding in response to customer demand which are unmet. At well under 1% penetration of the market this is a $500m company currently trading at $45m.

The risks centre on competitors and the companies ability to continue to innovate and deliver on it’s customer needs. Their strong relationship and involvement with their customers, love of the problem not the solution and cultural fit to their customer give me confidence they can succussed. We will continually receive feedback on their ability to success based on rates of sales growth and additions of new regions, which may be lumpy for large customers but should small customers should provide more consistent data.

I welcome comments and feedback from all on the valuation and acknowledge this is a high level and ballpark valuation that is lacking compared to a solid DCF. However, like my initial valuation it’s purpose is more to identify the direction of value relative to the current price and provide this is significantly higher it indicates a good chance of an asymmetric investment outcome.

Disc: I own RL+SM