HighCom Limited (ASX:HCL): A Stock Soaring on Hype, But Can Earnings Catch Up?

June 19, 2025 — HighCom Limited (ASX:HCL), an Australian defense and aerospace company, has become a poster child for the "story stock" phenomenon. Its shares have surged 122% over the past year, yet its earnings remain mired in stagnation, and its capital allocation decisions have raised eyebrows. The question is: Is this a company poised to break out, or is it a cautionary tale of overvaluation in a niche sector?

The Stock Surge: A Tale of Strategic Bets and Hope

HighCom's stock has been on a tear, rising from AU$0.12 in mid-2024 to near AU$0.31 in June 2025, a 158% jump. The rally has been fueled by a narrative of transformation: the recommissioning of its XTclave production facility in Ohio (which doubles its capacity to make lightweight ballistic materials), new defense contracts (including a A$2.6m order for counter-drone systems), and leadership changes aimed at boosting efficiency.

But the disconnect between this stock performance and financial results is stark. Let's dig into the numbers.

Earnings: Stagnant, With Spotty Gains

HighCom's earnings have been a rollercoaster. In FY2024, it reported a net loss of AU$11.6m, reversing a profit in 2023. While its first-half 2025 EPS improved to AU$0.012 (vs. a loss of AU$0.13 in 2024), this is still a trivial figure. Revenue has also been weak: trailing twelve-month sales of AU$56.96m in late 2024 marked a 40% drop from 2023 levels.

The chart above shows the stock's meteoric rise against a backdrop of declining revenue. Analysts highlight this mismatch: the stock is up 122% year-to-date, yet consensus revenue estimates have been cut by 48% since early 2024.

Capital Allocation: Equity Raises, No Dividends, and Questionable ROI

HighCom has relied heavily on equity financing to fund growth. In 2023 alone, it raised AU$11.17m through two follow-on offerings. This approach has diluted shares but hasn't yet translated into robust returns. Its ROE (9.4%) trails the aerospace sector's average of 11%, and it has retained every penny of earnings (no dividends).

The capital has flowed into ambitious projects: expanding the XTclave facility, securing defense contracts, and building a sales office in Poland. While these moves could pay off in the long run, the returns remain unproven. For instance, the XTclave upgrade, completed in June 2025, aims to boost production for international military customers, but scaling this into profit is far from certain.

Why Investors Are Betting Big

The stock's surge isn't entirely irrational. HighCom is playing in a growing defense market, with global spending on military tech expected to hit $2.3 trillion by 2030. Its XTclave technology—a proprietary method for producing lightweight, high-performance armor—has clear applications for body armor, drones, and vehicle protection. The company also benefits from geopolitical tailwinds, such as Australia's A$270bn defense modernization plan.

Moreover, new leadership under CEO Todd Ashurst (appointed in March 2025) has brought a sharper focus on operational efficiency. The recent CSUAS (counter-drone systems) order and partnerships with firms like AeroVironment suggest a strategic pivot to higher-margin, tech-driven products.

The Risks: Overvaluation and Execution Pressure

But the risks are significant. HighCom's market cap of AU$30.8m is tiny by industry standards, exposing it to volatility. Its valuation, per Snowflake's model, is seen as 91.1% undervalued, but that assumes flawless execution of its growth plans.

The company's cash reserves (AU$6.2m) are adequate, but it has no debt headroom. If contracts dry up or production costs rise, it could face a liquidity crunch. Additionally, its profit margins (5.5%) are razor-thin, and the industry's average ROE is a reminder that capital efficiency remains a hurdle.

Investment Takeaway: Buy the Story, or Wait for Results?

HighCom is a high-risk, high-reward play. The stock's valuation assumes near-perfect execution of its strategy: ramping up XTclave production, landing large defense contracts, and improving margins. If these goals are met, the AU$0.30 share price could climb sharply.

However, the disconnect between valuation and earnings is alarming. At current levels, investors are betting on a turnaround that hasn't yet materialized. For cautious investors, this is a speculative call—best suited to those with a high-risk tolerance.

For the bold, the potential upside is undeniable: analysts project 50.66% annual EPS growth, and the stock's price-to-sales ratio (0.5x) is well below aerospace peers. But if revenue growth stalls, or if the XTclave expansion hits delays, the stock could plummet.

In conclusion, HighCom is a company at an inflection point. Its stock price reflects hope, but the earnings and execution must catch up. Until then, this is a story to watch, not necessarily to bet on—unless you're prepared to ride the rollercoaster of a microcap with a lot to prove.