Company Overview: Tesserent Limited (ASX: TNT) is engaged in providing full service, enterprise-grade cybersecurity and networking solutions for enterprise and government customers across Australia and New Zealand. 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 Acquisition Synergies and Capital Raising Program: The company started FY22 on a strong note, with the completion of a capital raise, bolstering the balance sheet, and operating performance. Ongoing investment in product innovation to capitalise on new market opportunities, successful integration of its strategic business acquisitions are key growth drivers.

Digging Into 1QFY22 Details: 

• Increase in Total Turnover: In 1QFY22, the company’s total turnover in the underlying business soared a whopping 78% on pcp and came in at $9 million, owing to organic growth, go-to-market strategy, and acquisition synergies. Turnover for the first quarter is running ahead of the budget, which signifies customer engagement and robust sales performance.
• Improvement in Operating EBITDA: Operating EBITDA came in at $2 million for the quarter, depicting a rise of ~351% from the prior year’s corresponding quarter. The increase in EBITDA indicates enhanced operating leverage through the business, reorganisation strategies, pricing, and margin recovery on certain contracts.
• Liquidity Details: In Q1FY22, the company reported positive cash flow from operations of $0.6 million. TNT has funded deferred consideration payments and strategic investments in AttackBound, TrustGrid and Daltrey from operating cash. As at 22 October 2021, the company’s cash balance stood at $16.3 million, compared to $14.86 million reported at the end of FY21.
• Organic & Non-Organic EBITDA Growth: During the quarter, the aggregate operating EBITDA increased by 130% year over year. Non-organic EBITDA witnessed a rise of 85%, owing to synergies from the acquired business since Q1 FY20. On the other hand, organic EBITDA saw an increase of 45% in the core business units.
• Higher Recurring Revenues: In 1QFY21, the company recorded an increase in the proportion of recurring revenue, which depicts the company’s overall turnover to 42%, compared to 30% at the end of FY20. The company remains well focused with growing cross-selling activity and a recent Brand and Business Unit integration project.
• Capital Raising Program: The company has a robust as well as flexible financial position with a healthy balance sheet following the capital raising program in September 2021. The company completed a capital raise of $25 million to finance future potential acquisitions, particularly in upfront cash payment for the purchase of Loop Secure.
• Completion of Loop Secure Buyout: On October 7, 2021, TNT 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 and contribute to its annual turnover. 

The below picture depicts a decent momentum in TNT’s Turnover since 1QFY21.

Turnover Trend; Analysis by Kalkine Group

Key Metrics: For FY21, the company reported an EBITDA margin of 6.3%, against a negative 19.2% reported in FY20. In FY21, the company recorded a current ratio of 0.96x, compared to the FY20 figure of 0.85x.

Profitability & Liquidity Profile; Analysis by Kalkine Group   

Top 10 Shareholders: The top 10 shareholders together form around 22.6% 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 8.23%, followed by Ceely (Scott) holding 3.83%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: Prevailing global uncertainties related to COVID-19 and other geopolitical tensions and stiff rivalry from competitors add to the woes. Failure to achieve synergies from acquisitions may affect profitability and drain financial resources. Also, adverse movements in interest rates and foreign currency exchange rates are other potential risks.

Outlook: The company remains on track to enhance shareholders’ value through capital raising programs and build on its position as Australia’s number one ASX-listed cybersecurity provider. Further, its key strategies of strengthening its core Cyber 360 capabilities, expanding the product and service offering to its key clients, and acquiring complementary businesses are expected to drive the company’s market share through incremental EPS growth. Tesserent Academy also aims to uplift the industry-wide capability and curb the skill shortage gap. Also, the company expects to drive growth via strengthening its customer engagements and boosting its average number of services per customer. Further, cross-selling activities and leveraging international expansion opportunities (which consists of the USA, UK, NZ, and Canada) will aid the company to build a leadership position in the Converged Security and Cyber Education markets. The company will hold an AGM (annual general meeting) of 19 November 2021.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~25.83% in the past three months. Currently, the stock is trading below the average of its 52-week high and low levels of $0.44 and $0.185, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount as compared to its peers’ average EV/Sales multiple, considering the cybersecurity risks, foreign currency fluctuations risks, the risk of technology advancement, COVID-19 and other geopolitical tensions, integration risks, etc. For the purpose of valuation, peers such as Bravura Solutions Ltd (ASX: BVS), Codan Ltd (ASX: CDA), Integrated Research Ltd (ASX: IRI) have been considered. Considering decent turnover numbers, robust product pipeline, acquisition synergy, launching of new product and services, positive outlook, capital raising initiatives, current trading levels, indicative upside in valuation, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.215, down by ~2.273% as on 29 October 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.

TNT Daily Technical Chart, Data Source: REFINITIV

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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