Consensus community valuation
$9.04
Average Intrinsic Value
57.3%
Undervalued by
Active Member Straws
#FY2019 results summary
Added 3 months ago

Electro Optic Systems (EOS) have announced their 2019 full year results, with the key highlights:

·         $166 M Revenue, up 91% on 2018

·         $166 M EBIT, up 194% on 2018

·         $3.1 billion pipeline.

EOS have invested $800 million in R & D over the past 20 years developing core technologies, with much of this investment yet to be monetised.  

The EOS business consists of three pillars:  Space, Defence, and Communications, with the Space business creating the core technologies driving EOS innovations in weapons, communications, and space domain technology. 

Defence Business

EOS report that market estimates of $1 billion of annual demand for remote weapons technology are being confirmed by $3 billion of upcoming contracts over the next 3 years.   The Australian operations are now close to its full, $300 million per annum, production capacity, with the US operations commencing in mid 2020, and two other facilities to commence production in 2021 and 2022 respectively.  

EOS report the total addressable market for the Weapons business is $24 billion over the next decade.  With EOS winning approximately 30% market share to date, EOS is only in the early phase of meeting remote weapon system market demand.

Communications Business

Investments approaching $1 trillion have been made in space microwave technology, however bandwidth is close to saturation in space.  Optical communications can address the limitations of microwave, however, the technology is incompatible with microwave technology.  EOS has the technology to address this problem, and this represents a $100 billion revenue opportunity.  

Through recent acquisitions, Audacy and EM Solutions, EOS can now provide comprehensive space communications capability, allowing EOS to introduce optical communications via the newly established communications business.  

EOS have reported preliminary commitments of $100 million per annum for the proposed MEO satellite constellation, named EOSLinkTM.   Ben Greene advised during today’s earnings call preliminary satellite design has commenced, and he expects tenders to be let for the construction and launch of satellites next year (subject to Audacy acquisition approvals).   Ben Greene advised countries have offered incentives, such as 4-5 year interest free loans for the EOS satellite project, with Ben Greene indicating this may negate the need for a future capital raise.  

Space Business

A change in government policy in early 2019 has required EOS to change their business model to enable direct sales to international customers.  This will increase the diversity of customers, however, has delayed monetisation of intellectual property by 18-24 months.   

EOS believes the establishment of the US Space Force, and their counterparties, along with the ever increasing threat from space debris will drive demand for their Space business offerings. 

EOS have enormous optionaltity, which is difficult to value.   In the near future, I think the current valuation will look like an amazing opportunity. 

 

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#Acquisition - going into space
Added 4 months ago

The Audacy acquisition fits in very nicely with EOS's transformative satellite communications business.  

Audacy have US satellite microwave spectrum licences, which EOS will need to launch MEO satellites by June 20204 to provide microwave communications with LEo satellites and other space vehicles.     The acquisition aenables EOS to:

1) Develop own ground terminals, using the acquired EM solutions capability. 

2) Implement its optical communications technology, which will enable EOS to expand bandwidth / capacity beyond what the microwave licensing allows.  This will maximise returns on capital, and will demonstrate the benefits of the technology.   

3) over 50 potential customers haveexecuted MOUs realting to the proposed service.   

4) The prelimianry constellation design will be finalised in the short term.  

5) Remote Weopon Systme update: production is ahead of schedule for 2020.

this is a long term development, and I think this is a huge step towards EOS's development of a significant communications business. 

 

 

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#Industry/competitors
Added 5 months ago

EOS ranking 15th on the ADM annual top 40 defence contractors list.

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#acquisition - Audacy
Added 4 months ago

Audacy and went into administration in 2019, after failing to attract funding and development partners for its medium earth orbit satallites.   The proposed constellation consisted of three satellites.   

Things went pear shaped for Audacy when they lost contact with a protoptype satellite late in 2018.  

Audacy had $100 million USD per annum committed in MOUs from potential customers, and planned to have the satellites operational by end of 2020.  I don't know how much a communication satellite costs to launch - can anyone help here????

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#Industry/competitors
Added 5 months ago

EOS acquisition EM Solutions coming in at 17 on the ADM top defence SME list.

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#Fundy/Analyst Views
Added 3 days ago

15-May-2020:  https://www.livewiremarkets.com/wires/buy-hold-sell-2-fundies-clash-on-these-stock-ideas

Excerpt:

Matthew Kidman:  "Okay. Here's your chance, Simon. One stock that's just running its own course. Doesn't matter what's happening out there in this bleak old world that you can tell us about."

Electro Optic Systems (ASX:EOS)

Simon Shields (Buy):  "Electro Optic Systems. It's a buy. It's high-growth government contracts; shouldn't have been affected by COVID, was because one of its customers had to shut down some military bases that was accepting the kit but still government contracts, they will get done. Did a capital raise and diluted the shareholders, but the P/E is incredibly low, 10 times for a company that even with the downgrade's growing 40% sales this year, will grow in excess of that for the following two years per annum. Absolutely. It's a buy."

--- click on link above for more --- 

Simon Shields is from Monash Investors, and it sounds like they are EOS shareholders, albeit not substantial holders (not 5% or more of the shares on issue).  EOS do also have Regal Funds Management on their register with 6.42%.

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#Quarterly Reports
Last edited 4 weeks ago

30-Apr-2020:  Appendix 4C - EOS March 2020 Quarterly Report

ACTIVITY STATEMENT FOR THE QUARTER ENDING 31 MARCH 2020

The company’s operations in the quarter ending 31 March 2020 closely followed management’s expectations at the commencement of the period, in terms of production output, factory yield, revenue generation, cash flow and profitability.  However, events in the last 7 days of this quarter, caused by the COVID-19 pandemic, caused significant changes to the Company’s plans for the rest of 2020 and for 2021.

By Q4 2019 the Company was holding firm orders for over $180 million of defence products deliverable to a foreign buyer in the last 3 quarters of 2020.  Combined with another $70 million of firm orders more evenly distributed across 2020, the overall delivery requirement of $250 million was sufficient to support 70% growth in revenue and EBIT for 2020 over 2019.

Management assessed that 70% growth could be managed if the entire 2020 effort was evenly distributed across all four quarters of 2020 to smooth plant demand and reduce production risk.  In November 2019 the Company raised around $80 million in new funds, with most allocated to allow production in Q1 2020 of products for inventory, which would be delivered and invoiced from Q2 2020.

Product delivery takes place through a series of steps called the delivery chain.  The products must be delivered to the EOS facility in the foreign location, unpacked and checked, installed on customerprovided military vehicles, tested under real combat conditions with live ammunition at a special test range, and then delivered to a designated military base for deployment.  These 5 steps typically require 4-6 weeks and involve around 35 staff.

On 24 March 2020, one week before formal deliveries could commence, the delivery chain was broken in multiple places due to a national lockdown and the impact of COVID-19:

  • Five EOS technical staff from Australia were required to leave the foreign country on 24 hours of notice, or be stranded due to airport closures and quarantine.  These staff are essential for the delivery process.
  • All accessible airports were closed to normal commercial passengers and freight.
  • The EOS production facility, located in a secure industrial zone, was locked down by military police, along with all other defence plants.  Approximately 50% of EOS local staff of 35 persons were also formally quarantined.
  • The military test facility required for live firing was closed.
  • The designated delivery points within military bases were cut off by military base closures.

At 31 March 2020 these events were very recent, and were represented as precautionary by authorities.  At this point, including some activity late in 2019, the Company had already completed around $55 million of production for inventory, as planned. 

The company’s Space Systems and Space Communications businesses operated to expectations in this period.

Subsequent Events:

By 10 April 2020 the severity of the pandemic impact across the world and the affected country was more apparent.  The Company assessed that the recovery of the entire delivery chain would take 60 days after reasonable access and mobility was restored.  Since access was forecast to be opened from July, the earliest date for deliveries to commence would be September, pushing cash payments to Q4 2020.

There are no contractual issues arising from delivery delays due to the pandemic.  There is no contractual obligation on EOS to continue production of products which cannot be delivered.

On 14 April 2020 EOS decided to suspend production of products undeliverable in the near term as soon as the production facility could efficiently switch its output to another customer[s].  This switch requires 100 days to allow the supply chain to respond with appropriate parts.  The suspended production can resume as soon as the delivery chain is restored and inventory is reduced to normal levels.  This is likely to occur in 2021.

On 15 April 2020 EOS raised $134 million in new capital through a fully underwritten institutional placement with $55 million allocated to allow a further expansion of inventory until July 2020 when production capacity can be switched to other contracts with no delivery impediments.

The deferral of a substantial amount of activity and its associated revenue from 2020 to 2021 required EOS to reduce 2020 guidance from 70% growth to 25% growth over 2019 performance. 

--- ends ---

[Disclosure:  I don't hold EOS.  I had them on my Strawman.com scorecard as an "SP-recovery-from-Covid-19" trade, but I'm removing them tonight.  I'm not that comfortable with who the end users of their tech are, and what the tech can be used for, including to potentially kill innocent people - whether intentionally or accidentally, and there are better opportunities elsewhere, IMO, so I'm moving that Strawman playmoney out of EOS and into DOW instead, who look to me to have massive upside from here.  DOW is also a company I now hold in all of my real-life PFs.]

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#ASX Announcements
Last edited a month ago

23-Apr-2020:  EOS Expands Space Communications Backlog

Electro Optic Systems Holdings Limited (EOS) has announced that its wholly owned subsidiary, Brisbane-based EM Solutions, has recently closed contracts to deliver its Cobra Maritime Satellite Terminals to four allied Naval forces.  These contracts are principally for delivery to NATO forces and are together valued at approximately AU$14M. They will be delivered through 2020 and 2021.

In addition to its strong existing order book with the Royal Australian Navy, these contracts result in a record backlog for the company, six months after being acquired by EOS. 
 
 
[click on link above for photo of Cobra 1m Triband Maritime Terminal]

 

With its Cobra terminals now in use or on order with six of the world’s largest navies across four continents, these contracts further validate the acceptance of EM Solutions satellite communications products as a technology of choice to some of the world’s pre-eminent naval end users.  Operating at X-Band, Military Ka-Band and Commercial Ka-Band and certified for operation on major global networks such as WGS and Inmarsat GX, the Cobra terminals provide users with robust and resilient beyond line-of-site communications with unprecedented flexibility and assuredness for their operations at sea. 

EM Solutions CEO, Dr Rowan Gilmore said:  “These export sales help confirm EM Solutions as a trusted supplier of broadband satellite communications to defence forces around the world.  The orders come on the back of the tremendous support the company has received from the Australian Department of Defence in the development and commercialisation of its Cobra terminals.  As we continue to support the Royal Australian Navy with deployment of Cobra terminals on multiple vessel types, the confidence shown in Australian space communications technology by multiple allied navies is a strong endorsement of the sovereign capability that has been fostered by Australian Defence Industry Policy”. 
 
The Group CEO of EOS, Dr Ben Greene, said:  “The global success of our Cobra technology underscores its suitability for a wider role in global satellite communications.  Cobra is presently the most versatile satellite communication terminal available, providing users with access to both MEO (mid earth orbit) and GEO (geostationary orbit) satellites in multiple military and commercial bands, and from rapidly manoeuvring platforms such as fast naval vessels.  Cobra is now being extended in scale and adapted in spectrum for more platforms, and a wide range of potential roles in the EOS deployment of next-generation communication satellites in MEO.”

--- click on link above for the entire announcement, including photos ---

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#SPP: Share Purchase Plan
Added a month ago

15-Apr-2020:  EOS have today announced a business update, a fully underwritten institutional placement and an SPP (share purchase plan for existing shareholders).

Quick summary:

  • Placement:  EOS is undertaking a fully underwritten institutional Placement to professional and sophisticated investors to raise ~$134 million with ~28.3 million fully paid New Shares to be issued, representing 25% of current issued capital.
  • Share Purchase Plan (SPP):  EOS will also conduct a non-underwritten SPP to existing eligible shareholders capped at a total aggregate of $10 million.  All of the Directors of EOS who are shareholders have indicated that they will participate in the SPP.
  • Placement Price:  The Placement will be conducted at $4.75 per New Share, representing a 17.4% discount to the last traded price of $5.75 and 10.9% discount to the 5-day volume weighted average price of $5.33 on 14 April 2020. 
  • SPP Price:  The price for New Shares offered in the SPP will be the lower of the Placement Price and the 5-day volume weighted average price (VWAP) prior to close of the SPP.
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#Capital Raising
Last edited a month ago

15-Apr-2020:  Equity raising to enhance liquidity and fund ongoing growth

Also:  Equity Raising Investor Presentation

Electro Optic Systems Holdings Limited (EOS) has announced an update on its business operations and an institutional placement of ~$134m (at $4.75/share) to enhance liquidity and continue to fund ongoing growth. 

Key points

  • Backlog and pipeline expectations unchanged, with increased momentum of acquisition activity in key customer programs.
  • Logistical issues causing delivery and payment delays under some existing contracts despite full funding with irrevocable letter of credit.
  • Award of a material new contract from an existing customer expected within weeks, with no delivery or payment disruptions and on prompt payment terms.
  • FY2020 EBIT guidance revised to $27 million representing EBIT growth of 25%, reflecting decision to defer $9 million of EBIT relating to contracts with assumed disruption to delivery and payment.
  • Raising ~$134m via a fully underwritten institutional placement (excludes funds raised through the non-underwritten SPP) of new fully paid ordinary shares to fund working capital for inventory expansion, investments to maintain growth, additional liquidity and transaction costs.
  • Upon resumption of payments under delayed contracts, expectation of significant funding flexibility to continue to pursue growth opportunities. 

Business Update

...click on link above for all the details of EOS' update on Backlog and Pipeline, Staff, Logistics, Production and Supply Chain...

Outlook Update  

As a result of the current and potential impacts of COVID-19 on EOS, management have taken decisive and pre-emptive action to balance:

  • Temporary cash outflows associated with producing goods under some contracts with delivery and payment constraints; and
  • Importance of sustaining capacity in both EOS and its supply chain through FY2020 to return to high growth using existing EOS backlog and a resilient pipeline of government programs in FY2021. One key government customer has already taken a similar view and brought forward sufficient demand from EOS’ pipeline to retain supply chain capacity, with the contract with EOS expected to be executed within 30 days. EOS has consequently deferred approximately $70 million in production and associated revenue and $9 million of corresponding EBIT.  These amounts are expected to be received in FY2021. These deferrals relate to products which face delivery disruption.

Revised guidance is for $230m in revenue and $27m EBIT for FY2020.  This represents 25% growth over FY2019 EBIT of $21.7m (excluding FX gains) and assumes that no existing contracts are cancelled, the award of a new material contract and that the most severe impacts of COVID-19 are contained within FY2020.

EOS to date has produced over $60m of product for which delivery has been disrupted and payment delayed.  EOS plans to continue production from April to July 2020 for these government customers at a cash cost of up to $55m (with more than $140m of receivables associated with these delayed deliveries expected to be received from Q4 FY2020).

This continuation will maintain capacity in both EOS and its supply chain whilst allowing a smooth transition to a new contract with unimpaired delivery and payment from July / August 2020.

The outlook for FY2021 is for strengthening growth as activity deferred from FY2020 is caught up, backlog is processed and pipeline awards are made.

Upon resumption of payments under delayed contracts, EOS expects to have significant funding flexibility to continue to pursue value-accretive growth opportunities.

Funding Update  

Following the production of over $60m of deliverable product for which delivery has been disrupted and payment delayed, EOS has an unrestricted cash balance of $43m as at 14 April.

EOS is taking pre-emptive and decisive action by raising ~$134m via the underwritten Placement to fund the following:

  • ~$55m to produce goods from April to July 2020 assuming cash receipts for this effort will be delayed to Q4 FY2020;
  • ~$31m to fund investments to maintain momentum through FY2021 in high growth areas of communications and counter-UAS products;
  • ~$14m to fund investments to move company operations to a post-pandemic paradigm allowing secure and classified work and operations across IT networks; and
  • ~$34m retained to provide additional cash liquidity, optionality to pursue growth opportunities and to fund transaction costs associated with the Placement.

Following the Placement, EOS expects to have sufficient cash to generate $27m EBIT and produce ~$140m of billable goods within FY2020 for which cash payment is expected to be received from Q4 FY2020, while at all times throughout FY2020 maintaining a sufficiently positive amount of unrestricted cash. 

EOS has also agreed a $15m line of credit from EFIC providing additional funding headroom.  EOS has not drawn any debt facility to this point. There remains the potential to consider additional debt facilities.

[click on links above for more]

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#Acquisitions
Added 4 months ago

28-Jan-2020:  EOS Acquires US Space Communications Business

That's how you get your SP to rise +4.4% on a day when the All Ords drops 104 points.

Wish I held this one!  Up +315% in the past 12 months - from $2.48 to $10.28.  Not bad at all...

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#SPP: Share Purchase Plan
Last edited a month ago

22-Apr-2020:   Share/Security Purchase Plan (SPP)

Electro Optic Systems Holdings Limited – Share Purchase Plan  

On 15 April 2020, Electro Optic Systems Holdings Limited (EOS or the Company) announced to the Australian Securities Exchange (ASX) that it had successfully raised A$134 million from an institutional placement of new fully paid ordinary shares in EOS (Shares) to investors at an issue price of A$4.75 per Share (Placement Price) (Placement), representing a discount of 17.4% to EOS' closing Share price on ASX on Monday 14 April 2020.  

The board of directors of EOS (Board) recognises that a number of EOS' loyal shareholders did not have an opportunity to participate in the Placement. In addition, the Placement was made in reliance on the temporary extra placement capacity afforded by the class waiver granted by ASX on 31 March 2020 (which is conditional on the Company undertaking a share purchase plan). The Board is therefore pleased to offer Eligible Shareholders an opportunity to participate in EOS' share purchase plan (SPP or Offer). The SPP will give all Eligible Shareholders an opportunity to apply for up to A$30,000 worth of new Shares at an issue price per Share [which is the lower of:  

  • (a) $4.75, being the Placement Price; and  
  • (b) the price (rounded down to the nearest cent) which is equal to the volume weighted average price (VWAP) of EOS Shares traded on ASX over the 5 trading days up to, and including, the date that the Offer closes,  

(Purchase Price)]. The additional capital raised under the SPP will be used to fund future growth opportunities and provide additional cash liquidity. The SPP is open to all shareholders recorded as holding Shares on EOS' register of members as at 7.00pm (Sydney, Australia time) on Tuesday, 14 April 2020 and who have a registered address in Australia or New Zealand (and who otherwise meet the eligibility criteria set out in the attached SPP Terms and Conditions) (Eligible Shareholders).

Other conditions of the SPP include:

  • (a) Eligible Shareholders may apply for a parcel of Shares with a dollar value of $2,500, $5,000, $7,500, $10,000, $15,000, $22,500 or $30,000;  
  • (b) applications, certificates (in the case of 'custodians') and full payment for Shares subscribed for under the SPP must be received by 5.00pm (Sydney, Australia time) on Friday, 8 May 2020, unless the Offer is extended, in accordance with the instructions set out in the Application Form and the SPP Terms and Conditions;  
  • (c) the Offer attracts no brokerage or other transaction costs; and
  • (d) the SPP will be initially capped at A$10 million. However, the Board reserves the right in its absolute discretion to accept applications from Eligible Shareholders in excess of $10 million.  Alternatively, if the total value of applications for Shares under the SPP exceeds A$10 million in aggregate, EOS may scale back applications under the SPP in its absolute discretion. In the event of a scale back occurring, you may not receive the full number of Shares applied for under the SPP and the difference in any application monies will be refunded to you (without  interest) following the issue of Shares under the SPP.

Participation in the SPP is completely optional. However, an Eligible Shareholder's entitlement to participate in the SPP is non-renounceable. This means that an Eligible Shareholder's right to participate in the SPP cannot be transferred to anyone else.

The Board recommends that you read the attached SPP Terms and Conditions carefully and in their entirety before you decide whether to participate in the SPP.

 

--- the above is not the entire announcement - it is just what I consider to be the most important bits - click on the link at the top for the entire announcement ---

[I don't hold EOS shares - but they are currently on my Strawman.com scorecard - I'll be looking to remove/sell them once their share price recovers enough - I added them for a short term trade only.  This CR will delay that SP recovery, but it should happen eventually.]

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#Risks
Added 4 months ago

I like this business long term and loving the price drop at the moment. i'm not in it yet but will be soon and will keep buying on the dips. 

am i missing any risks or do you agree this drop is profit taking?? 

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