Electro Optic Systems Holdings Limited

EOS Details

1HFY21 Result Highlights: Electro Optic Systems Holdings Limited (ASX: EOS) operates in the sectors of defence, space, and telecommunications.

• Increase in Revenue: The company posted revenue of $97.82 million, up by 29.7% YoY in 1HFY21.
• Reported Net Loss: EOS incurred $11.72 million of net loss after tax attributable to its members in 1HFY21 versus a loss of $14.26 million in 1HFY20.
• Net Cash Inflows: EOS generated $4.56 million of net cash from the operating activities in 1HFY21 versus $62.55 million cash used by operations in 1HFY20. The cash receipts from the customers increased to $116.98 million in 1HFY21.
• Key Resignations: EOS reported the retirement of Ian Dennis as Non-Executive Director in May 2021. Mr Fred Bart resigned as the Chairman & Director of EOS in July 2021 and was replaced by Peter Leahy AC to the Chair role.
• Liquidity Balance: EOS held $51.11 million cash and cash equivalents as of 30 June 2021.

Revenue & Net Loss After Tax from 1HFY20-1HFY21; (Analysis by Kalkine Group)

Key Risks:

• COVID-19 Impact: The COVID-19 situation is evolving in Australia and worldwide due to new virus strains. The reoccurrence of COVID-19 can increase supply chain costs, lower supplier responsiveness, and cause contract negotiation and product delivery delays to EOS.
• Financial Risks: The company faces market risks such as interest rate changes, credit risk, price risk, and currency risk.

Outlook:

• The company has lowered the revenue guidance to $230-240 million from $235-$245 million for FY21.
• The Underlying EBIT after SpaceLink has been re-estimated at $1- $4 million from $3- $8 million stated previously for FY21.
• EOS has a sales pipeline of $2.6 billion on a risk-weighted basis for its Defence Systems. The company has multiple material contracts in the negotiation stage with existing customers. EOS has an order book of $375 million as of 30 June 2021, with ~70% related to international activities. EOS will book ~30% of the orders as revenue in 2HFY21 (half in 2022 and the balance in 2023).

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (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 15.31% in the past three months and a negative return of 30.34% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $3.420 - $6.920. The stock has been valued using the Price to Earnings multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount than its peers’ average, considering its higher net loss after tax in 1HFY21, lowered guidance for revenue and Underlying EBIT after SpaceLink for FY21 and the various risks associated with COVID-19 and technology. For this purpose of valuation, peers like Quickstep Holdings Limited (ASX: QHL), PTB Group Limited (ASX: PTB), Elsight Limited (ASX: ELS) and others have been considered. Considering the current trading levels, increase in revenue, cash receipts, and positive net cash flows from operating activities in 1HFY21, valuation, sales order pipeline for Defence Systems in 2HFY22, and key risks associated with the business, we give a ‘Speculative Buy’ rating on the stock at the current market price of $3.440 as on 1 September 2021, 10: 30 AM (GMT+10), Sydney, Eastern Australia.

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.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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