Financial journalist and commentator on 3AW and Sky Business
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Australians should be well aware of cyber-risk, after National Census Day in 2016 was almost sabotaged by four distributed denial-of-service (DDoS) attacks. The Australian Bureau of Statistics (ABS) was forced to take the Census site down, to protect the integrity of the data.
But if anyone was not aware, the ‘WannaCry’ ransomware attack earlier this month – believed to be the world’s biggest online extortion attempt – really should have focused minds.
The WannaCry attack struck more than 100,000 organisations in 150 countries, including British hospitals, German rail operators and Chinese universities. The UK’s National Health Service had to turn away patients after WannaCry locked up hospital computers, forcing the closure of wards and emergency rooms.
Researchers don’t yet fully understand how WannaCry got onto computers in the first place. Analysts at the European Union’s cybersecurity agency believe the hackers likely scanned the internet for systems that were vulnerable to infection and exploited those computers remotely.
The hackers appeared to target PCs with the Microsoft Windows operating system that had yet to apply an anti-malware patch issued by the tech giant in March: they applied a WNCRYT file extension to infected files, and demanded victims pay – in bitcoin – up to $US600 ($800) to recover their data.
Unfortunately, global cyber-attacks on governments and corporations are only going to become more common – which makes cyber-security a very big business. According to Indian technology research firm Markets and Markets, the global cyber security market will grow from US$106.3 billion ($142 billion) in 2015 to US$170.2 billion ($227 billion) by 2020, growing at a compound annual rate of 9.8%.
But this also makes cyber-security a major investment theme, offering massive potential gains for companies that provide security products, applications and services.
The ASX is home to a buzzing mini-sector in cyber-security: here is a look at the major players. [WHY IS TESSERENT NOT LISTED AS A PLAYER???????]
Prophecy International (PRO, 47 cents)
Market capitalisation: $30 million
Software company Prophecy International got into the cyber-security business in 2011 when it bought Intersect Alliance, an Australian software company that made, among other things, the SNARE (System Intrusion Analysis and Reporting Environment) platform.
SNARE finds, filters, forwards, stores, analyses, reports and alerts on computer events, to detect intrusion and malevolent behaviour. It complements in-house prevention strategies and extends existing SIEM (security information and event management) investments.
SNARE is installed in more than 100,000 sites worldwide, in in the finance industry, defence, retail, utilities, hospitals, transport, casinos, universities, and all tiers of government. Among the prominent customers are NASA, the US Army, Northrop Grumman, Verizon, the US Department of Energy, Raytheon, Rolls-Royce, Fujitsu, and Vodaphone.
In FY16, SNARE accounted for just under 52% of Prophecy’s revenue. SNARE revenue rose by 27% surge to $7.6 million, helping to drive a 47% surge in total revenue, to a record $14.7 million, allowing net profit to rise 3%, to $2.4 million, allowing a full-year dividend of 4 cents, unfranked.
For the December 2016 half-year, revenue slipped 26% to $5.9 million, with net profit slumping 93% to $127,500, with no interim dividend paid.
Prophecy’s other major business is eMite, a management information system software package that provides near-real-time operational data to business managers, to help optimise-day-to-day operations. But SNARE is the main attraction for investors going forward. However, there are no analyst earnings or target price forecasts in the market.
Senetas Corporation (SEN, 9 cents)
Market capitalisation: $97 million
Senetas Corporation is a pure-play cyber-security company: it provides data encryption hardware, engineered for high-speed networks, to major corporations and governments. Established in 1997, the company’s first job was solving a mission-critical, high-speed data network problem for an Australian federal government law enforcement organisation. Senetas’ encryptors now protect network transmitted data in more than 30 countries, and are used by customers ranging from government organisations with highly sensitive information, for example, the US defence forces, to commercial and industrial organisations, banks and global financial transactions systems providers, cloud service providers and small businesses.
Senetas says its encryptors are the world’s only products of their type certified by all four leading international certification authorities – the US government’s FIPS (Federal Information Processing Standards) certification, Common Criteria (required by Australian government and defence organisations), Communications-Electronics Security Group (CAPS) for its Ethernet IG product in the UK (the first up-to-1GB encryptor for government data networks ever certified by CAPS) and the NATO (North Atlantic Treaty Organisation) information security product certification, which covers the 28 NATO member states.
Senetas is profitable, but like many technology stocks, is reinvesting profits in its business rather than paying dividends. In FY16 Senetas lifted revenue by 19.3%, to $19.3 million, and boosted net profit by 29.9% to $5.2 million. Then, in the December 2016 half-year, revenue rose 8% to $9.3 million, with net profit declining by 31% to $1.3 million.
Analysts expect Senetas to show a 37% fall in earnings per share (EPS), to 30 cents, before boosting EPS to 50 cents a share in in FY18. Analysts’ consensus expects dividends to begin in FY18, with a 0.1-cent payout. The consensus target price on the stock is 14 cents.
Covata Limited (CVT, 2.7 cents)
Market capitalisation: $14 million
Listed on the ASX in November 2014, Covata is another “pure play” cyber-security provider: its data protection technology focuses on protecting the data at the source, as it is created.
Covata’s Safe Share secures data at the point of origin, protecting proprietary information whether it is shared inside the organisation or across untrusted networks and devices. Its Delta product is a cloud-based service that enable businesses to integrate data-centric security directly into products and services. The Covata platform ensures that the customer’s data is protected outside the domain, in the cloud and across all devices and endpoints. The access controls can be extended to external ad hoc users, with view‐only restrictions, real-time revocation and complete visibility and auditability.
Covata’s Safe Share platform has already achieved market validation through its continued and increased use by several Australian government departments, delivered through its channel partner Macquarie Telecom, and in the enterprise market in Germany through its channel partner T-Systems.
Covata has former director-general of ASIO, David Irvine, and former Finance Minister Lindsay Tanner on the board, and has had noted technology executive Ted Pretty as CEO since January. But it must be said that after initial enthusiasm, the stock market has been very severe on Covata. Floated at 20 cents, the stock surged to 66 cents by April 2015, but it has been one-way traffic since then – including a one-day mauling of 53% in March when the company announced it had “not been chosen as the preferred vendor” for a UK Crown Prosecution Service contract.
In FY16, Covata earned $2.4 million in revenue, a rise of 15.3%. Then, for the December 2016 half-year, revenue rose by 9.8%, to $1.1 million. But Covata is not profitable, and analysts do not expect it to make it into the black this financial year or FY18. However, according to Thomson Reuters, analysts’ consensus expects very significant share price appreciation from here: the consensus price target is 23 cents.
Dropsuite Limited (DSE, 6 cents)
Market capitalisation: $26 million
Listed in December 2016, Dropsuite is a cloud-based data recovery provider with a global platform enabling small-to-medium-sized businesses (SMBs) to back up, recover and protect their digital assets. The company’s software has been specifically built for small business users, which it says are mostly non-tech savvy, yet are most vulnerable to harmful data losses from cyber-attacks and hardware failures.
Dropsuite has begun rolling out its suite of backup products through partnerships with companies including GoDaddy, Ingram Micro, Australia’s Dreamscape Networks, Crazy Domains, the Netherlands’ LeaderTelecom and GMO Internet in Japan. As of late April, Dropsuite had reached 160,000 paid SMB subscribers, just two months after hitting the 140,000 paid user mark. Revenue should rise strongly this year but Dropsuite has a long way to go to achieve profitability.
BetaShares Global Cybersecurity ETF (HACK, $5.76)
Market capitalisation: $8 million
Launched in September 2016, HACK is an exchange-traded fund that offers, in a single listed stock, exposure to the major global companies involved in cyber-security. HACK is designed to track the performance of the Nasdaq Consumer Technology Association Cybersecurity Index, which covers the performance of the leading firms in the global cybersecurity industry. This includes global giants such as Symantec, CheckPoint, PaloAlto Networks and Cisco, as well as emerging leaders such as FireEye, Fortinet and Experian.
While almost three-quarters of the index is made up of US companies, HACK also picks up emerging players from other tech hotspots such as the Netherlands, Israel and Japan. Like any ETF, HACK invests in the poor performers in the index as well as the stars, but it offers a simple way to establish a diversified exposure to this major – and growing – investment theme.
Managed for 0.67% a year, HACK is unhedged, meaning that investors take A$/US$ currency risk – which in the right circumstances can actually add to the return. HACK has moved from $5 to $5.76 in its eight months on the stock market. Upcoming listings
WhiteHawk
A US cyber security company co-founded by the former deputy head of US naval intelligence, Terry Roberts, WhiteHawk is expected to float on the ASX in the second half of the year, after the business has started to generate revenue. WhiteHawk is expected to raise $4 million through the IPO, which would capitalise it at about $15 million.
WhiteHawk, which also counts Barack Obama’s former chief of cyber and national security unit for the White House, Trevor Rudolph, as its head of business operations, has created an online marketplace of cyber security service providers and a patented algorithm that matches companies to their most suited providers.
Customers can go to WhiteHawk’s website, fill out a multiple choice questionnaire so the company understands their key risks and the gaps they have, and after a free assessment, the customer is directed to a marketplace of options of providers addressing those risks. The companies in the WhiteHawk marketplace can compete with each other on price, but they cannot pay money to be ranked more highly.
Votiro CyberSec
Established in 2010 in Israel, Votiro is also heading for an ASX float in the second half of the year. Founded by a team of senior cyber-security experts, who served with the elite intelligence unit of the Israel Defence Forces, Votiro develops and licenses unique security software solutions that help protect organisations from external cyber-attacks.
Based on the company’s patented Advanced Content Disarm and Reconstruction technology, Votiro solutions analyse all incoming files and email messages and apply an active “cleansing” process to all of them seeking to prevent threats from entering a company’s email server. The process is automatic and therefore does not rely on employees’ assessment of incoming files’ safety.
The process does not use the common signature-based detection technologies, which Votiro says were and still are unable to detect undisclosed and “zero-day” threats, where the security breach is exploited by hackers before the organisation or its software vendor becomes aware of it.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
TNT Price at posting:
8.2¢ Sentiment: Buy Disclosure: Held
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