logo-loader

XTEK better positioned for FY22 and beyond after strategic review, according to broker Taylor Collison

Last updated: 08:34 25 Oct 2021 AEDT, First published: 08:18 25 Oct 2021 AEDT

XTEK Ltd - XTEK better positioned for FY22 and beyond after strategic review, according to broker Taylor Collison

XTEK Ltd (ASX:XTE) is better positioned for FY22 and beyond following its strategic review and move to diversify its product and geographic exposures, according to broker Taylor Collison. 

After a strategic review, XTE is continuing as a re-seller of high-value military equipment in addition to its own proprietary products. 

By continuing to re-sell equipment, XTE’s profit margins will moderate and a lumpier revenue profile will result in comparison to selling proprietary products alone. 

Catalyst for re-rating

In a broker note, Taylor Collison said: “This is a prudent approach with the market still profitable for XTE.

“Longer term, one or two major contract wins in either the body armour or re-selling space could provide the catalyst for an XTE share re-rate.”

The broker noted that despite a challenging FY21, XTE now has access to large new markets due to its investment in body armour and the strategic purchase of HighCom in the US.

It said underlying demand for XTE’s products is expected to be solid, driven by defence spending, which has proven resilient to economic cycles and the current COVID-19 environment.

Strategic review

XTE’s FY21 annual report detailed the completion and implementation of its recent strategic review into the performance of the business.

Moving forward a slight strategy change would place the re-selling of military equipment and the sale of its own manufactured product on an equal level.

As a result, the broker has adjusted its revenue figures up and lowered its gross margin expectations as the resale equipment is lower margin.

Post capital raising

Post capital raising, XTE’s balance sheet is better funded with net cash of around $5.7 million, assuaging short-term liquidity concerns.

In October 2021, the company carried out a $2.7 million placement to existing and new shareholders and announced a $5 million pro-rata non-renounceable entitlement offer.

Longer-term, the key for XTE lies in its ability to sell more proprietary products, start generating positive operating cash flow, and win contracts for its unmanned aerial and unmanned ground vehicles, it noted.

XTE remains highly speculative as it establishes its defence sector credentials.

New markets

XTE now has access to large new markets due to its investment in body armour and the strategic purchase of HighCom in the US.

The underlying demand for XTE’s products is expected to be solid, driven by defence spending, which has proven resilient to economic cycles and the current COVID-19 environment.

XTE is currently bidding for two major contracts with the Australian Defence Force. These contracts are binary in nature and therefore difficult to predict but they could have a large effect on revenue figures.

To continue to grow the business, XTE is required to win future defence contracts.

The purchase of HighCom enables XTE to sell its products to the US military as an American supplier with production from its new US facility, the broker said.

Australian Strategic Materials signs US$600 million LoI

Rowena Smith, CEO and managing director of Australian Strategic Materials Ltd (ASX:ASM, OTC:ASMMF), joins Jonathan Jackson in the Proactive studio to discuss the company’ s Dubbo Project, in Central West New South Wales. This project aims to extract and process critical minerals and rare earth...

9 hours, 53 minutes ago