KEY POINTS

  • Operating revenue increased 12.3% to $21.3m (post AASB15), ahead of industry growth rates with sales and maintenance revenue both stronger. 
  • Operating profit before tax of $3.9m (excluding impairment of SAT and Votiro loss), slightly ahead of our expectations. 
  • Gross profit margin declined to 78.3% (81.2% FY2018) largely due to higher manufacturing costs for the 100Gbps encryptor.
  • Cash on hand remained strong at $17.8m (30 June 2019) with no debt. Flexibility for strategic investments and capital management.
  • Strong earnings growth expected over next few years driven by traditional and new hardware encryption products, virtualised encryption, SureDrop and cybersecurity awareness. 
  • In accordance with the new accounting standard AASB15, Senetas is required to estimate and recognise the revenue expected to be earned from customer contracts, rather than waiting for the actual end sale before recognising the revenue. The net accounting impact on FY2019 was to increase revenue and net profit before tax by $0.20m compared to what would have been recognised under the previous standard.
  • Given that Senetas recorded a statutory net loss of $463K, the company will pay a distribution to shareholders in the form of a capital return of $0.000462 per share.  The distribution is subject to shareholder approval at the AGM to be held on 22 November 2019 and if approved the distribution will be paid on 13 December 2019.

OUTLOOK

We remain positive on Senetas with the company now having laid the foundation for sustained growth over the next few years. The continuing evolution of Senetas’s product suite with transport layer independence and virtual technologies provides an expanded range of uses and revenue opportunities.  Importantly, distribution capability has been increased with Thales who has a significantly expanded sales and distribution platform for Senetas’s products.

In the short-term, revenue growth will continue to be driven by Senetas’s traditional hardware products until the new software products such as virtual encryption and SureDrop and also the transport layer independent hardware products start to build sales momentum during FY2020  and beyond. Senetas’s share of the Votiro loss will continue to impact on statutory net profit, however, we expect underlying profitability will improve particularly with the absence of any non-recurring expenses that impacted on the FY2019 result.  A larger portion of overall revenue in the future will be derived from software based solutions which are delivered as a service (SaaS). This will increase annuity style income which should be far more predictable.     

For FY2020, we are forecasting revenue growth of around 12% and net operating profit after tax of $3.7m (excluding the loss impact of Votiro).  For FY2021, we expect operating profit after tax to increase around 20% to $4.6m on revenue growth of 12.5% with slightly higher margins.  On average, we would expect Senetas to achieve revenue growth in the range of 10%-15% over the next few years. 

With the stock selling on an EBITDA multiples for FY2020 and FY2021 of 11.2x and 9.7x respectively based on our forecasts, we believe the current valuation does not fully reflect the potential of Senetas’ new products and the distribution capability of Thales which will open up significant new growth markets for Senetas.  

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DISCLOSURE: This publication has been prepared by Gordon Capital Pty Ltd, as Authorised Representative of InterPrac Financial Planning Pty Ltd, Australian Financial Services Licence No. 246638. The registered office of InterPrac Financial Planning Pty Ltd is Level 8, 525 Flinders Street Melbourne 3000.

Please note that Gordon Capital has been retained by SENETAS CORPORATION LIMITED to provide this report for a fixed fee. Gordon Capital does not provide specific investment recommendations and does not receive any additional benefit for the provision of this report. Gordon Capital aims to provide a balanced and objective analysis in this report.

 

 


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