Electro Optic Systems Holdings Limited

EOS Details

Enhanced Cash Receipts on Inventory Movement: Electro Optic Systems Holdings Limited (ASX: EOS) operates mainly in three sectors - Defense, Space and Communications. The company provides specialised technology for all the respective segments. As per company update on 12 May 2021, EOS is converting cash on its inventory levels. The company has reported cash of $41.5mn as on 31 March 2021. Since 1 April 2021, cash inflows of $43mn has been registered. EOS still holds $100mn of completed goods to be handed over to the customer. The company expects a usual delivery to all its customers and expects further cash receipts of $100mn by the end of Q4FY21.

FY20 Financial Highlights: The company has registered an increase in its revenue to $180.18mn in FY20 against $165.38mn in FY19. Despite an increase in revenue, the company has incurred a loss of $25.20mn in FY20. EOS has registered a decline in its cash position to $65.93mn as on 31 December 2020 against $77.88mn as on 31 December 2019.

Financial Performance (Source: Analysis by Kalkine Group)

Key Risks: The company deals in multiple currencies. Thus, any adverse movement in foreign exchange prices may impact the financials of the company. The company holds an interest-bearing liability and may see an impact on its profit margins with a severe movement in Interest rates.

Outlook: EOS won a contract from Commonwealth of Australia (CoA). Under the contract, CoA has already accepted 90 Remote Weapon Systems (RWS). EOS expects to deliver a total of 530 units by Q3 2021 to CoA. EOS is expecting an order from NATO member for RWS in mid-2021 and follow-on orders from FY22.

Valuation Methodology: EV/EBITDA based Relative Valuation Method (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 23.09% in the last one month and a return of -17.95% in the last three months. The current market capitalisation of EOS stands at ~$589.48mn as of 26 May 2021. The stock is currently trading below the average 52-weeks’ price level range of ~$3.62~$7.30. We have valued the stock using the EV/EBITDA multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in % terms). We believe that the company can trade at some premium as compared to its peer average, considering an increase in revenue in FY20 and an increase in cash receipts on inventory movement. For this purpose, we have taken peers Orbital Corporation Ltd (ASX: OEC), PTB Group Ltd (ASX: PBT), Xtek Ltd (ASX: XTE), to name a few. Considering the strong order book, usual inventory movement post Covid-19 period, recent contract wins, current trading levels, associated business risks, and valuation, we recommend a “Speculative Buy” rating on the stock at the current market price of $3.93, up by ~0.511% as on 26 May 2021.

EOS 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.

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