Electro Optic Systems Holdings Limited

EOS Details

Addition of New Products to Underpin Future Growth:  Electro Optic Systems Holdings Limited (ASX: EOS) is a leading defence and space company, involved in the designing, development and production of advanced electro optic technology devices and systems. The market capitalisation of the company stood at ~$771.05 million as on 15^th September 2020.

Contract Secured for Supply of RWS: Recently, the company announced that it has won two contracts of $4.25 million for the supply of R400 Remote Weapon Systems (RWS) to a European NATO country.  The company added that RWS products are well suited to the emerging market for Remotely Operated Combat Vehicles (ROCV) due to their market-leading accuracy, reliability and light weight. In addition, the company is participating in several tender opportunities for ROCV capabilities in multiple countries with a sales pipeline of more than A$1 billion. In the upcoming 12 months, the company is expecting to receive major contracts.

Decent Growth in Topline: During 1H FY20, the company reported revenue growth of 31% to $75 million despite interruptions to deliveries by COVD-19. The company reported a net loss after tax of $14 million as revenue and profit have been deferred into 2H FY20 and 2021. In addition, the company finished capital raising of $144.8 million through the institutional placement of $134 million and SPP of $10.8 million. The capital raising was well supported by investors. As a part of growth initiatives, the company started the development of new products, which include Counter-UAS, directed energy, containerised weapons and remotely operated combat vehicles. The company ended the half-year with a cash balance of $128 million.

Key Financials (Source: Company Reports)

Guidance: For FY20, the company expects to report EBIT in the range of $20-30 million. The growth priorities of the company revolve around defence sector, communication, and space technology.

Stock Recommendation: EBITDA margin and operating margin of the company stood at 15.6% and 13.1% in FY19, reflecting YoY growth of 6.4% and 4.6%, respectively. On a TTM basis, the stock of EOS is trading at a price to book value multiple of 2.2x against the industry median (Aerospace & Defense) of 2.7x on TTM basis. On the technical analysis front, the stock of the company has a support level of ~A$5.024 and a resistance level of ~A$6.259. Therefore, considering the recent contracts for RWS product, capital raising and growth in revenue, we give a “Hold” recommendation on the stock at the current market price of $5.620 per share, up by 8.915% on 15^th September 2020, owing to the award of new contracts.

EOS Daily Technical Chart (Source: Thomson Reuters)

Quickstep Holdings Limited 

QHL Details

Growth Expected in Order Book: Quickstep Holdings Limited (ASX: QHL) is involved in the manufacturing of advanced carbon fibre composites. The market capitalisation of the company stood at ~$57.79 million as on 15^th September 2020.

Decent Growth in Top-line and Bottom-line: During FY20, the company reported a rise of 12% in sales revenue to $82.3 million and an improvement in EBITDA margin to 10.1%. In the same time period, the company reported NPAT amounting to $3.9 million, reflecting an increase of 44% on the prior year. During FY20, the company reported an increase in its net debt by $6.1 million over the year to fund its capital expenditure. QHL is likely to witness a growth in the existing order book and product development, demonstrating the incremental revenue opportunities within its core customer group.

Financial Summary (Source: Company Reports)

Outlook: During FY21, the company anticipates customer revenues to increase by 5% -10% on FY20. In addition, EBITDA for the period is likely to improve over FY20 as efficiency initiatives are implemented. Operating cash flow for FY21 is expected to witness material improvement over FY20 because of improved profitability as well as the increase in cash receipts from the C-130 contract. The company is scheduled to conduct its Annual Shareholders Meeting on 20^th November 2020.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of QHL has corrected 4.14% and 10% in the last one and three months, respectively. As a result, the stock is inclined towards its 52-week low level of $0.055, offering decent opportunities for accumulation. On the technical analysis front, the stock of the company has a support level of ~A$0.079 and a resistance level of ~A$0.094. We have valued the stock using the P/E multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Austal Ltd (ASX: ASB), Senetas Corp Ltd (ASX: SEN), Austin Engineering Ltd (ASX: ANG), to name few, and arrived at a target price of low double-digit upside (in percentage terms). Therefore, in light of the growth in topline and bottom line, outlook, current trading levels and key risks with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.082 per share, up by 1.235% on 15^th September 2020.

QHL Daily Technical Chart (Source: Thomson Reuters)

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