Electro Optic Systems Holdings Limited

EOS Details

Improvement in Top-line as well as Bottom-line: 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. Over the last four years, the company has witnessed significant improvement in its top-line and bottom-line. From 2016-2019, the company’s revenue has increased at a CAGR of 85.99%. Over the same period, the company’s net income has turned from a loss of $0.9 million in 2016 to a profit of $18.4 million in 2019.

Revenue Summary (Source: Company Reports)

COVID-19 Update: In the latest June quarter report, the company informed that due to the evolving COVID-19 situation, it has been impacted in multiple ways, including increasing supply chain costs, reducing supplier responsiveness, product delivery delays, delays in contract negotiation and execution, access to customers and inefficiencies in staff utilisation. COVID-19 situation has caused the delivery chain to break at five separate places. In response to COVID-19, the company is implementing all practical measures to prevent infection and reduce the operational impact of any new infection, while maintaining positive operating momentum. Lately, the company has experienced some relief with airports operating at sufficient capacity to allow EOS products to be transported to the customer’s country. The company’s production facility has also re-opened and up to 40% of staff are permitted to attend work. The company believes that if these developments continue, deliveries and invoicing could resume in Q4 2020.

Acquisition of Satellite Communications Business: On 28 May 2020, the company completed the acquisition of the satellite communications business of Audacy Corporation as well as two technical initiatives in the expansion of its Communication Systems business. The company believes that its optical communication technologies will deliver vast improvements in global communication capacity over the next decade and beyond.

Latest Developments: The company is currently in talks with the Commonwealth of Australia for the acquisition of 251 Remote Weapon Systems. The company expects to conclude its negotiations by Q3 2020, with initial deliveries made in 2020, in-line with customer requirements. With regards to the space communications capability, the company has received all the necessary US government approvals to proceed with the establishment of capability. The company is currently completing the preliminary design of the initial constellation to allow the intended customers to assess its suitability for the task of carrying their data.

EOS has recently moved its directed energy [DE] drone kill system to production. This product places EOS at the forefront of the CUAS market globally.

Cash Flow Update: During the June 2020 quarter, EOS received $20.83 million as receipts from customers. Over the quarter, the company spent $41.78 million on product manufacturing and operating costs and $12.44 million on staff. The total net cash outflow for operating activities stood at $46.96 million. At the of the June quarter, the company had a cash balance of $128.12 million.

Key Risks: The company is exposed to risks of COVID-19 as it has caused delays in contract negotiation and execution. Further, the company’s financial instruments expose it to the several risks including currency risk, fair value interest rate risk, credit risk, liquidity risk and cash flow interest rate risk.

Guidance: Due to the impacts of COVID-19, the company expects to report a net loss after tax of $12.7 million in H1FY20. The company expects its FY2020 EBIT to be in the range of $20-30 million, consistent with prior guidance of $27 million. The company expects to achieve growth in FY21 as activities deferred IN FY20 will be caught up in next year.

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of EOS has corrected by 43.68% on ASX and is currently trading below the average of its 52-week trading range, offering a decent opportunity for accumulation. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of higher single-digit upside (in % terms). For the purpose, we have taken peers like Orbital Corporation Ltd (ASX: OEC), Codan Ltd (ASX: CDA) and SKY and Space Global Ltd (ASX: SAS). Considering the company’s improvement in bottom-line and top-line, the easing of COVID-19 restrictions, FY20 guidance, and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $5.540, down by 4.318% on 31 July 2020.  

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

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