The Digital Age, also known as the Third Industrial Revolution, dawned in the early 1950’s and came of age in the late 1970’s as the use of digital computers proliferated. With it came advances that were the stuff of science fiction prior to the digital revolution.
Today corporations and consumers are increasingly paying a price for their wonder with the onslaught of the bane of modern life in the digital world – hacking.
Cyber Security – a term unheard of prior to the coining of the term Cyberspace in 1982 – has evolved from its introduction in 1989 to the number one risk citied by North American business leaders in a 2018 study.
The risk has extended beyond the business world to strike at the very fabric of societies everywhere, affecting governments as well as ordinary citizens. Australians now know our country was not spared the intrusive reach of not only the ubiquitous Russian hackers, but attacks from the Pakistani military as well.
In 2014 the Center for Strategic and International Studies and US-based cybersecurity firm McAfee released a study showing online crime – both corporate and consumer -- peeling off 0.08% of global GDP. The now outdated graphic displays the shocking numbers by country.
UK-based digital technology research firm Juniper Research released another study at the close of 2015 predicting the global cost of cyber-crime will reach $2.5 trillion by 2020. Australia now has an official government Cyber Security Strategy, with a projected investment of in excess of $230 million dollars over the next four years, rivalling defence expenditures over the same period of $400 million.
There are an increasing number of cyber-security companies listing on the ASX, following the 2011 lead of Prophecy International Holdings Limited (PRO), an enterprise software provider that jumped into the cyber security space through acquisition. The next to come on the ASX was PS&C Ltd (PSZ), listing in 2013, followed by Covata Limited (CVT)with a reverse merger listing in 2014. Over the past five years, all three have disappointed investors, with major upward moves in 2015 falling by the wayside.
All three fell when financial performance failed to meet investor expectations. Covata and Prophecy are rising slightly in 2018 while PS&C continues to struggle. There are other stocks on the ASX to consider. The following table lists six prospects by market cap.
Senetas Corporation Limited (SEN) has been around since the mid 1990’s offering large institutions encryption solutions to safeguard data passing through networks. The company’s products are in use in a myriad of sectors, from business enterprises to government and defence systems to healthcare networks to financial and utility networks and even to large scale gaming companies.
In 2016 Senetas announced the company had received NATO Certification for use of two of its encryption products by NATO member countries. The company has a two-year earningsgrowth forecast of +34.7%, with 5-year average earnings growth of 24.6% and an impressive 33.5% growth over ten years. Over five years the share price is up close to 750%.
After experiencing slowdowns in both revenue and profit for FY 2017, the company’s Half Year 2018 Financial Results were dramatically improved, with record level revenues increasing 10.3% and net profit after tax (NPAT) up 90%.
Prophecy International Holdings Limited (PRO) is a software developer with a long history of serving a broad range of large scale customers, from enterprise users to government and defence. The company has two core products – eMite and Snare -- with Snare giving Prophecy a place in the cyber security space. Snare is an intrusion detection system while eMite is a monitoring and management system for IT applications with data analysis capabilities. Both products came through acquisitions.
The company’s Full Year 2017 Financials disappointed investors, with a 26% decline in revenue and a 19% drop in profit. Half Year 2018 Financials showed improvements, with revenues up 24% and EBITDA (earnings before interest, taxes, depreciation, and amortisation) up 59%. Prophecy has offices here in Australia as well as in the UK and the US.
Covata Limited (CVT) claims its approach begins with the user devices where data is created and shared, rather than centres where the data is stored. The company operates here in Australia, Europe, and the US with three product lines serving businesses and government agencies. The products are integrated to provide a platform aimed at three objectives: discover; protect; and control.
Data Discovery searches for sensitive information in local and remote locations where files are shared.
Safe Share encrypts user data for safe storage, retrieval, and sharing.
CipherPoint Eclipse provides centralised access permissions management as well as encryption capabilities.
CipherPoint was acquired from a US company and completes Covata’s Covata Secure, a single Data Security Platform. Some companies employ multiple vendors for different security requirements. Covata Secure offers in a single platform data discovery, encryption, access management, and privacy compliance. The 2017 CipherPoint acquisition came with the added benefit of major US customers, including NASA, the Department of Energy, the US Army and the US Defense Advanced Research Projects Agency.
In January the company announced three new contracts with revenues valued at $250k, more than half the $424k total sales revenues generated in FY 2017.
PS&C Limited (PSZ) is far from a pure play cyber security company, with only one of its three operating divisions focusing on Security. The company’s People Division offers outsourcing and recruitment services while the Communications division offers telephony and other communications services. The Security division offers a range of independent security solutions.
The company’s Full Year 2017 Financial Results were troubling, at best, with a 13.4% revenue drop and a swing from a profitable FY 2016 at $6.9 million to a loss of $5.6 million, a 180% decline. The People Division is the company’s principal revenue generator at $45 million, compared to $15 million from Communications and $12 million from Security.
Tesserent Limited (TNT) listed on the ASX in February 2016, with the share price falling steadily since it came on before experiencing a bit of a bump so far in 2018.
The company operates on a “security as a service” model, offering a suite of security products and services, from consulting to firewall protection to secure network connectivity. In March of this year the company announced a partnership arrangement with Sophos, a global provider of anti-virus software, for incorporation into the Tesserent firewall offerings. Tesserent’s CyberBiz – offering cyber security products for small to medium size businesses – was named a finalist in the 2018 CRN Impact Awards. CRN is a digital news outlet, originating under the name Computer Reseller News.
The Tesserent share price got a boost in March following the announcement of a partnership arrangement with the Leading Edge Group, with a retail distribution network of more than 130 stores, prospective customers for CyberBiz. Tesserent is now in a trading halt pending an announcement.
Tesserent also announced its addition to the WhiteHawk Exchange, a platform from another newcomer to the ASX WhiteHawk Limited (WHK). The company listed on 24 January of this year, opening at $0.22. Despite the company’s unique business model, investors remain unimpressed, with the share price collapsing to the current level of $0.09.
WhiteHawk operates an internet website serving as a marketplace exchange where businesses can go for assistance with cyber security needs. WhiteHawk has an AI (artificial intelligence) platform – the CyberPath Solution Engine (patent pending) enabling users to sort through the maze of cyber security products to determine the best fit for their business needs and budget.
Aussie investors with knowledge of the US markets know the available investment opportunities there dwarf the number of companies currently on the ASX. Investors here now have the opportunity to get exposure to US listed stocks through a recently released, ETF -- BetaShares Global Cybersecurity ETF (HACK).
The fund includes established players as well as newcomers from Europe and Japan and the US. ETFs are ideal vehicles for investors looking for company diversification within a specific sector, with neither the time nor the temperament to research opportunities on their own. There is less risk with ETFs but also reduced potential for outsized rewards. The stellar returns of star players will be averaged lower by sub-par returns from others in the fund. Hack’s performance since listing in 2016, however, has been more than satisfactory, even for risk tolerant investors.
Concerns about what goes on in cyberspace transcend the world of business and government. Families are becoming increasingly concerned about the safety of their children in a digital world fraught with risk. In August of 2016 a new player came on the ASX to address that need -- Family Zone Cyber Safety Limited (FZO).
The company has developed a series of cloud-based parental control applications that work everywhere – at home and in school and at public hotspots as well as within carrier networks.
The company’s suite of applications – the Family Zone Platform; the Family Zone Box and Network Service; and the Family Zone App – allow parents to set parameters for internet access and use of their children. Parents can block sites or limit access, especially gaming sites, restrict content and app downloads and purchases, and set access and sleep times on every device everywhere.
Since listing the company has acquired multiple technology companies to enhance its platforms as well as signed multiple agreements with major telco companies to promote or pre-load Family Zone apps. The latest announcement was for a partnership with India’s Alcatel telco. Family Zone has also partnered with more than 120 schools in Australia, New Zealand, and the United States to incorporate the School Zone portion of the Family Zone Platform.
The company has no debt, with AUD$7.8 million cash on hand following a successful capital raise of $5 million in December. Analysts from BW Equities Research expect the company to reach a total of 350 schools by 2019, with the company posting its first profit of AUD$10.3 million in FY 2019. The stock is somewhat off the radar of the Australian investment community, with a three-month average daily trading volume of 154k shares, compared to 706k for sector leader Senetas.
TNT Price at posting:
6.0¢ Sentiment: Buy Disclosure: Held
