Company Overview: Tesserent Limited (ASX: TNT) is one of Australia’s leading players in offering end-to-end cybersecurity services. The company provides products, services, and strategic advice to enterprise, government, and critical infrastructure clients. TNT has been incorporated by acquiring several high-quality Cyber Security businesses, including Pure Security, Airloom, iQ3, North Security, Seer Security, Lateral Security and Secure Logic.

TNT Details

TNT Rides on Decent Operational & Financial Fundamentals: FY21 represented a year of noteworthy growth for TNT, thanks to its key strategies of strengthening its core Cyber 360 capabilities, expanding the product and service offering to its key clients, and acquiring complementary businesses.

Key Findings from FY21 Results:

• Rise in Total Sales Turnover: In FY21, the company’s total sales turnover soared a whopping 372% on pcp and came in at $7 million. The year over year increase was backed by organic growth through its execution of the Cyber 360 go-to-market strategy and completion of six buyouts.
• Increase in Statutory Revenues: During the period, statutory revenues went up from $20.2 million in FY20 to $67.4 million in FY21.
• Improvement in EBITDA: Normalised EBITDA for the period came in at $9.6 million (excluding acquisition related costs and non-operating share-based costs), compared to a loss of $2.8 million reported in the year-ago period.
• Turnaround in Profits The normalised net profit for FY21 represent a significant turnaround from last year. Notably, FY21 normalised NPAT stood at $4.9 million against a loss of $5.1 million in FY20.
• Acquisition Synergies: On August 19, 2021, the company completed the buyout of Loop Secure Pty Ltd to enhance TNT’s Managed Security Services, GRC and Offensive Security. The addition of Loop Secure is expected to bolster TNT’s Cyber 360 capabilities, as well as contribute to its annual turnover, thus adding substantial recurring revenue to the company.
• Tesserent Innovation: In FY21, the company unveiled Tesserent Innovation to determine strategic partnerships with various technology businesses. Notably, under this innovation, TNT acquired a 25% interest in each of TrustGrid and AttackBound and inked an investment deal for a 7% stake in Daltrey Pty Ltd (completed in early July 2021).
• Cash & Debt Position: The company exited FY21 with a cash balance of $14.86 million, up from $4.35 million reported at the end of FY20. Total debt amounted to ~ $33.1 million at the end of the period.

Ongoing investment in product innovation to capitalise on new market opportunities are key growth drivers. In addition, the successful integration of its strategic business acquisitions, aided the company to strengthen its financial performance and enhance its commercial position in the market. The below picture depicts a decent momentum in TNT’s top-line since FY17.

Revenues Highlight; Analysis by Kalkine Group

Key Metrics: For FY21, the company reported a gross margin of 85.7%, higher than the 73% reported in FY20. In FY21, the company recorded a current ratio of 0.94x, compared to the FY20 figure of 0.85x. Debt-to-equity ratio declined from 0.50x in PcP to 0.38x as of June 30, 2021.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 25.45% of the total shareholdings, while the top 4 constitutes the maximum holding. Lord (Geoffrey Frederick) held the maximum number of shares with a percentage holding of 9.26%, followed by Ceely (Scott) holding 4.31%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• The company is exposed to the risk of technology advancement.
• Prevailing global uncertainties related to COVID-19 and other geopolitical tensions along with stiff rivalry from competitors developing similar product lines and services, adds to the woes.
• Failure to achieve synergies from acquisitions may affect profitability and drain financial resources.
• Also, foreign currency fluctuations risks, and a leveraged balance sheet remains potential headwinds.

Outlook: For FY22, the company remains positive with the business delivering above budget performance, a strong pipeline of renewals and new sales performance. Further, several deal wins are expected to offer decent organic growth in the days ahead. The company had surpassed its earlier guidance of achieving an annualised turnover run rate of $150 million and is hoping to achieve sustainable quarter on quarter growth. Also, the company remains on track to complete several potential acquisitions currently in review, which will further add to the inorganic earnings growth and strengthen the Cyber 360 model.

Stock Recommendation: The stock of the company has been corrected by ~10.18% in the past one month. Currently, the stock is trading below the average of its 52-week high and low levels of $0.44 and $0.185, respectively. On a TTM basis, the stock of TNT is trading at a P/B multiple of 4x, lower than the industry average (Technology) of 11.1x, thus seems undervalued. Considering the higher revenue base, robust product pipeline, turnaround in profits, acquisition synergy, launching of new product and services, strategic deal wins, positive outlook, technical levels as mentioned below, current trading levels, valuation on TTM basis, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.24, down by ~2.041% as on 17 September 2021. Investors with high-risk appetite should evaluate this stock in view of the technical support and resistance levels as well as taking into consideration associated risks in cyber security, technological changes, and foreign currency risks.

Technical Commentary:

On the daily chart, TNT stock price has been moving up gradually in the last few days. The prices are sustaining above the upward sloping trendline and continuously taking support of the same. The leading indicator RSI (14-Period) is trading at ~46.20 levels and showing the positive sign which might indicate the possibility of a upside recovery from the current levels. An important support level for the stock, is placed at AUD 0.198 while the key resistance level is placed at AUD 0.31.

TNT Daily Technical Chart, Data Source: REFINITIV 

Note: The purple color line in the chart depicts RSI (14-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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