BuffettStyle96' Valuation & Breakout Thesis for ASX:XRG – Why I’m Holding + My Game Plan

My first proper post on HC - hope you enjoy the read!

Disclaimer: I'm a retail investor and current holder of XRG. I have a background in engineering - in particular, electronics product development. I started holding XRG in from last year and have been accumulating steadily since. What follows is just my personal research and thoughts based on public info (ASX releases, financials, and a 2023 Veritas report). This is not financial advice — do your own research and consult a licensed adviser. I'm sharing this to hopefully add value to the discussion here.

(Full disclosure: I used ChatGPT to help me format this nicely and fix my typos).

Performance vs. Original Projections

See report for reference: Veritas-Initiation_XRG-July-23-1 (1).pdf (I've attached the PDF at this link if you have trouble accessing it)

In 2023, Veritas released a forecast that valued XRG at 9.5c (there were ~446m share on issue at the time), based on DCF. I think I can confidently say that XRG has well and truly outpaced what was expected in the 2023 Veritas forecast. The Veritas model had them pegged at $14.9M revenue and $2.8M ARR for FY25 — but XRG actually pulled in $17.7M in cash receipts, split pretty evenly between Operator XR ($8.8M) and their entertainment arm ($8.9M). ARR came in at $4.7M, about 69% above the original estimate.

They’re basically hitting levels at least a year ahead of schedule. For context, FY2025 revenue was nearly 3× FY2022’s $6.6M. Strong operating cash flow too — $3.1M for FY25 — and margins expanding towards the high 20s%. Management reckons they’ll clear 30% EBITDA margins in FY26. All this points to an earlier profitability inflection than expected.

Contracts & Strategic Wins

Some major recent wins that stand out and should be considered in valuation as these have a significant impact on the FY26 financial outlook.

• $5.6M US DoD Project (via Endurance Group): About 50% delivered already. The rest ($3.9M) is due in FY26. More importantly, it opens the door to follow-on work with other US agencies.

• $5.7M Texas DPS Deal: Largest Operator XR contract to date. Could lead to similar deals across the other 30+ state DPS agencies in the US.

• $2.1M Govt Grant: Non-dilutive capital to fund R&D (esp. AI features in Operator XR) and expand their training weapon manufacturing capabilities.

Pipeline & Recurring Revenue

The sales pipeline looks solid, but I expect it's rather conservative considered the addressable market size— 316 qualified leads worth ~$30.4M. They’ve now got 67 enterprise clients globally (up from 29 just a year ago). ARR at $4.7M gives a solid recurring base going into FY26.

Entertainment is rapidly losing relevance, but at does still contribute some steady cash too (~$8.9M in FY25) with low capex needs. FREAK is closing soon (by the end of this year - which I think is a good thing) and there's some uncertainty regarding the future of iFLY. On a side note, I think that one of the side-effects of starting from iFLY is that this stock has been categorised under "entertainment" rather than "defence", so it's probably getting less attention simply due to being in the wrong categories which may have contributed to it flying under the radar for so long. (I'm sure that will change once it gets the right sort of attention).

Revised Financial Outlook (FY26)

The 2023 Veritas model had FY26 revenue at $18.5M and EBITDA at $6.0M. Based on everything in hand now, it appears those numbers are outdated and will be significantly surpassed.

Here's what seems more likely:

• ~$8M in confirmed revenue (DoD + Texas DPS)

• ~$5M in ARR renewals + upgrades

• ~(Estimating at least $7M+ from new deals (based on pipeline conversion) - of course, the number could be much higher, but I'll stay conservative.

Even while remaining at a base case, that’s $20–25M revenue, possibly more if a couple of big US or international deals land. EBITDA could realistically hit $7–8M, certainly with room for major growth, along with upside margin surprises.

Breakout Case (DroneShield Parallel?)

If you follow ASX defence/tech stocks, you'll know what happened to DroneShield (ASX:DRO) — revenue exploded 5× in ~2 years. The share price followed.

Perhaps XRG could follow a similar arc if:

• A few more US DPS departments adopt Operator XR

• A big defence program (US or allied nation) picks them up

• International sales start to ramp via new distributors

Even a modest slice of global VR training budgets (~A$50M from 1% market share) would deserve a major rerate. And it's quite evident that they're already scaling manufacturing and headcount in anticipation.

Veritas had a DCF target of 9.5¢ — based on much lower forecasts than what’s actually playing out now. In a breakout year, XRG could easily be doing $12M+ EBITDA — which on a similar EV/EBITDA multiple implies 3–5× upside from today’s valuation.

Updated Investment Thesis (Why I’m Holding)

• Proven Product-Market Fit: US DoD, Texas DPS, Aust Defence — big clients already onboard.

• SaaS Model + Recurring Revenue: ARR compounding at 100%++ YoY. High-margin recurring cashflow growing fast.

• Huge TAM: Law enforcement & defence VR training is a massive, global market. XRG is early — but already executing.

• Clean Balance Sheet: Grant funding supports growth. No more heavy debt hanging over them. (Thanks Steve Baxter. You're a legend, mate!)

• Clear Growth Engine: Operator XR

• Multiple Catalysts Ahead: Contract renewals, US expansion, AI product rollout, EU/APAC sales, strong tailwinds etc. etc...

When Would I Sell?

Certainly not in the 4–5¢ range. Even Veritas thought it was worth closer to 9.5¢ based on DCF before all the outperformance and new wins (noted, there has been some dilution since then...however, the Vertias report still had a lot more liability expected in FY25 then now...)

That said, if it spikes way beyond fundamentals (say, >15–20¢ fast on hype), I might scale out partially. But I’m not keen to miss what could be a multi-multi-bagger over the next 12–24 months.

Valuation Notes (IMO ONLY - Not advice!!))

	Scenario	Valuation Range (AUD/share) - NOTE THAT I'M NOT AN ANALYST	Justification (This is not advice - just ballpark thoughts...)
1	Base Case	$0.09 – $0.11	Based on updated DCF and relative multiples (EV/Revenue, EV/EBITDA) using FY26 projections
2	Bull Case	$0.13 – $0.16	Assumes strong US traction, follow-on contracts, ARR >$10M, and >$8M EBITDA in FY26
3	Breakout Case	$0.20 – $0.35+	Large-scale adoption, federal/military expansion, similar to DroneShield growth/valuation trajectory

In summary, the fundamentals appear stronger than ever — and the recent contract momentum, rising ARR, and global pipeline growth suggest a business that's still early in its growth stage.

While I’m holding, I'll keep an eye out for signs of overextension or irrational spikes that might justify taking partial profits. In my view, I don't think we're anywhere near that territory at current prices. I think the bigger risk for long-term holders is selling too early before the wider market realises the upside.

Again, this isnot financial advice — just one investor’s perspective. I’d welcome thoughts or alternative views from others holding or watching this stock.
Best regards,

BuffettStyle96