Positives

• Significant director ownership, with Directors and executives owning ~46 million shares (note this is mainly the chairman). Two Directors purchased significant volumes of shares on market during past 12 months. There are 235 million shares on issue so directors and executives own ~20% of company.
• Gross margins are growing with more sales in higher margin areas
• Low margin services are seeing economies of scale and growing to profitability
• Cashflow growth aligns with profits growth - this is great, it means it is not all accounting bullshit
• Current assets are >250% of current liabilities AND cash balance alone is greater than current liabilities

Negatives

• Services business is historically (and still is) low margin. Revenue grew by ~75% to over $25 million but EBITDA is still <10%
• Significant portion of revenue is non-recurring (sales of fibre technologies, lock and access technology), which means they need new customers just to stand still let alone grow revenue

Risks

• FFT only accounts for 36% of revenue but makes up 57% of EBITDA. This is non-recurring revenue so needs continual new sales to keep revenue going.
• In the services division one customer accounted for $9.8 million revenue in FY20 (39% of this division’s revenue). 

Opportunities

• FFT: The Indian Military Project accounted for ~$4.5 million of FFT revenue in FY20, or about 29% of total revenue for FFT for FY20…
  • this leaves ~$11.7 million revenue from this project to be delivered in FY21
  • Assuming the business maintains the same level of “non-Indian military revenue” in FY21 (~$12 million) then revenue in the FFT segment will double in FY21.
  • Assuming margins remain constant under the above assumptions then the FFT EBITDA could (conservatively) grow to ~$8.5 million….this means EBITDA from this segment alone could be 15% higher than total group earnings in FY20
• Services: services revenue grew by 58% in FY20. Assuming growth halves to 30% in FY21 and that increasing scale means they are able to continue to increase EBIT margin to 15% (FY20 was 9.5%) then EBITDA could double to $4.9 million 
• BQT: they are talking up big deals (deal done in May for ~$3 million with aus Government) and recent agreements for distribution in North America and Europe. Most of Aug Gov deal is to be delivered in first half of FY21…so potentially not unreasonable to expect an uplift in Revenue from this segment in FY21 of ~50% (FY20 revenue was $4.3 million)

Valuation

• At closing price of $0.275 and with 235 million shares on issue the market capitalisation is $64.7 million
  • The earnings multiple based on FY20 EBITDA is 8.7
  • The earnings multiple based on assumed FY21 EBITDA is 5.35
  • Assuming continued revenue growth and the cyber thematic as a tailwind an earnings multiple of 20x would not be crazy - this would create a valuation of $1.03 per share

How will I know if I got the thesis wrong?

• Need more large FFT sales on the back of the Indian Military win - if no more of these then this is not a long-term opportunity
• The mining tech needs to convert from pilots to recurring sales - there are multiple of these on the go
• Need to see continued strong growth in services division and BQT as these need scale to be profitable
• 1st half of FY21 should show all of the above to be true - if not consider selling