• Defence Strategic Review could be positive for XTEK but company also looking at exports for growth
  • CEO Scott Basham said Aussie military small compared to global market so overseas markets crucial
  • XTEK achieves record half-year revenue of $48.5 million with record FY23 forecast of more than $82m

XTEK (ASX:XTE) said release of the Defence Strategic Review (DSR) could have positive flow-on effects for the company.

However, CEO Scott Basham told Stockhead it is not relying completely on the most significant defence report since WWII for future growth.

With six priority areas the review is expected to shape Australia’s defence policy and national security posture for decades to come.

The Federal Government has made a commitment to work with Aussie industry as it works to improve the country’s defence capabilities.

“For XTEK there is no negative outcome for us as we see the changes to the focus for defence, and in particular army,” Basham said.

He said there is also a focus on Australian made products to supply the Australian Defence Force (ADF).

“There is a redefining of the importance of what is called Australian Industry Content (AIC) in the procurement of new products by the Australian Defence Force,” Basham said.

XTEK operates as two distinct divisions – ballistics and technology.

The ballistics division is based on its HighCom Armor brand and is focused on designing, manufacturing, and supplying global military, law enforcement and first responder customers with personal protection ballistic products.

XTEK’s military tech division supplies UAV and UGV solutions, detection and optical payloads, 3D mapping and modelling software along with tactical situation awareness software.

“Our technology division is primarily focused on small unmanned aerial systems (SUAS), another term for UAVs, the payloads that go on those and software that provides information to people who need to make decisions,” Basham said.

“Importantly we provide the maintenance, support, integration, and training of those systems.“

Already supplier to the ADF

In December 2022, XTE received a purchase order from ADF, totalling $26.9 million for new SUAS.

XTE has announced delivery is on track to be completed in late H2 FY23 with corresponding revenues recognised in the same period.

“Our Technology Division is an exclusive distributor of some overseas product in that SUAS space, and we’ve been a long time provider to the Australian Army,” Basham said.

He said the DSR is positive for our technology business because it talks about remote and autonomous systems.

“There will be potentially more numbers of these specialist high end units over the coming years as the army’s focus is on protection, surveillance, identification, reconnaissance at greater distance and greater range,” he said.


Grants to advance manufacturing capabilities

XTE has received Department of Defence grants totalling ~$800k to purchase new advanced manufacturing equipment to double production of its Rifle Combat Helmet (RCH) and accelerate development and prototyping of its ultra-lightweight, high-performance body armour.

“We have a start-of the art factory in Adelaide opposite the old Holden facility in Elizabeth, that makes world-leading next generation helmets,” Basham said.

“The helmets that are sold elsewhere right now only stop pistol bullets.

“Using our globally patented XTclave technology, we’re developing helmets that stop AK-47 and machine gun M16 bullets.”

Basham said he sees the products XTE make may be potentially more attractive to the ADF.

“It’s not that we can just make helmets superior in protection to what the Army uses right now, but we also make helmets that are half the weight of those products as well,” he said.

“For operations in arduous environments, where it may be hot and wet, being lightweight is more important.”

Basham said while a helmet provides protection in modern-day warfare, they are also a platform for other equipment such as sensors, cameras, night vision goggles, microphones, or strobe lights.

He said this means with the added weight of extra equipment, a lightweight helmet is optimal.

“We have two helmets. Our Rifle Combat Helmet or RCH is the one that stops AK-47 and machine gun bullets, while our Featherweight Level 3A is half the weight of current combat helmets which only stop pistol bullets,” he said.

“So we offer either the same level of protection but half the weight, or double the level of protection at effectively the same weight.”


Push to military off-the-shelf products

Basham said a need for speed in getting military equipment into the hands of soldiers has also put more pressure on the ADF to buy more military off-the-shelf (MOTS) products.

He said there was criticism in the DSR of the ADF’s procurement group, known as the Capability Acquisition & Sustainment Group (CASG), typically wanting to modify off-the-shelf equipment, which inevitably added risk, time, and cost.

“The products we supply in our Technology Division are all MOTS,” Basham said.

“So, we see continued opportunity to supply these high-end drones to Army over the coming years.

“On the Ballistics side, we see opportunity to provide our high-end, high-performance, ultra-light body armour and ballistics helmets.”

He said in the DSR there was also commentary about allowing sole-sourcing to reduce time previously spent going to tender, particularly if the Army can justify buying product X because it is best on the market or meets their needs.

“They can do this already with particular equipment in what is known as a limited tender, where it’s limited to one entity,” he said.

“It just probably means the parameters to allow them to do it will be increased.

“For us, that might be beneficial, because they’ve already bought products from us.”

Basham said there was commentary in the DSR about growing the size of the military into the future, and that adding many thousands of new soldiers, sailors, and airmen in due course could boost XTE’s potential future supply opportunities.

“Every soldier will potentially need a helmet and set of body armour, so that’s potentially good for our supply opportunities in the future,” he said.


Not putting eggs all in one basket

While the DSR may provide opportunities for XTE, its export market is also a significant focus.

“We also have manufacturing in Ohio and supply our ballistic products all around the world to law enforcement, military, and security agencies,” Basham said.

In April, the company announced it had inked a deal with Tata Advanced Systems Ltd (TASL), a division of the world leading Tata Group, to collaborate on the supply of its advanced RCH for the Indian Defence market.

“Defence is not going to necessarily fund an Australian entity to develop something that might take years to bring to market if it can be purchased off the shelf already overseas,” Basham said.

“Acquiring the capability rapidly now is the driving factor for Defence in the DSR, and not creating an Australian version of that capability, which may take years.”

Basham said what that means is that Australian companies should not rely on R&D funding.

“For Australian industry it’s about backing yourself and funding your own product development if you think you’ve got a great idea, and not necessarily waiting for some R&D funding from defence to create a capability,” he said.

“Companies also need to look at export markets to grow their business, because the size of the Australian military is small in the grand scheme of things.

“The Australian military is small, and in the past they’ve been very slow to complete acquisitions – like the Land 400 Phase 3 Project for example.”

This project involves the purchase of new infantry fighting vehicles to replace the current M113 armoured personnel carriers that have been in service since the mid 1960s.

“That was going to be the biggest spend the Army had every made, and now after the DSR has happened it’s only 30% of what it was originally tendered to be five years ago,” Basham said.


Record half year revenue

XTE recently released its H1 FY23 results including record half-year revenue of $48.5 million. Other highlights include:

• Strong gross margins holding over 50%
• Near record order backlog of $35.1 million
• Inventory of $25.4m mitigating supply chain risks and allowing for rapid order delivery
• No debt with $4.8m of undrawn WC facilities

XTE is currently calling out a record FY23 revenue result of more than $82m.


The XTE share price today:


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The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.”