Electro Optic Systems Holdings Limited

EOS Details

Q3FY21 Financial and Operational Highlights: Electro Optic Systems Holdings Limited (ASX: EOS) is in designing, development and production of advanced electro-optic technology devices and systems for the space and defense markets. During the quarter ended 30 September 2021, the company merged the Space Systems and Communications Systems divisions for establishing an enlarged division with tighter linkages between space and communications activities.

• The company has restructured its available cash to around $100 million for growth in its space and defence businesses. It includes a working capital facility of $35 million, which was established during the quarter.
• After the end of the quarter, the company received $65 million of new cash payments under its largest export contract. As a result, EOS has received over $95 million of cash payments under this contract in the past six months.

1HFY21 Financial Summary:

• Growth in Revenue: The company managed to generate growth of ~30% in revenue to $97.8 million against $75.4 million in 1HFY20 in spite of the disruptions caused by COVID-19,
• Small EBIT loss in Business: As a result of continuous investments, the company recorded a small EBIT loss before SpaceLink costs of -$2.1 million.
• Improvement in Operating Cash Flow: During the half-year, EOS witnessed a turnaround in operating cash flow and recorded an inflow of $4.6 million against the outflow of $62.6 million in 1HFY20.

Revenue Trend (Source: Analysis by Kalkine Group)

Signing of Contract:

• As announced on 20 October 2021, the company and its US subsidiary, SpaceLink Corporation, have inked an Authorization to Proceed with OHB Systems AG after finishing all the negotiations in relation to a contract for the manufacture and delivery of the initial constellation. The value of the contract stood at US$300 million.
• OHB is planning to make an investment of around US$25 million into SpaceLink as the cornerstone investor in the first tranche of financing for the project. This is likely to be in the form of a SpaceLink PreIPO Convertible Note.

Key Risks:

• Forex Headwinds: The company’s financial performance could be impacted by adverse movement in foreign currency.
• Technology Risk: Any change in technology may impact its performance, as EOS works in a more technical environment.

Outlook:

• For FY21, the company expects to report revenue in the range of $215 million to $220 million and Underlying EBIT Before SpaceLink Costs & FX in the ambit of $4 million to $8 million.
• The company is currently focusing on numerous opportunities, many of which are expected to result in contracts being awarded to the successful party in the upcoming 15 months. The company believes that EOS is in a decent position to secure a number of these contracts.
  

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: As on 30 September 2021, the cash balance of the company stood at $54.92 million as compared to $51.1 million as on 30 June 2021. The stock of EOS is trading near to its 52-week low levels of $2.775, offering a decent opportunity for accumulation. The stock of EOS has been corrected by ~17.54% and ~31.55% in the past one and three months, respectively. The stock has been valued using EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight premium to its peers’ median EV/Sales multiple, considering rising revenue, a turnaround in cash flows, and a decent liquidity position. For the purpose of valuation, peers such as Quickstep Holdings Ltd (ASX: QHL), Orbital Corporation Ltd (ASX: OEC) and PTB Group Ltd (ASX: PTB) have been considered. Considering the expected upside in valuation, decent performance in Q3FY21, rising revenue, improving cash flows, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $2.780 as on 11 November 2021, 12:58 PM (GMT+10), Sydney, Eastern Australia.

EOS Daily Technical Chart, Data Source: REFINITIV  

Fluence Corporation Limited

FLC Details

Secured New Contract: Fluence Corporation Limited (ASX: FLC) is involved in the delivery of innovative, cost-effective decentralized water, wastewater, and reuse solutions for businesses and communities globally. Recently, the company has secured a US$8.5 million contract to build a third SUBRE plant using MABR technology in Sihanoukville, Cambodia, from the Cambodian Government’s Ministry of Land Management, Urban Planning and Construction. The company is likely to commence operations in 1HFY22.

Q3FY21 Financial and Operational Summary:

• During the quarter ended 30 September 2021, the company recorded revenue amounting to US$20.0 million, reflecting a rise of 46% over Q3FY20. FLC earned Smart Product Solutions (SPS) revenues of US$7.4 million, which brought FY21 year-to-date SPS revenues to US$18.9 million.
• The company witnessed Strong Adoption of MABR SPS with sales of 44 MABR plants in year to date, which included recent Cambodia order and brought the total sales to 290 globally.
• During Q3FY21, FLC recorded an improvement in operating cash outflow to US$2.0 million as compared to US$5.9 million in Q3FY20.
• The company continued to execute the Ivory Coast Project in Q3FY21 and recognized revenue of US$13.2 million. As a result of payments received in 2020, the Ivory Coast Project is cash flow positive and is likely to remain cashflow positive for the duration of the project.

Revenue Trend (Source: Analysis by Kalkine Group)

1H FY21 Financial Summary:

• Decline in Revenue: For 1H FY21, the company recorded revenues amounting to ~US$39.7 million against ~US$53.7 million in 1H FY20. However, FLC witnessed a growth of 45% in China revenue.
• Contract Backlog: The company witnessed strong momentum in 1HFY21, evident by a contracted backlog of US$175 million in 1HFY21, out of which US$18.7 million is from the SPS backlog.

Key Risks:

• Regulatory Risk: The company is exposed to a complex regulatory environment; any failure in compliance may lead the business to penalties, fines etc.
• Competition from Peers: The company’s operation and financial performance could be impacted by the rising market share of competitors.

Outlook:

• For FY21, FLC is well-positioned for growth and reiterates guidance for SPS sales in the ambit of US$35 – US$50 million and positive underlying EBITDA for FY21.
• Looking forward, the company’s priority revolves around continuing strategic repositioning in order to focus on SPS and Recurring Revenue.
• FLC is also seeking to secure new contract wins in markets such as the US, Asia, and the Middle East.
  

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: As on 30 September 2021, the company had cash and cash equivalents of US$16.3 million. The company held short and long-term deposits of $35.7 million, out of which $34.1 million has been used as collateral for bank guarantees for the Ivory Coast Project. The stock of FLC is trading near to its 52-week low level of $0.160, offering a decent opportunity for accumulation. The stock of FLC has been corrected by ~8.10% and ~14.99% in the past one and three months, respectively. The stock has been valued using EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ average EV/Sales multiple, considering the high debt to equity, low gross margin, and material business risks such as competition and regulatory. For the purpose of valuation, peers such as Korvest Ltd (ASX: KOV), Zicom Group Ltd (ASX: ZGL) and Amaero International Ltd (ASX: 3DA) have been considered. Considering the expected upside in valuation, decent growth in quarterly revenue, rising sale of MABR plants, acquisition of new contracts, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.170, down by 2.858% as on 11 November 2021.

FLC Daily Technical Chart, Data Source: REFINITIV  

Decmil Group Limited

DCG Details

Key Updates for Investors Consideration:  Decmil Group Limited (ASX: DCG) primarily provides services such as designing, engineering, construction and maintenance to the Infrastructure, Resources, Energy and Construction sectors throughout Australia. On 5 Nov 2021, Thorney International Pty Ltd has made a change to substantial holdings in the company with the current voting power of 19.99% as compared to the previous voting power of 20.96%. In the month of September 2021, the company secured two new contracts of $88.7 million and $28.2 million with Major Road Projects Victoria for Barwon Heads Road Upgrade – Work Package 1 and Roy Hill-Munjina Road alignment works, respectively.

• The company is likely to commence execution on the Work Package 1 contract on an immediate basis and anticipates finalising in 2023.
• With respect to Roy Hill-Munjina Road alignment works, DCG is likely to begin work in October 2021 and expects to finish the work by mid of 2022.

FY21 Financial Summary:

• Decline in Revenue: During FY21, the company recorded revenue amounting to $303.7 million against $451.3 million in FY20 due to delays and shifts of numerous contracts caused by COVID-19.
• Turnaround in EBITDA: DCG witnessed normalised EBITDA profit of $7.6 million in the fiscal year against EBITDA loss of $42.3 million in FY20, supported by an improved normalised gross margin.
• Improvement in Losses: DCG reported a statutory after-tax loss of $11.5 million against the loss of $140.4 million in FY20. This includes the write-down of a contract position of $9.7 million from a legacy dispute.

Revenue & EBITDA (Source: Analysis by Kalkine Group)

Key Risk:

• COVID-19 Headwinds: The company witnessed challenges from COVID-19, which caused delays in the contract and impacted DCG’s topline.
• Funding Risk: DCG’s business model requires decent funding in order to finish its contract in an effective manner. This may lead the business to a more debt position moving forward.
• Selection Risk: The company’s business risk also includes the choice of projects which can deliver acceptable returns for the commensurate risk.

Outlook:

• The company closed FY21 with an order book of ~$570 million contracted and preferred, which include ~$400 million work in hand, contracted and preferred for FY22.
• DCG is expecting to report revenue of ~$500 million in FY22 and anticipates maintaining a gross margin of 8-9% for the upcoming year and beyond.

Stock Recommendation: DCG recorded net cash flow from operations of $2.7 million before repayment to surety bond providers of $24 million in FY21. The stock of DCG is trading near to its 52-week low level of $0.310, offering a decent opportunity for accumulation. The stock has been corrected by ~34.61% in the past six month. On a TTM basis, DCG has an EV/Sales multiple of 0.3x as compared to the industry average (Construction & Engineering) of 8.8x. Considering valuation on a TTM basis, turnaround in EBITDA position, improving bottom line, decent outlook, current trading level and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.340 as on 11 November 2021, 2:12 PM (GMT+10), Sydney, Eastern Australia.

DCG Daily Technical Chart, Data Source: REFINITIV 

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

Note 2: Investment decision should be made depending on the investors’ appetite on 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 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 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 unfavourable movement in the stock prices.

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