Pinned straw:
Have done a more detailed review of the EOS FY2023 Annual Report, the 1QFY2024 Appendix 4C and the recent Investor Day Presentation. The slides below is how I have internalised the good turnaround story and the very positive trajectory of the business since new management came onboard in late 2022, amidst of a lot of business/Covid turmoil.
Have been seeing a very steady flow of positive news in the last year and knew that things were going well, but have got a much better appreciation of how well through these slides and the financial summary.
Have remained invested since Mar 2020 when initially opened the position from around ~6.60, after falling from the peak of ~$10, (thinking I got in at a good price ...). Have topped up from about ~1.13 earlier this year as more evidence emerged of the positive turnaround outcomes.
EOS is now on a much firmer footing with clearer direction, amidst buoyant global demand for its products, as governments respond to the changing nature of warfare towards counter-drone, electronic warfare, autonomy/unmanned and space - EOS is very well positioned to meet demands in these areas.
Really liking what management has done to fix the business issues and the evidence of those fixes steadily emerging. Will stay invested and average up as more positive evidence emerges with the expectation that EOS is one best positioned for the medium instead of short term, given the very long selling and product development cycles amidst inherent government/military/was conflict uncertainty.
Discl: Held IRL
FY2023 Results
Slides summarises nicely, the FY2023 full year results ending 31 Dec 2023.
Contract backlog of $622m at 31 Dec 2023
While FY2023 results were strong, summary below of the last 4 HY’s shows more clearly, the significant positive moment in (1) revenue (2) rapidly reducing Loss After Tax (3) improving Gross margin and (4) steady march to positive underlying EBITDA
1QFY2024
- 1QFY2024 continues the 1H revenue momentum since FY2022 - appears that 1H has consistently been the weaker half.
- Cash balance of $72.4m as at 31 Mar 2024 with record cash flows at the end of FY2023
Business Turnaround
- Previous issues with cash collections, liquidity very much under control - significantly improved revenue, revision of contract terms, cash collected + capital raising has allowed the consistent on-time repayment of high-cost working capital loans from Washington SOL Pattison, a major shareholder, and meeting of debt covenants.
- Business Turnaround under new management after the turmoil of 2022 has delivered results and is well advanced - leaner organisation, sale of loss making SpaceLink, disciplined cost and capital management
Market Conditions
Market conditions and demand are very favourable - current conflicts have highlighted the changing nature of warfare - EOS has products and IP to directly address this changing nature of warfare and is positioned very nicely to capitalise on this demand with recent product launches in the back end of 2023/early 2024.
Customer base has significantly widened to Europe, reducing previous heavy dependence on the UAE market
Growth Plans
EOS has IP and innovations in High Energy Laser Weapons and Space Warfare - focus now is on finding customer partners to fund the development of these innovations - this will drive the next wave of EOS growth in 3-5 years and beyond.
mikebrisy
@jcmleng Good to read your update and that the problems of the past appear to be behind them. I held from 2019 to 2021 - long enough to make a c. 20% loss before I realised some important lessons:
1) This is a risky business because the imbalance of power with buyers;
2) It essentially takes on project and supply chain risk when it signs up to contracts that - because of 1) - it probably can't fully price in. For example, several of its systems have to be integrated into the client's operations and meet performance tests before payments are made. So its not just making and shipping widgets.
3) I could never get the transparency and understanding of the economics of the business, in large part because of the long cash conversion cycle (money tied up for a long time) and different contracts and products probably with quite different economics not visible to investors;
4) Management turnover is a concern. I'm glad they changed out the lot that were in charge when I held - they were overpaid and I don't think they were straight with shareholders over the risks they were managing (although, the closed borders and inability to move people to do acceptance testing during COVID was a big issue outside their control). Also, there was little skin in the game. To be clear, I am talking about the previous lot - I don't know much about the current crowd. But with a new bunch in charge, there is zero basis of confidence for me to invest. It is clearly not a great business that will succeeed no matter who is in charge.
I am still concerned that this business is not shareholder-friendly. Total compensation of the CEO is $1.6m, for a company with a market cap of $275m, where SOI have gone from 113m to 193m in 5 years, that doesn't make a profit, and has very unpredictable cashflows. Of course, it is really hard to attract top talent in the defence industry, and you will have to pay up if you want a CEO with experience in the international majors. This is the dilemma the Board will have faced.
If I am reading the annual report correctly, the CEO and CFO/COO own a total of zero (0) share between them. In fact, according to Simply Wall St, the Executive Team own 0.035% of SOI.
There's no doubt they have some great, relevant tech. and strong market tailwinds. They may even do very well from here.
However, I prefer businesses where I have some way of looking at how they've gone in the past and then being able to have a go and assess what they can look like in 3 to 5 years time, following the current strategy. When I held $EOS, I quickly reaslised this wasn't a business I'd ever be able to do that.
Its not an investment I could ever hold in the foreseeable future with any conviction. It just wouldn't make my top 30. And I'd never sleep easy, always waiting for the next surprise.
Everything I've written does not negate that this might well prove to be a fantastic investment from here, if the recent progress continues. It just doesn't fit my style and my comments above probably say more about me than about the company.
Disc. Not held