Australian defence smallcap XTEK lands on Bell Potter’s radar; recommends buy and hold

Australian defence smallcap XTEK Limited (ASX:XTE), a body armour manufacturer having a very good year, is now being covered by Bell Potter with the latter recommending shareholders buy and hold. 

Potter has given XTEK a price target of $0.95, up from $0.645 today (+46%).

Of foremost interest to Bell Potter is XTEK’s body armour product line, which the stockbroker says is superior to all other products on the market—more on that below. 

XTEK’s solid year can’t be understated 

XTEK’s year to date (YTD) share price performance currently sits up 186% after a series of contract wins to supply military products to various agencies, including the Australian Department of Defence, and, the US Government. 

In Bell Potter’s words: “XTEK is leveraged to the current trend of global rearmament, which is likely to be a central market narrative over the next decade.” 

Part of the reason Potter is paying attention, beyond its solid performance, may be XTEK’s established US presence. The smallcap partners with a NASDAQ-listed defence tech major, AeroVironment, which boasts a market cap of US$2.2bn. 

Through that partnership, XTEK most recently minted a $27m order from Australian Defence to provide drone technology at the start of this month. 

Potter bullish on superior armour; revenue 

Bell Potter today says of XTEK the company benefits from “strong fundamentals and positive macro thematic.” 

Potter ranks the smallcap as undervalued based on a price-to-earnings valuation when looking at its peers, highlighting the following points underpinning its assessment: 

• Contracted orders for FY23 see XTEK likely to make over $82m in revenue in the financial year, logging the company’s second record year ($58.2m FY22)

• Retention of higher margin sales driven by a transition to direct and channel sales which underpinned FY22 performance 

• Potter describes XTEK’s body armour as superior to competitor products due to lightweight durable nature 

• Potter expects the company to begin charging more for its products

• Restructure in the second half of 2021 significantly reduced XTEK’s opex spend 

• XTEK likely to benefit from an increase in defence budget spending all around the world; which Potter sees accelerating only further on the Russia-Ukraine war, and, China’s role in the Pacific 

What about risks?

The biggest risk to XTEK’s performance, Potter notes, is competition. 

“The ballistics protection market is an extremely competitive segment of the global defence industry,” the broker notes, “with participants including multinational corporations and local Australian firms.” 

Australian entities most likely to threaten XTEK are: Craig International Ballistics (lead supplier to ADF and Police), Armor Australia (Potter doubts it has better manufacturing tech,) and CCA Protect.

A look at XTEK's one year charts