Shaw & Partners - 35c prince target

	Equity Report

	Tesserent (TNT)

.35

1		Rating: Buy |Price Target:
2	Rating: Buy |Price Target: $0.35

	Cybersecurity Raising the Stakes

	EVENT

Last week TNT raised $25m via a placement to institutional investors, at $0.21ps (9.3% discount to 10-day VWAP), with the majority of proceeds earmarked for strategic acquisitions and deferred acquisition payments. The company also released an updated investor deck, and the next quarterly update will be released by the end of the month.

	HIGHLIGHTS

·$25m capital raise – use of funds:

o$11m for initial cash consideration for potential strategic acquisitions (at a guided 4.5-6x EV/EBITDA);

o$6m for upfront cash consideration for the Loop Secure acquisition, which was executed at 6x EV/EBITDA and completed yesterday;

o$5m for deferred cash consideration and earn-out for the Airloom acquisition (implied earn-out multiple of 2x incremental EBITDA); and

o$3m for investments via Tesserent Innovation & transaction costs.

·New insto capital– Management noted the addition of ‘new strong institutional shareholders to the TNT register’, which was one of the catalysts we detailed in our recent initiation (link here).

·Business remains Operating CF positive– Management also took the opportunity to flag that TNT has been generating positive operational cash flows since January 2021, i.e. the funds raised will be used for the purposes stated above vs subsidising operating performance.

·Acquisition assumptions– We have updated our forecasts for the capital raise, including the following aggregate assumptions around potential strategic acquisitions (which largely mirror the recent Loop Secure transaction):

oCash raised in Sep-21 for new acquisitions of $11.0m;

oTotal cash cost for new acquisitions of $22.0m;

oImplied total consideration of $32.9m;

oImplied incremental annual EBITDA (at 6.0x) of $5.5m, commencing from 2H22;

oAcquired EBITDA growth in line with broader TNT EBITDA growth; and

oAcquired EBITDA margin in line with weighted acquisition historical average (16.6%).

·Earnings upgrades– The net effect of these changes is an increase in FY22-24F EBITDA of 15.3% / 26.8% / 25.0% and an increase in FY22-24F EPS of 1.2% / 10.2% / 7.5%.

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 $20.7m), operating cash flow positive (FY22F $13.1m), and appropriately levered to execute on further accretive acquisitions as they arise (FY22F ND/EBITDA 0.3x). We expect further accretive strategic acquisitions that build on core capabilities or geographic reach, and with previous acquisitions outperforming relative to initial expectations we remain comfortable around management’s ability on this front. TNT offers a high-quality exposure to a key thematic at a reasonable price, with our forecasts indicating the stock is too cheap relative to peers (~30% discount), in particular given the earnings growth outlook. We maintain our Buy rating, and after raising our earnings forecasts our blended target price increases from $0.31 to $0.35 (59% upside).

Key Information Current Price ($ps) 0.22 12m Target Price ($ps) 0.35 52 Week Range ($ps) 0.19 - 0.43 Target Price (%) 59.1% TSR (%) 59.1% Reporting Currency AUD Market Cap 235.7 Sector Information Technology ASX 200 Weight (%) 0.01% Fundamentals YE 30 Jun (AUD) FY21A FY22E FY23E FY24E Sales ($m) 68.4 119.6 154.6 170.5 NPAT ($m) 7.3 9.7 13.3 15.1 EPS adj (cps) 0.6 0.7 1.0 1.1 EPS Growth (%) 141.4% 14.6% 37.7% 13.3% 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 31.5 22.9 20.2 EV/EBITDA (x) 25.7 11.7 9.0 7.6 Div Yield (%) 0.0% 0.0% 0.0% 0.0% Payout Ratio (%) 0.0% 0.0% 0.0% 0.0%

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www.shawandpartners.com.au