HighCom Limited

ASX:HCL

HighCom Limited

ASX:HCL
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$0.140 (0%)
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#391
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Forum Topics HCL HCL Scott Basham Meeting

Pinned straw:
Strawman
Added 9 months ago

I didn't take great notes during the meeting, but a few things that stood out:

  • Scott aims to triple revenue over the next few years, while maintaining and growing profitability. Aspirations are great, execution is another thing altogether.. But still, it does give a sense of what he at least believes is possible. Given the company is on a trailing PE of 8, there'd seem to be a lot of value on offer if you think he can pull it off.
  • Ballistics (armour) is clearly where the growth lies. The tech segment, which effectively only sells three different drones, and only has one customer (the Aus Defense force) is profitable and has secured some long term maintenance revenue, but it's not where the action is.
  • Moving to the US makes a huge amount of sense and should radically enhance the share of end-customer wallet and market opportunity. The militarisation of the US police force is definitely a thing, and I can certainly understand his optimism.
  • The XTClave is a sunk cost (circa $10m) that has a good deal of slack to support much higher volumes, and can underpin decent gross margins for a good while yet
  • I haven't done the work, but I can take at face value the claim that their armour is best in class (as Scott said, it either stops a bullet or doesn't)
  • The tailwinds are (sadly) very real. National defence budgets are only going up
  • The big drop in the cash balance is a function of unearned income rolling over (pre-paid for previous big contract). Balance sheet remains in good shape, there are no funding concerns
  • Expect an acquisition. Maybe even soon. They are clearly actively looking. It will be in the Ballistics area. I suspect they just need a better share price to lower the cost of capital and they'll pull the trigger. Honestly, this is one of the biggest risks for me -- acquisitions are so hard to get right.


I will be taking a small watching position here on Strawman.
Noddy74
9 months ago

Loved that last question about acquisitions @Strawman. As an (long-time) ex-journo the art of asking a question is not the gotcha or the 'how smart do I sound'. Instead it is quite simply phrasing it in such a way you illicit a response the questionee wouldn't have volunteered otherwise. I would encourage anyone who is curious to watch the interview - or even if you're not interested in the company just watch the end from 1:01:30. It's really inciteful how the Overlord asks a fairly open-ended question and ends up with a really directed and specific answer, that if Scott had of wanted to highlight he would of already have presented in some form.

My takeaway from that interview was that they are deep in the dataroom of someone. For Scott to narrow their list of targets to such a very specific set of criteria can only mean that they are very close to announcing something. Now - as always - with great acquisitions comes great risk but the strategic rationale that Scott rolled out makes a lot of sense to me.

Now something I have learnt about myself is that I am a natural saver but when it comes to goodwill - I spend that shit before it's even landed. So when it comes to my holdings I never leave without some criticism. I asked a question about their capital allocation policy and intention to pay a dividend. I don't give a flying toss about the dividend. If they need it for growth I think the new management* have earnt the benefit of the doubt. I do care that they put that into an announcement and then never mentioned it again. They never said "we said x and then did y". In my view that's a miss and should be factored into anyone's bear case.

[Held - rode the up thinking "how smart am I?", endured the down thinking "what did I miss?", now back to par thinking "why didn't I buy at the bottom?"]

*when I sing the praises of the new management, it is partially in contrast to the previous management who were terribly apocalyptically awful - and yet somehow managed to keep this company afloat. That speaks to the quality of the segments - particularly ballistics - that the company has kept.

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Strawman
9 months ago

Your comment on goodwill made me literally laugh out loud @Noddy74

And your question on the dividend was an excellent one. My sense is that too many CEOs let the investor relations person get in their ear and they speak about dividends only because that's what they think investors want (without ever understanding the opportunity cost that it, potentially, represents) and because they think it will help the share price.

Also, speaking of a good business buried behind poor management and unattractive segments, I though Scott's remarks on AVA Risk were interesting too. Very much seemed to suggest that there were things that needed to be fixed -- he did quickly add that Mal was doing what was needed since he took over, I just hope he wasnt just being nice.

And, yeah, an acquisition is definitely in play. I just hope they don't force it.. Seems like there's a good thing going with the ballistics business, and the cost of capital aint exactly cheap right now.

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Wini
9 months ago

@Noddy74 @Strawman Interesting conversation on dividends and how it fits into capital allocation framework. From a purely theoretical perspective if a company can re-invest earnings into a higher return on capital than their cost of capital then they shouldn't pay a dividend and instead focus on growth.

But the real world is tougher and you often don't know the return on capital for many years down the road. In some ways, a board/shareholder base that forces a management team to stick to some dividend policy is a bit like the adage of residential mortgage being a benefit for "forced savings". Theoretically it's not the best financial decision (@Strawman if you have a spare two or three hours maybe you could elaborate on this), but in many circumstances it can be if it removes the potential for bad behaviour.

And given the track record of capital allocation on the ASX (especially in the small/micro end where most Strawmen play) I think a policy that forces some direct shareholder return before the remainder is invested for longer term growth is not the worst idea...

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Strawman
9 months ago

I do have a few thoughts on property @Wini :)

But yes, that's an excellent point. Management have to be a lot more discerning with capital when they've committed to a dividend.

A leadership team with lots of spare cash burning a hole in their pocket can (and often do) make some pretty poor decisions!

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