Buy recommendation - shaw and partners

	Equity Report

	Tesserent (TNT)

.31

1		Rating: Buy|Risk: High |Price Target:
2	Rating: Buy|Risk: High |Price Target: $0.31

	A Hidden Gem, Decrypted

	EVENT

After investing two years and ~$125m acquiring several smaller firms in the highly fragmented domestic cybersecurity market, TNT is now one of the leading players in Australia, with a particularly strong presence in the government space. With the recent 4Q21 result confirming a clear step-change in both revenue and (positive!) earnings, TNT’s core strategy is to continue integrating these businesses under the Tesserent brand, build on strong organic growth by targeting high-value customers with high-margin services (in particular in the government space), and execute on further strategic acquisitions as they arise. With the benefit of highly favourable sector thematics (i.e. cyber security spend) we see enormous upside in the event management can continue to execute on this plan, and as such we initiate coverage with a Buy rating and DCF/multiples-derived target price of A$0.31 (41% upside).

	HIGHLIGHTS

·‘Cyber 360’ is an Australian digital revolution– Over the past two years the management team and board of TNT have pursued the goal of creating Australia’s premier cybersecurity firm, primarily via a series of acquisitions in the highly fragmented domestic market. These acquisitions have allowed TNT to build out its end-to-end full-service offering, marketed as Cyber 360, which allows the company to provide clients (chiefly medium to large enterprises and government departments) with high-margin, mission-critical services. These services cover the entire range of cybersecurity risk requirements (i.e. ‘basement to boardroom’) and the approach ensures clients receive an optimal level of security at a satisfactory ROI. We see this as a key selling point for TNT, and note the strong 4Q21 result shows burgeoning success on this front.

·For the people, by the people– TNT is the largest Australian provider of cybersecurity services to the Federal Government, and the company’s stated mission is to be the ‘sovereign cybersecurity provider of choice for the protection of Australia and New Zealand’s digital assets’. We have confidence in the management team’s ability to meet this goal, and note the inherent competitive strength of a leading Australian cybersecurity player providing these services to Australian governments (i.e. vs offshore competitors). We see this dynamic driving strong revenue growth at high margins across the forecast period, with the added backing of stable, long-term contracts.

·The Security for Cybersecurity– Cyber risks are not only becoming increasingly prevalent but also more recognised as a critical issue for business groups and governments. State-based cyber campaigns, ransomware attacks that take out critical infrastructure (e.g. pipelines), and various forms of fraud are receiving increasing media attention as the world continues to digitise. Governments, including in Australia, are responding with significant increases in focus and funding in order to limit potentially enormous economic impacts. As the only pureplay cybersecurity firm listed on the ASX, TNT is the ideal play for domestic investors looking for exposure to this thematic.

RECOMMENDATION

TNT’s strategic shift over the past two years has transformed the company, with the financial upside starting to come through (albeit not yet priced by the market). The company is EBITDA profitable (FY22F $17.9m), cash flow positive (FY22F $7.0m), and appropriately levered to execute on further accretive acquisitions as they arise (FY22F ND/EBITDA 0.7x). The strategic intent remains to execute on accretive strategic acquisitions that build on either core capabilities or geographic reach, and with a number of previous acquisitions outperforming relative to initial expectations we have significant comfort around management’s ability on this front. Ultimately TNT offers investors a high-quality exposure to a key thematic at a reasonable price, with our conservative forecasts indicating the stock is too cheap relative to peers (~20% discount), in particular given the earnings growth outlook. We initiate coverage with a Buy rating and target price of $0.31 (41% upside).

Key Information Current Price ($ps) 0.21 12m Target Price ($ps) 0.31 52 Week Range ($ps) 0.19 - 0.43 Target Price (%) 45.9% TSR (%) 45.9% Reporting Currency AUD Market Cap 227.7 Sector Information Technology ASX 200 Weight (%) 0.01% Fundamentals YE 30 Jun (AUD) FY21A FY22E FY23E FY24E Sales ($m) 68.4 103.1 120.3 134.5 NPAT ($m) 7.3 8.3 10.5 12.1 EPS adj (cps) 0.6 0.7 0.9 1.0 EPS Growth (%) 141.4% 13.2% 26.5% 16.2% DPS (cps) (AUD) 0.0 0.0 0.0 0.0 Franking (%) 0.0% 100.0% 100.0% 100.0% Ratios YE 30 Jun FY21A FY22E FY23E FY24E P/E (x) 38.6 30.8 24.4 21.0 EV/EBITDA (x) 24.9 13.4 10.9 9.2 Div Yield (%) 0.0% 0.0% 0.0% 0.0% Payout Ratio (%) 0.0% 0.0% 0.0% 0.0%

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