Electro Optic Systems Holdings Limited

EOS Details

Innovation to Mitigate Space Debris: Electro Optic Systems Holdings Limited (ASX: EOS) operates in Defence, Space and Communications sector in Australia. EOS has recently announced regarding developing a laser technology to mitigate space debris. The innovation will add significantly to the development of space infrastructure. EOS will utilise its Guide star laser technology to track the space debris and place them at lower altitudes. The technology has been developed in collaboration with Space Environment Research Centre (SERC). The technology to mitigate space debris will be retained and marketed by EOS.

Robust Sales Pipeline to Aid Business Growth: Despite Covid-19 situation in FY20, EOS held its deliveries and let their inventory grow past $120mn in FY20. EOS is now expecting these inventories to be sold by second quarter of FY21. EOS had already received a formal customer acceptance in December 2020 for 25% of inventory. The company currently holds a strong sales pipeline amounting to $3.4bn on a risked basis and $13.0bn on an un-risked basis. 

FY20 Financial Highlights: EOS has registered an increase in revenues to $180.18mn in FY20 as compared with $165.38mn in FY19. The company has registered losses of $25.20mn in FY20 due to the unavoidable Covid-19 situation. The company has posted a decline in its cash and cash equivalent position at $65.93mn as on 31 December 2020 as compared with $77.88mn as on 31 December 2019.

Cash Position (Source: Company Reports)

Key Risks: The company is engaged defence and space segment. The company utilises technology to carry out its business objectives, any failure of technology may lead to financial losses for the company. The company requires heavy investments for its business process. Lack of liquidity on the balance sheet of the company may result in discontinuation of investments in various projects, which can further lead to business loss. 

Outlook: As per the company reports, EOS is expecting better results in FY21 on the back of continuation of delivering inventories to its customers, gaining contracts and the accomplishment of the Commonwealth 251 RWS contract. EOS is likely to develop and apply new defense technologies amid geopolitical tensions, leading to the business growth for the company.

Valuation Methodology: Price to Sales Based Market Multiple Valuation Method (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: In the last one month, EOS has increased by ~0.84% and decreased by ~5.20% in the last three months. The current market capitalisation of EOS stands at ~$811.11mn as of 9 April 2021. The stock is currently trading below the average of its 52-weeks’ price range of ~$3.950-~$7.300. On the technical analysis front, the stock has a support level of ~$5.05 and a resistance of ~$5.68. We have valued the stock using a 3-year average Price to Sales Based Market Multiple Method (considering some discount to its three years’ median P/S multiple at the back of registering losses in FY20 and a decline in its cash position as on 31 December 2020) to FY21E consensus sales of $303.10mn and have arrived at a target price of low double-digit upside (in % terms). Considering a robust sales pipeline, recent innovation to develop space infrastructure, positive outlook, valuation, and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $5.37, down by ~0.186% as on 9 April 2021.

EOS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: 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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