Company Overview: Harvest Technology Group Ltd (ASX: HTG) is in the provisioning of offshore solutions and engineering services for subsea intervention projects and asset integrity risk mitigation. HTG is engaged in the development and delivery of proprietary software, products and services, which are enabling the secure encrypted transfer of data from anywhere via satellite or congested networks at ultra-low bandwidths.

HTG Details

Decent Platform and Industry Fundamentals to Underpin Future Business: The company operates a 100% proprietary technology that is industry and device agnostic. HTG’s business is being supported by the decent platform and industry fundamentals, evident by substantial market opportunity, sustainable competitive position, unique technology, strategic partnerships, and committed management. In the past few years, the company has witnessed consistent growth in depth and quality of its customer base with increasing sector specialisation and diversification. With respect to its Three-Phase Strategic Plan, the company was focused on a global launch of its leading-edge technology, wherein Phase 1 included the implementation of foundational systems and resources to improve speed to market.

Q1FY22 Financial and Operational Summary: During the quarter ended 30 September 2021, the company has appointed Mr. Stuart Carmichae as an independent Non-Executive Director of the company.

• HTG’s U.S. team initiated a rebranding process with an objective to launch Harvest Technology Group Inc. (wholly owned U.S. based subsidiary) as Opsivity Inc. along with the new SnapSupport SaaS product identity, Opsivity™.
• During the quarter, the company recorded a net operating cash outflow of ~$1.5 million, indicating continued investment in research and development, people and systems, customer development and global relationships.
• The company closed the quarter with a cash balance of ~$4 million as compared to ~$6.75 million as on 30 June 2021.

Source: Analysis by Kalkine Group

FY21 Financial Highlights:  

• During the year, the company acquired Silicon Valley-based Software as a Service (SaaS) company SnapSupport, Inc. for a total consideration of $2.59 million.
• For the year ended 30 June 2021, the company recorded revenue amounting to $8.51 million as compared to $11.76 million. The fall was due to impact on offshore operations, cancelled/delayed projects and travel restrictions led by the COVID-19 pandemic.
• As a result of falling revenue, the loss for FY21 rose to ~$10.23 million against ~$6.14 million in FY21.
• At the end of FY21, the company had a working capital surplus of ~$8.38 million as compared to ~$7.78 million as on 30 June 2021.

Capital Raising for Financing Business Growth

• In the month of December 2021, the company announced a 1 for 10 accelerated non-renounceable entitlement offer to raise up to ~$11.1 million in order to pursue strategic growth.
• As announced on 15 December 2021, HTG successfully wrapped up the institutional component of a non-renounceable entitlement offer and raised ~$3.0 million (before costs). In addition, the company has extended the closing date of its Retail Entitlement Offer to 28 January 2022.
• The company would use the proceeds to finance the achievement of Phase 2 in line with its Three-Phase Strategic Plan.

Inking of Licensing Agreement: The company has signed a sales and licensing agreement with TechnipFMC for twelve (12) Infinity Nodestream Quad (NSQ) systems for use in eight vessels in its fleet, which indicates an initial purchase order of ~$230K.

Top 10 Shareholders: The top 10 shareholders together form around 32.97% of the total shareholding, while the top 4 constitute the maximum holding. Kyriaco Barber Pty. Ltd., and Guilfoyle (Paul Joseph) are holding a maximum stake in the company at 6.02% and 5.72%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: HTG recorded a current ratio of 2.83x in FY21 as compared to the industry median of 1.91x. On the leverage side, the company recorded a debt-to-equity ratio of 0.26x during the year against 0.54x in FY20.

Liquidity and Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Forex Headwinds: The company’s business is exposed to a risk arising from adverse movement in foreign currency and could impact its topline and bottom line.
• Technology Risk: HTG’s performance could be impacted by the change in technology, which could affect its way of doing business.
• Stiff Competition: The company’s operational and financial performance could be hampered by the rising market share of peers in the industry in which it operates.

Outlook:  For FY22, the company would be focused on new applications, expansion of business in the U.S. and the execution of production and management systems to support global scalabilities of its leading-edge technology. The company would continue to seek business opportunities to enhance market penetration and will also be focused on intensifying innovation, research, and development. With respect to the Three-Phase Strategic Plan, the company has met all the conditions for the transition from Phase 1 to Phase 2 of the Strategic Plan. Phase 2 is focused on income diversity by transitioning the business model away from energy and resources sectors by expanding commercial opportunities, diversifying customer base, and developing elevated sustained levels of Annual Recurring Revenue (ARR). Phase 3 would witness the business model transition and focus on income-producing operations in the US and establishing a presence in Europe and Asia.

Technical Commentary: After witnessing sharp downside correction, HTG prices are now taking support of the two downward sloping trend lines that indicates possibility of upside price reversal. Volumes are declining with decrease in prices on a monthly chart that further suggest that bears are losing grip in the stock. RSI (14-period) is hovering at ~44 level that indicates the stock comes down to moderate region. Immediate support levels are AUD 0.17 and AUD 0.147 while immediate resistance levels are AUD 0.225 and AUD 0.25.

Stock Recommendation: The stock of HTG is currently trading near to its 52-week low level of 0.180, offering a decent opportunity for accumulation. The stock has been corrected by ~7.14% in the past one month. In addition, the stock has an EV/Sales multiple of 15.3x as compared to the industry average (Electronic Equipment & Parts) of 32.7x on a TTM basis. Thus, it can be said that the stock is undervalued at the current trading levels. Considering the valuation on a TTM basis, decent liquidity position, improving debt to equity, focus on presence in Europe and Asia, optimistic long-term outlook, technical factors mentioned above, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.190, down by ~2.565% as on 21 January 2022.

Investors with a high-risk appetite should evaluate this stock in view of the technical support and resistance levels, as well as taking into consideration risks associated with a change in technology and COVID-19 Led Uncertainties.

HTG Daily Technical Chart, Data Source: REFINITIV

Note: The purple line reflects the RSI (14-day period)

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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