Why the Xtek share price is crashing today following its profit results

The Xtek Ltd (ASX: XTE) share price was shot down as losses in the group widened substantially even though its results weren't as bad as the headline numbers suggested.

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The Xtek Ltd (ASX: XTE) share price was shot down as losses in the group widened substantially even though its results weren't as bad as the headline numbers suggested.

Shares in the defence equipment supplier crashed 6.6% to 57 cents this morning. The sell-off comes as management reported a 55% increase in first half net loss to $3.6 million on Friday evening.

Xtek's top line fell too. Revenue declined 23% to $12.4 million for the six months ended 31 December 2020, compared to the same period in 2019.

Silver lining to Xtek's profit results

But it isn't all bad news, although most investors would have missed any good news as these are buried in the details.

It also doesn't help perception as Xtek chose to release its results after the market closed on Friday. There's a market belief that only ASX shares with bad news will release an announcement after the closing bell on a Friday.

However, management's positive outlook commentary should sooth fears about its new Adelaide manufacturing plant.

Ramping up production

Problems with the commissioning and ramp up of the new plant, which makes bullet proof composites, have been the main reason why the Xtek share price has underperformed since its capital raising in August 2020.

These issues seem to have been addressed. Xtek received regulatory approval to operate the plant and has successfully manufactured and tested three hard amour plates.

Xtek believes the plant will hit full production by the June quarter and current orders for its plates can be fulfilled at the smaller existing test plant.

Bigger net loss explained

The bigger net loss is also largely due to increase costs. These related to the commissioning the Adelaide plant and running the recently acquired US body armour business HighCom.

The drop in interim revenue is more disappointing. The fall comes even as HighCom's topline increased by 30% to US$10 million for calendar 2020 compared to the year before.

This suggests a lacklustre first half for the rest of Xtek's businesses, which includes military drones, software and armaments.

Positive outlook fails to support Xtek share price

But management is tipping a stronger second half result due to the seasonality of its business. Defence spending typically picks up towards the end of the financial year in Australia. This is because government departments have to spend their budgets or risk losing some of their funding in the new financial year.

Xtek is also predicting an increase in exports of its bullet proof plates, further sales of spare parts and servicing for its drones used by the Australian Army, and sales of its drone mapping software under the federal government's C4EDGE program.

Shareholders not feeling the Pyne

Another piece of significant news is the appointment of former defence minister Christopher Pyne as a non-executive director.

The cynic in me thinks this could be another reason why the stock is underperforming. ASX companies that appoint ex-government minsters to their boards don't have a good track record in creating shareholder value.

Xtek shareholders like myself will be hoping this time will be different.

Motley Fool contributor Brendon Lau owns shares of Xtek Limited. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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