In a Livewire post this morning Claire Aitchison, Head of Equities & Funds ResearchIndependent Investment Research, highlighted a few small and microcap industrials that were on the move in October. Here is her summary for XTEK.

“Xtek Group operates two divisions: (1) Ballistics Division; and (2) Technology Division. The Ballistics Division designs, manufactures and supplies global military, law enforcement and first responders with advanced personal protection ballistic products and solutions for body armour, ballistic helmets and composite armour structures. The Technology Division manufactures and supplies global defence and security agencies with uncrewed systems and sensor payloads, and Australia-made software and local support. 

During the month, Xtek announced they had secured a support contract from the Commonwealth of Australia’s Department of Defence to maintain and sustain the $26.9 million newly acquired fleet of small unmanned aerial systems (SUAS) from Xtek. The initial 4 year term is valued at $15.9 million with a further $29 million anticipated to be realised during the contract period. If all extensions are awarded (up to six years), and potential spares are used, the total contract value over the 10 year life of the contract is anticipated to be more than $110 million.

The Company delivered record revenues in FY23. In an investor update in October, the Company highlighted that the Group had a pipeline of leads at various stages worth more than $375 million, primarily driven by the Ballistics Division with the Company forecasting continued revenue growth in FY24. Ongoing uncertainty in Europe and continuing tensions in the South China Sea and those developing in the Middle East is expected to drive short-and-long term supply demand and strategic investment to upgrade with next generation products and solutions. 

At the date of this report, consensus estimates are forecasting a 5% increase in revenue in FY24 with a 43.3% increase in normalised EPS. “

-Ends-

Claire’s data for analyst consensus forecasts are for FY24 normalised EPS to increase by 43.3%. This would put FY24 EPS at approx 8.5cps which match’s the data on Simply Wall Street provided by Bell Potter. This would put XTEK on a forward PE of 5.4X based on the current share price of 46cps. The multiple sounds low if sales continue to grow.

Disc: Held IRL and SM

Today XTEK announced a new $4.1m SUAS Spare Parts Order Received From the Department of Defence. While it’s exciting to see yet another order for XTEK which will likely keep the share price momentum going, put in perspective this new order represents only 0.84% of the FY23 revenue.

I am excited for the future of XTEK though, after finally getting around to listening to Andrew’s interview with CEO Scott Basham over the weekend (great interview @Strawman). It was great to hear more detail about the relocation of the Adelaide HighCom Ballistic Armour plant to the US. I hope this all goes well and is back up and running in the US by March next year as anticipated. Until then XTEK will be relying on inventory to cover sales, which Scott believes is well covered.

The potential for the HighCom business is the US sounds massive and moving the plant to open up opportunities in the US market makes perfect sense strategically.

ASX Announcement:

Key highlights:

• New $4.1m SUAS Spare Parts order received from Defence

• Order is part of the new multi-year Support Contract announced on 3 October 2023

• Support Contract directly linked to $26.9m new drone fleet order announced on 1 December 2022

Monday, 13 November 2023. XTEK Limited (ASX: XTE, ‘XTEK’, ‘Group’) is pleased to announce that it has received an order for $4.1m of spare parts from the Commonwealth of Australia’s Department of Defence in support of its newly acquired Small Uncrewed Aerial Systems (SUAS) capability, previously announced on 1 December 2022. This new spare parts order is the first received for the new multi-year SUAS Support Contract announced on 3 October 2023.

Scott Basham, XTEK’s Group CEO, said:

“XTEK is very pleased to be able to continue to provide the Department of Defence with our high-end sustainment support services. This latest spare parts order, which is the first received that is related to the new multi-year Support Contract we announced on 3 October 2023, for Defence’s new mixed fleet of AeroVironment SUAS we announced on 1 December 2022, ensures that our team of engineers, technicians, and logistics support specialists, can provide all of the necessary support required for this new capability going forward.”

Disc: Held IRL and SM

Over the past week XTEK has announced two new orders totalling $6 million:

1. Supply spare parts in support of its existing Small Unmanned Aerial Systems (SUAS) fleet with Australia’s Department of Defence for $3.4m
2. Order to supply its high-end ballistic body armour from an undisclosed European customer to the value of A$2.6 million.

To put it in perspective, these orders represent approx 7% of FY23 revenue guidance ($87 million) and approx 3% of the “FY24 Opportunity Pipeline exceeding $200m” management referred to in the upgraded guidance announcement on the 29th June.

Bell Potter, the only analyst covering XTEK on Simply Wall Street, is forecasting FY24 revenue of $89.6 million, FY24 NPAT of $9 million, or 9.7 cps. If Bell Potter is in the ball park that puts XTEK on a FY24 PE of 4.2. That’s not too demanding, providing sales go ‘ballistic’ from here! On Bell Potters forecast earnings my valuation with a 15% required annual return is 46 cps. It’s a hold for me at the current price of 41cps until more new deals materialise.

Disc: Held IRL 0.5%, SM 2.3%

17/07/23

XTEK’s HighCom Receives New A$2.6m Ballistic Armour Order

• Purchase Order for international supply of specialist ballistic armour products worth A$2.6m

• Many thousands of individual high-performance items to be provided

• Shipment to be delivered to new undisclosed European customer over coming weeks

Monday 17 July 2023. XTEK Limited (ASX: XTE, ‘XTEK’, ‘Group’) is pleased to announce that the Group’s HighCom Armor Solutions Inc. (HighCom) business has received an international purchase order to supply its high-end ballistic body armour from an undisclosed European customer to the value of A$2.6m.

Scott Basham, XTEK Group CEO said:

“HighCom is XTEK’s Group global armour business, and from our advanced manufacturing capabilities in Columbus, Ohio, our patented XTclave production capability located in Adelaide, South Australia, and our new European Sales & Distribution office in Poland, we design, manufacture, and supply world-leading, ultra- lightweight and high-performance specialist ballistic armour solutions to militaries, law enforcement, and first responder customers all around the world.

This new international order, valued at A$2.6m received from a new undisclosed European customer, will see many thousands of individual advanced high-performance body armour products dispatched over the coming weeks to meet this customer’s delivery priorities”.

12/07/23

XTEK Receives New $3.4m SUAS Spare Parts Order from Defence

Key highlights:

• New Defence SUAS spare parts order valued at $3.4m

• SUAS fleet supported under existing multi-year support contract

Wednesday 12 July 2023. XTEK Limited (ASX: XTE, ‘XTEK’, ‘Group’) is pleased to announce that it has received an order from the Commonwealth of Australia’s Department of Defence for $3.4m for spare parts in support of its existing Small Unmanned Aerial Systems (SUAS) fleet.

Scott Basham, XTEK’s Group CEO, said:

“XTEK is very pleased to provide high-end sustainment support services under the existing multi-year support

contract we have with the Department of Defence for their in-service fleet of AeroVironment SUAS.

This latest spare parts order ensures that our team of engineers, technicians, and logistics support specialists, will have all of the specialist components at hand to be able to continue to support this important SUAS capability.”

XTEK Achieves Major Delivery Milestone for Defence SUAS Order

Key highlights:

• Major delivery milestone achieved against A$26.9m Defence SUAS order announced on 1 Dec 22

• Mix of AeroVironment SUAS used by Army for tactical reconnaissance and surveillance tasks

• Equipment valued at circa $14m as part of this milestone

• Total contract revenue recognised to date of more than $21m

15 June 2023. XTEK Limited (ASX: XTE, ‘XTEK’, ‘Group’) is pleased to update the ASX, that it’s Technology Division has achieved a major project milestone in performance of the $26.9m Defence SUAS order announced to the ASX on 1 December 2022, with the shipment and revenue recognition of approximately $14m of contract deliverables.

Scott Basham, XTEK’s Group CEO, said:

“XTEK is very pleased to be able to continue to support Defence with the provision of world-leading SUAS technology.

With other key project milestones still due to be achieved before the end of FY23, this is an exciting time for XTEK’s Technology Division, as it continues to further develop it’s SUAS supply and sustainment capabilities”.

Held: IRL and SM

@Noddy74 thanks for bringing XTEK to my attention with your excellent straws. I wish I had done more research when you first called it out. I thought I’d missed out on its bull run, but the result was fantastic, seemed to be in line with analyst expectations (one only) and the share price dropped 15% this morning. I was prepared with my valuation and bought some. Although, I feel like I must be missing something with the market running in the other direction? Some profit taking perhaps? Can you please help me out here Noddy?

This morning XTEK released its 1H23 results. NPAT up 188% which seemed in line with expectations. Management said they expect FY23 revenue to be over $83 million (funny thing, this statement wasn’t included in the outlook).

Financial Overview

The strong financial performance was achieved by delivering multiple large orders to key defence and law enforcement agency customers in Europe, Australasia, and the United Sates.

The XTEK Group’s revenue from continuing operations increased by 321% from $11.5m (H1 FY22) to a record $48.5m.

Gross Profit margins have increased to 50.6% at H1 FY23 (up from 27.1% at H1 FY22). Net Profit after income tax for the consolidated Group was $6.0m (HY1 FY22 loss $6.8m).

As of 31 December 2022, the Group held cash of $6.9m. The cash balance at the beginning of the reporting period was $36.2m after receiving an advance receipt for an international order delivered during H1 FY23. Cash payments during the reporting period were primarily used to deliver on the major orders on hand and to increase inventory stock. Inventory stock was replenished during the reporting period, with an increase from $16.4m (FY22) to $25.4m, in readiness for the large orders currently under customer evaluation.

“The Group currently expects revenue to exceed $82m for FY23”

There is only 1 analyst covering XTEK in S&P Global data on Simply Wall Street (chart below), however this seems in line with their full year expectations.

XTEK have achieved NPAT of $6 million for 1H23 and it looks like NPAT of $10.5 million for the full year is achievable.

Valuation

A full year NPAT of $10.5 million, 101 million shares outstanding (Commsec), that is 10.4 cps NPAT.

Shareholder equity is c. 35 cps (Commsec data) therefore full year ROE should be c. 30%, up from 16.5% last year and a loss in 2021. XTEK is growing rapidly.

Source: Adapted from Commsec chart

Using McNiven’s StockVal formula and assuming normalised ROE if 24% (allowing for a bit of slowing) equity of 35 cps, no dividends (all earnings reinvested at 24% ROE) and a required rate of return of 15% per year, I get a valuation of 91cps. At a required rate of return of 12% I get a valuation of $1.40.

As Noddy points out, XTEK benefits from conflict, and none of wants global conflict. Unfortunately though this seems to be a tailwind for XTEK at the moment.

Given the business is cyclical, and it’s future is unknown I’m going for a valuation of 91 cps.

Disc: Added IRL this morning.