Electro Optic Systems Holdings Limited 

EOS Details

Adding New Clients to Boost Top-Line Performance: Electro Optic Systems Holdings Limited (ASX: EOS) is an industrials player operating in the defence systems and communication business. The stock was listed on the ASX last year and was included in the S&P/ ASX 300 in June 2020. As on 4 May 2021, the market capitalisation of the company stood at ~$670.90 million. During Q1FY21, Michael Lock joined EOS as the CFO in March 2021. The company earned $51.44 million as receipts from customers in Q1FY21. During the quarter, EOS signed new contracts in Australia and witnessed considerable progress across Europe, the US, and the Middle East for its Defence Systems segment. The company is inked a contract for the supply of 251 Remote Weapon Systems (RWS) by the end of Q3FY21. In another agreement with Hanwha Defense Australia (HDA), EOS will provide T2K turrets for three HAD Redback vehicles for the Land 400 Phase III program. The company has resumed a key delivery contract in the Middle East and pre-placed over $120 million of the completed product under its Defence Space segment.

In April 2021, EOS’ Space Systems notified of a breakthrough in proprietary laser technology to reduce space debris. EM Solutions, EOS’ subsidiary, shipped M-Frigate Cobra systems ordered by the European NATO Navies. EMS posted the highest revenue and EBIT levels for Q3FY21. SpaceLink, the US subsidiary of EOS, has completed the Request for Information (RFI) to assess satellite vendors interested in satellite bidding. It held a cash and cash equivalents balance of $41.49 million as of 31 March 2021.

Cash Flow from Operating Activities, Q1FY21 (Source: Company Reports)

Key Risks: The company is exposed to the risk of high competition from peers, pertaining to contracts across its defence, space, and communications segments. Further, COVID-19 related disruptions are causing hindrances in the supply chain and delivery of key projects.  

Outlook: EOS expects an order delivery of RWS for Remotely Operated Combat Vehicles (ROCV) in mid-FY21 from a NATO member and expects large orders to follow on in FY2022. It is currently testing Mopoke Counter-UAS (CUAS) system thoroughly at a field site in ANZ. Post-testing, it will conduct customer evaluation and expects agreements from 2HFY21. Further, EOS has completed a CUAS demonstration of the armed drones for the US Government in April. EOS plans to commercialise its laser technology IP, co-developed with the Cooperative Research for Space Environment Management (SERC). Importantly, it will release the Request for Proposal (RFP) in early May 2021 to authorised bidders. Meanwhile, SpaceLink, the US arm, is engaging with the customers and signing MOUs in the US and Australia for awarding the contract for its satellites from July 2021.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (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: The stock of EOS gave a negative return of ~18.29% in the past three months and a negative return of ~21.57% in the past six months. The stock is currently trading lower than its 52-weeks’ average price level of $4.12-$7.30. The stock of EOS has a support level of ~$3.639 and a resistance level of ~$4.878. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium over its peer average, considering its steady cash receipts from customers in Q1FY21, project deliveries scheduled for new contracts, EMS’ record revenue and EBITDA, and continued strength expected in future periods. For this purpose, we have taken peers like Orbital Corporation Limited (ASX: OEC), PTB Group Limited (ASX: PTB), Xtek Limited (ASX: XTE), etc., which comes under Defence space. Considering decent Q1FY21 results, new contract wins for delivery of RWS and Turrets, ROCV orders expected from NATO member and for Mopoke CUAS in FY21, EMS’ record performance and continued growth expected in FY21, we give a ‘Buy’ rating on the stock at the current market price of $4.290, down by 3.596% on 4 May 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.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine do not hold interests in any of the securities or other financial products covered on the Kalkine website.