Electro Optic Systems Holdings Limited

EOS Details

Outlook for FY21 Remains Strong:Electro Optic Systems Holdings Limited (ASX: EOS) operates in the space, defence systems and communications business. The company recently updated that its Annual General Meeting will be held virtually on 29^th May 2020.

New Contracts Secured by Subsidiary: As per a recent announcement, EM Solutions, a Brisbane-based wholly owned subsidiary of the company, has closed contracts to deliver its Cobra Maritime Satellite Terminals to four allied Naval forces. All the contracts together were valued at $14 million and will be delivered through 2020 and 2021. The contracts further validate the acceptance of the company’s satellite communications products as a technology of choice of the world’s pre-eminent naval end users.

Capital Raise: The company recently updated that it has successfully raised an amount of $134 million from an institutional placement of new fully paid ordinary shares in the company at an issue price of $4.75 per share, representing a discount of 17.4% to the closing share price on 14^th April 2020. The above capital raise is aimed at enhancing the liquidity of the business and funding of ongoing growth initiatives and working capital requirements.

Business Update:The company announced that none of its customers has shown any intent to cancel or diminish any contracts. It possesses a potential contract pipeline worth $3 billion, with an increased level of acquisition activity from key customer programs. The company has not seen any major delays or disruptions across the supply chain so far and holds a large parts inventory for over three months of full production in Australia, due to a large portion of unconsumed volume, which was acquired to meet the EBIT growth target of 70% adopted in November 2019. 

For the year ended 31^st December 2019, the company reported revenue amounting to $165.98 million, as compared to $87.13 million reported in the prior year. In the defence segment, production plant utilisation increased beyond 50% of the capacity, that led to a three-fold increase in overall sector EBIT.
 

FY19 Income Statement (Source: Company Reports)

Outlook: The company has deferred ~$70 million in production and associated revenue and $9 million of corresponding EBIT, pursuant to delivery disruptions relating to some products. The above amounts are expected to be realised in FY21. For FY20, the company expects to report revenue amounting to $230 million and EBIT amounting to $27 million. In terms of growth, EBIT is expected to be up 25% on the pcp, assuming that no existing contracts get cancelled, a new material contract is awarded, and the major impacts of COVID-19 are contained within FY20. Despite the challenges in FY20, the company has strengthened the outlook for FY21, with the deferred activity from FY20, processing of backlog and the pipeline awards made. As payments for deferred contracts are resumed, the company expects to have significant fund flexibility to pursue value-accretive growth opportunities.

Valuation Methodology: Price to Sales Based Market Multiple Valuation 

Price to Sales Based Market Multiple Valuation (Source: Thomson Reuters)
 
Stock Recommendation:In the last three months and six months, the stock price has corrected by 55.45% and 33.53%, respectively. Currently, the stock is trading below the average of its 52-week low and high level of $2.740 - $10.800. The recent contracts by EM Solutions provide a record backlog for the company, in addition to the strong existing order book with the Royal Australian Navy. We have valued the stock using a 5-year average Price to Sales multiple of ~3.25x and arrived at a target price with an upside of high-single digit (in percentage terms). Considering the business update, a modest outlook for FY21, price movements, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $4.79, up 4.585% on 28^th April 2020.
 
 
EOS Daily Technical Chart (Source: Thomson Reuters)

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