Electro Optic Systems Holdings Limited

EOS Details

Q3FY21 Financial Performance: Electro Optic Systems Holdings Limited (AS: EOS) is in designing, developing, and production of advanced electro-optic technology devices and systems for the space and defense markets. On 19 January 2022, EOS announced the emergence of a new position of Deputy Chief Executive Officer. The CEO of EM Solutions, Dr. Rowan Gilmore was appointed for the position, effective immediately.

• Operational Position: Despite COVID-19 disruptions, excluding $19 million discretionary development outlays on SpaceLink, EOS is trending towards a modest profit of $4 million to $8 million for FY21, despite the recent Q4 deferral of $11 million.
• Cash Position: The company has built its total cash availability to almost $100 million, to embark upon high growth prospects in space and defense businesses. The above includes $35 million of credit facility for working capital investment. Cash and cash equivalents stood at $54.93 million as of 30 September 2021.
• Company Investments: EOS continues to make modest investments in the SpaceLink business. In FY21 these expenses are expected to clock almost $19 million. SpaceLink is now moving forward to raise funds via a pre-IPO convertible note in the SpaceLink entity for its initial satellites’ constellation from external sources.

H1FY21 Segment Performance, Analysis by Kalkine Group

Key Risks and Challenges

• Forex headwinds: The company’s financial performance could be affected by adverse movement in foreign currency, considering global operations.
• Technology Risk: Any technology change may affect its performance, as EOS works in a more technical environment.

Outlook

EOS’ underlying EBIT before SpaceLink costs is estimated to range between $4 million and $8 million, a decline of $14 million from previous guidance. SpaceLink has contracted OHB for the manufacturing of its first constellation with an initial tranche of project funding being underway via a pre-IPO convertible note. SpaceLink concluded a competitive tender process for the space segment, ground segment, and optical terminal segment for the initial satellites constellation.

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

Source: 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 stock of EOS gave a negative return of ~62.478% in the past year. The stock is currently trading lower than the 52-weeks average price level band of $2.080 - $5.790. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price low double-digit (in percentage terms). The company might trade at a slight premium to its peers, considering top-line improvements and a turnaround in cash flows. For valuation, few peers like Austal Ltd (ASX: ASB), PTB Group Ltd (ASX: PTB), Orbital Corporation Ltd (ASX: OEC), and others have been considered. Given the decent performance in Q3FY21, improved revenue, the turnaround in cash flows, decent outlook, current trading levels, upside indicated by valuation, and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $2.130, as of 19 January 2022, 02:22 PM (GMT+10), Sydney, Eastern Australia.

EOS Daily Technical Chart, Data Source: REFINITIV

Note: The purple line reflects the RSI (14-day period)

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Technical Indicators Defined: - 

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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