Stocks’ Details

Electro Optic Systems Holdings Limited

Quarterly Update for The Period Ending 31 December 2020: Electro Optic Systems Holdings Limited (ASX: EOS) is engaged in space, defence systems and communications business. The market capitalisation of the company as on 24 February 2021 stood at ~$ 737.42 million. During the December 2020 quarter, the company was awarded a $34 million C4EDGE contract by the Commonwealth of Australia as the Prime Contractor. EOS initiated the RWS production in its US facility in Huntsville, Alabama. EOS experienced a delay of around two weeks of deliveries to its clients, and the related revenue will be recognised in FY21.

Cash Outflow from Operations During December 2020 Quarter (Source: Company Reports)

Outlook:  The company expects FY20 EBIT to be in the range of $20-30 million, with the recovery in processes and product delivery in the past few months. The company will announce its full-year results for the period ended 31 December 2020, on 26 February 2021.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The company was awarded a $5.1 million contract by the Australian Department of Defence for technical development, on 16 October 2020. The contract has started in Q4FY20 and will be effective for two years. As per ASX, the stock of EOS is trading below its average 52-weeks’ levels of $2.950-$9.180. The stock of EOS gave a negative return of ~23.72% in the past three months and a negative return of ~9.79% in the past one month. On a technical analysis front, the stock of EOS has a support level of ~$4.584 and a resistance level of ~$5.05. We have valued the stock using an EV/EBITDA multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium to its peer median EV/EBITDA (NTM Trading multiple), considering its recent contract wins, recovery in product delivery and a stable balance sheet. For the purpose, we have taken peers such as Orbital Corporation Limited (ASX: OEC), Xtek Limited (ASX: XTE), to name a few. Considering the current trading levels, contract wins, recovery in product delivery, and potential upside in valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $4.790, down by 2.84% as on 24 February 2021.

DroneShield Limited

Research & Development Agreement: DroneShield Limited (ASX: DRO) is engaged in the development and sales of hardware/software technology for drone detection and security. The market capitalisation of the company, as on 24 February 2021, stood at ~$ 64.33 million. As per a recent update, the company has entered into a Cooperative Research and Development Agreement (CRADA) with the US Department of Homeland Security Science and Technology Directorate. The research will comprise of DRO's multi-sensor Unmanned Aerial System (UAS) detection capabilities, with a major focus on DroneSentry and DroneSentry-C2 solutions.

Period Ending 31 December 2020 Quarter Update: The company witnessed decent quarterly performance with customer receipts of $2.1 million, along with $250,000 in grants. The cash position was at $16.3 million as on 31 December 2020. The net cash outflow for the quarter was less than half of the previous quarter, reflecting the increased traction in sales of DRO.

Cash Outflow from Operating Activities for the December 2020 Quarter (Source: Company Reports)

Outlook: The company has an order book of $13 million in customer orders as of December quarter. It anticipates further benefit from the expected changes in the US foreign policy and military posture. It has a well-established pipeline estimated to be over ~$90 million.

Stock Recommendation: On 8 February 2021, the company had announced the rollout of its first Machine Learning/AI based detection and classification software to its existing customer systems. As per ASX, the stock of DRO is trading above its average 52-weeks’ levels of $0.084-$0.250. The stock of DRO gave a negative return of ~8.10% in the past three months and a positive return of ~21.42% in the past six months. On a technical analysis front, the stock of DRO has a support level of ~$0.16 and a resistance level of ~$0.195. Considering the current trading levels, decent performance during the December 2020 quarter, improvement in cash outflow from operations, strong order book and pipeline, and the key risks associated with the business, we recommend a 'Speculative Buy' rating on the stock at the current market price of $0.170, up by 3.030% as on 24 February 2021.

Quickstep Holdings Limited

Completion of Acquisition of Boeing Australia’s Repair Business: Quickstep Holdings Limited (ASX: QHL) is an independent aerospace composite business in Australia. The market capitalisation of the company, as on 24 February 2021, stood at ~$ 55.15 million. As per a recent update, the company has completed the acquisition of Boeing Defence Australia’s aerospace maintenance and repair business on 19 February 2021. QHL will acquire the company through its subsidiary Quickstep Aerospace Services Pty Ltd, and will acquire the operating assets plus inventories for a cash price of $2.64 million.  The acquisition aligns with the business strategy of QHL and brings in new opportunities in the high-value commercial aftermarket.

H1FY21 Results Update: The company has reported decent performance during the period with sales of $41.5 million, which is an increase of 8% on the previous corresponding period. The underlying pre-tax profit grew by 57% to $1.1 million in H1FY21. The operating cash flow stood at $4.3 million during the period and net bank debt has decreased by $2.7 million to $3.7 million as on 31 December 2020, from the 30 June 2020 levels. This has been a consequence of better working capital management and improved profitability.

H1FY21 Financial Performance (Source: Company Reports)

Outlook: The company expects its FY21 customer revenues to increase year on year. It also expects to deliver growth in profit before tax over the prior year in its base business. The acquisition of Boeing Australia’s component repair business is expected to be earnings accretive from the second year of purchase. 

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  The company reported a statutory PBT of $0.8 million during H1FY21, including $0.3 million one-off acquisition costs. As per ASX, the stock of QHL is trading below its average 52-weeks’ levels of $0.055-$0.125. The stock of QHL gave a negative return of ~12.49% in the past three months and a negative return of ~9.41% in the past six months. On a technical analysis front, the stock of QHL has a support level of ~$0.075 and a resistance level of ~$0.085. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe the company can trade at a slight premium to its peer average EV/Sales (NTM Trading multiple), considering its decent financial performance, reduction in net debt and acquisition of the business segment of Boeing Australia. For the purpose, we have taken peers such as Orbital Corporation Limited (ASX: OEC), Austal Limited (ASX: ASB), to name a few.  Considering the current trading levels, resilient financial performance, reduction in net bank debt, completion of the acquisition of Boeing Australia’s component repair business and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.077 as on 24 February 2021.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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