Harvest Technology Group Limited - Improving Efficiency and Revenue

673 Views16 Dec 2022 08:00

Issuer-paid

SUMMARY

Harvest Technology Group Limited (ASX:HTG) licenses its proprietary video compression and encryption technology for low-bandwidth, high-latency applications needing secure real-time streaming video communication. The company delivers solutions for data transfer from anywhere via satellite or congested networks. Harvest offers a solution which enables real-time monitoring of remote locations, real-time feedback for field technicians, and secure video conferencing. In 2022 Harvest has launched two new product platforms with further product developments expected. The company raised $6.78m in March 2022 via a private placement in preparation for an increase in sales tempo and customer numbers. In FY23 Q2 the company has focused on efficient delivery of systems to large customers and is expected to once again see substantial revenue growth which will translate to cashflows at a higher margin after onshoring of some technical roles. An improved cost structure potentially suggests a shorter path to breakeven than we currently model. Harvest’s trading update on 15 December confirms sales are strong and interest in the Infinity suite of products is increasing. The current geopolitical environment is supportive of a business engaged in securing communications and providing connectivity in remote locations and we expect further strong sales growth.

Business model

HTG offers products and solutions which enable real-time monitoring of remote locations, real-time feedback for field technicians, and secure video conferencing. HTG has two trademarked product platforms, Infinity Nodestream and Remote Inspection System (RiS). The company is on the verge of large-scale roll-out of the Infinity Nodestream secure video transmission product suite through reseller agreements with the major maritime satellite communications operators. It has also launched its own Remote Inspection System (RiS) and a US business focused on enabling remote field technician support via real-time video over low-bandwidth networks and satellite. The company has a Perth headquarters and has expanded over the past 12 months, establishing sales offices in the US and UK/EMEA regions. HTG is currently focused on converting a strong sales pipeline into customer wins.

Q2 on track – trading update

Harvest issued a trading update on 15-Dec highlighting strong revenue from customers with expected Q2 revenue in the range $950k to $1.05m. Both income and costs appear likely to improve in Q2. Harvest has reduced costs by bringing technical roles back to Australia, simultaneously reducing exposure to a strong US$. Cash on hand has been supported by receipt of a R&D Tax Incentive Rebate for FY21 of $946,951 (announced 16-Nov) with a further claim for FY22 R&D expenses yet to be lodged. Harvest management notes a large increase in enquiry rate, likely assisted by high-profile attacks on data storage and IT infrastructure this year.

Base valuation of $0.28/share supported by efficiency gains

Our valuation is based on a DCF using a Beta of 1.47 and risk-free rate of 3.5%. We have modelled three cases differentiated by customer conversion rate, cost of hardware manufacture and licence fee received. Our base case is $167m or $0.28/share while a downside case values HTG at $123m or $0.21/share and an upside case is $347m or $0.59/share. The crucial period to achieve sufficient momentum in sales to justify these valuations is in CY22 with results from FY23 Q1 and Q2 supportive. Recent cost reductions will likely shorten the period until cash breakeven is attained.

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