Highcom could benefit from geopolitical tailwinds. Picture Getty
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Sequoia has initiated coverage on Highcom (ASX:HCL), with a 12-month price target of 25c (versus current price of 15c).
Formerly called XTEK, Highcom is a $15m market-capped company providing world-leading lightweight body armour protection products for high risk, mission critical operations.
The company designs, manufactures, and supplies global military, law enforcement, and first responder customers with advanced personal protection ballistic products and solutions like body armour and ballistic helmets.
Sequoia believes Highcom has strong macro tailwinds from global conflicts and rising geopolitical tensions, events that will continue to drive increased military spending at least into the medium term.
Another tailwind is the fragmented law enforcement industry in the US – which underpins a very large, addressable market for protective hardware.
At the time of its listing in 2005, Highcom (then called XTEK) was a reseller of agency products, focussed on the Australian homeland security market with revenue largely sourced from explosives and small contributions from forensics, weapons and ammunition.
It was essentially a defence items procurement business with a single customer, the Australian Department of Defence.
Through to around 2009 and 2010, revenue was volatile and subject to unsustainable “sugar hits” with profitability hard to achieve. Through the teens (2010-2019), the company gradually restructured its revenue base by exiting agency lines and re-shaping its product profile.
“Notably in 2010, it established a relationship with AeroVironment, a US manufacturer of Unmanned Aerial Systems (UAS) which was formalised in an agreement in 2016. This relationship now underpins the Highcom Technology division,” explained Sequoia.
“During this period, the company also invested heavily in R&D, developing and optimising its XTclave and XTatlas technologies”
Since then, Highcom has undergone significant changes, positioning itself in the US law enforcement and military markets, particularly with its body armour products.
The company’s lightweight body armour is considered top-notch, thanks to its XTclave technology. By acquiring US-based Highcom Armor and relocating its operations to the US, Highcom has now established a strong foothold in the American market.
“Its body armour protection products have emerged as the company’s largest business unit and the strategic priority as a growth driver,” said Sequoia.
Despite record EBITDA in FY22 and FY23, Highcom faced a setback in H1 2024 due to various factors such as failed contracts, relocation costs, and management errors. The CEO was replaced in the interim by the chairman whilst a search for a replacement is conducted.
“The obvious questions are whether this is merely a temporary setback and how quickly can profitability be restored,” Sequoia noted.
The company has said that it expects to recover soon, especially with the XTclave technology coming online and favourable market conditions, including increased military spending globally.
“We believe that Highcom could return to previous levels of revenue and EBITDA in FY26, and from there, launch a sustained period of growth,” said Sequoia.
“This will, however, be subject to the availability of resources, particularly financial to enable it to effectively pursue its strategies.
“Based on the favourable market conditions for the company, especially in the US and our expectations of a return to profitability and growth in FY25 and FY26, we have a 12-month price target of 25 cents per share,” said Sequoia.
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