Consensus community valuation
$8.31
Average Intrinsic Value
54.5%
Undervalued by
Active Member Straws
#media
Added a month ago

New Weapons Boost Army Capability and Secure Jobs

The Morrison Government will acquire 251 Remote Weapon Stations that will better protect Army personnel on operations while boosting Australian jobs and opportunities for small businesses.

The Remote Weapon Stations, which allow a gunner to operate a weaponised system from a protected position, will be added to the Army’s Bushmaster and Hawkei protected mobility vehicles.

Prime Minister Scott Morrison said the new weapons were part of the $270 billion capability upgrade for the Australian Defence Force, under the new 2020 Force Structure Plan.

“The Federal Government is committed to ensuring Australian Defence Force personnel have the tools they need to protect themselves and keep Australians safe,” the Prime Minister said.

“At the same time we must have a robust and resilient defence industry that maximises opportunities for small businesses and supports Australian jobs and local investment.”

Minister for Defence Senator Linda Reynolds CSC said the 2020 Defence Strategic Update and the 2020 Force Structure Plan would strengthen the ADF’s capabilities to respond to an increasingly challenging strategic environment.

“The Morrison Government is investing a record $270 billion in Defence capability and infrastructure over the next decade,” Minister Reynolds said.

“Investments such as the acquisition of Remote Weapon Stations will make the ADF more capable for the wide range of potential scenarios and threats Australia will face in the future.”

Minister for Defence Industry Melissa Price said the investment in new remote weapon stations would provide job stability for over 200 of Electro Optic Systems’ workforce directly involved in engineering and support.

“This investment not only secures local jobs but it also provides certainty for over 100 supply chain businesses across Australia,” Minister Price said.

“More than 80 per cent of the parts that Electro Optic Systems use for these weapons are sourced through the Australian supply chain and that’s good for jobs and small businesses.

“While the Federal Government’s focus is on keeping Australians safe, our investments in Defence have a significant benefit for Australian businesses and workers – around 15,000 businesses and 70,000 workers benefit from our investments and that’s set to grow.”

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#Defence Announcement-July 1, 2
Added a month ago

ScoMo announced $270 Billion in defence spending over the next 10 years.   What is interesting is this (from ABC report today):

The Government will spend $15 billion on cyber and information warfare capabilities over the next 10 years, $1.3 billion of which will be used to boost the cyber security activities of the Australian Signals Directorate and the Australian Cyber Security Centre.

Including a network of satellites for an independent communications network, $7 billion will also go towards improving Defence's capabilities in space....

This is a huge opportunity for EOS, and perhaps is why EOS spiked +15% this morning.......

Disc.: I hold EOS

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#Space Defence Opportunity
Added a month ago

Ok, dept. of defence will be spending $13.5 Billion on Space and Satellite Communications.   Here is where:

1) Satellite Communications: $6.9 Billion over 10 years.  It looks like defence will establish low earth obit satellites, which need MEO satellites to communicate - EOS's MEO satellite communications will surely be a beneificary, providing high margin communicaitons services. 

2) Space Situational Awareness: $2 billion over 15 years.   This is right in EOS's sweet spot.  They will surely win a significant chunk of work through this. EOS are developing two new failities in Qld and SA to support data sales. 

3) Terrestrial Operations in Contested Space: $1.4 -2 B form 2027.  This is reliant on tracking data , and further R & D to develop and improve such data - This will surely require EOS's expertise. 

4) Satellite Communications Assurance: $1.7 - $2.6 B from 2028.  This expeniture is about defending and securing the space domain (i.e. EOS laser technology anyone?).   This is presumably an opporutnity to deplo EOS's laser technology to move space objects around perhaps.   

So this looks to be a great opportunity, and it is perhaps an opportunity greater than the Defence Weapons business if Australia's allies need similar technology.   

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#Communications Business
Added a month ago

the EOS Communications business, is only months old, but has made tremendous progress, and has the technlogy to transform satellite communications over the next 10-15 years.    

Here is a video from one of EOS's competitors, SES Satellites, which gives you an idea of the use cases for the a Mid Earth Orbit (MEO) satellite constellation:  https://o3bmpower.ses/use-cases/cruise.

Extensions to SES Satellites MEO constellation is scheduled to be launched into space in 2021 by SpaceX.  SES Satellites Netork revenue was 745 M Euro last year, for their GEO and MEO networks (unable to separate out their revenue), with an EBITDA margin of 62%, and profit margin of around 20%.   

A very profitable business.   SES Satellites has a marhet capitalisation of $3.5 BN Euros ($5.7 BN AUD), or 7x EOS's market capitalisation.   

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#Trading Halt
Added a month ago

EOS Contract with DEpt. of Defence worth $100 million.........https://www.australiandefence.com.au/news/eos-to-supply-rws-under-approx-100-million-stimulus-deal

Given they remain in a trading halt, there is a possibiility there are other contract announcements pending.  

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#AGM Notes
Added 2 months ago

Some interesting takeways from Dr Greenes presentation:

1) Defence - RWS total Addressible market is $16B.  With ROCV (remotely operated combat vehicles) being the fastest growing segment.  EOS has a powerful competitive advantage, due to its accuracy and reliability.  The CEO reported the EOS system consumes 1/3 of the ammunition of its nearest competitor to complete a mission, giving it a significant competitive advantage.  Further upgrades have increased the capability of the RWS's systems, which can now incorporate anti-tank weapon systems.   Given the relentless innovation being demonstrated, it is quite possible EOS will dominate this market for years to come.   

2) Satellite communications.   EOS reported that all mid orbit satellite communication network competitors are profitable, due to the difficulty in establishing mid orbit constellations.  The EOS has secured communications bandwidth that is in the order of 3-4 times larger than the next 3-4 competitors combined. 

3) EOS forecast having $200 m in cash by the end of FY2021.     They are also in discussion with suppliers and customers around ways to finance / fund the satellite constellation capital costs.  EOS will not need to fund the satellites until 2024, and will report on funding negotiations in 6-12 months.  

4) Powerful synergies - the synergies between the three businesses are becoming increasingly powerful, with the communications business finding opportunities in the ROCV sector (where reliable communications are critical), and the space business securing the Communications business satellite network - which is highly valued feature for defence customers, among other synergies

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#Trading Halt
Last edited a month ago

I agree with Rapstar. The original trading halt announcment on Thursday indicated that an announcement would be made on that day.  The contract is either bigger or there is haggling over details.  $100M sounds a little cheap for 251 (why not 250) of the remote weapon systems (RWS, ~$4M each), but I wouldn't really know.

It will depend on the time frame as well.  The 2019 Dec quarter was $54.3M.  Presumably it will take some time to build 251 automatic firing turrets, so what time frame is does that $100M get spread over?.  EOS has a big back log on contracts.  Maybe they should expand?

Disclosure I hold EOS

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#Fundy/Analyst Views
Added 2 months ago

15-June-2020:  EOS was covered on "The Call" today on Ausbiz:  https://www.ausbiz.com.au/media/the-call-monday-15th-june?videoId=1933 starting at the 19:40 mark, so around one third of the way in.

Gaurav Sodhi from Intelligent Investor said it is a very interesting business but there is a huge mismatch between reported profits and cashflow, so he said people shouldn't go near it unless they fully understand how the revenue recognition works and why they have negative cashflow despite reporting large operating profits.  Gaurav also explained the space communications upside potential (i.e. using lasers for space communication instead of microwaves). 

Mathan Somasundaram from Blue Ocean Equities also seemed reasonably interested in EOS, however he has concerns with a rotation out of growth stocks into value stocks and how that rotation would likely hurt a growth stock like EOS where you are paying up for where you think they can get to in the future rather than the business as it is today.

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#Risks
Added 4 days ago

If you liked the company yesterday, I think you'll still like the company today. No great surprises and all competition will be in the same boat regarding shipping logistical nightmares.  A good bit of cash and lots in the pipeline. Once fully operational the business will take off. As a long term investor I am happy to buy on any weakness. 

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#Defence CEO Interview
Added 2 weeks ago

https://www.defenceconnect.com.au/key-enablers/6473-podcast-maintaining-agility-through-covid-19-grant-sanderson-electro-optic-systems

Great insight in this interview.   One key takaway is that EOS has around $150 M of Work in Progress stuck in their factory due to supply chain disruption, but this is expected to be cleared by the end of September.  

Also mentions the opportunities in the recent defence strategic review, but higlights the bigger opportunities are offshore.

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#Financials - cash flow
Added 4 weeks ago

Foolnomore  had a question about EOS's negative cashflow.  I don't know the absolute answer to this, but I think it is a function of the contract business model.  EOS bids for contracts worth hundreds of millions of dollars, they then need to purchases bits and bobs from suppliers to fullfil the contracts and then as they deliver to milestones they are paid money, which may take a number of years. If the number of contracts increases/grows, which is the case for EOS, there is a backlog. This increase in contracts then requires them to spend more to get the supplies to meet those contracts, which then results in a negative cash flow, because the timeframe for getting the milestone payment is a year or more in the future. 

Obviously I am not an accountant (but it makes sense in my head), but if anyone can give a more nuanced explanation that would be great!

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#FY2019 results summary
Added 5 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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#media
Added a month ago
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#acquisition - Audacy
Added 2 months ago

EOS Completes Acquisition of Satellite Communications Business

The Acquisition was completed on 28 May 2020. EOS will now move forward to deploy communication satellites in a constellation which EOS has named EOSLink.

The EOS strategic approach to space communications is based on the widely-held industry view that optical communications, where EOS has very advanced technology and strong capabilities, will carry the majority of space communication traffic by 2036. This traffic is then expected to be around 100 times the volume of today, but will generate revenues for service providers at only the same level as today. For the market segment EOS intends to service, which excludes broadcast and internet applications, this revenue currently exceeds AU$100 billion annually. EOS intends to address a niche in this segment.

Market demand for aggressive improvements in price-performance is severely disrupting an industry facing the capacity limits of current radio frequency (“RF”) technology. There are mounting corporate casualties of the trend toward higher capacity at a lower delivered cost. This rationalisation of the industry is likely to continue for some time.
EOS has chosen to enter this disrupted market now, by acquisition, to become a full service space communications provider.

See link for remainder.

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#ASX Announcements
Added 4 days ago
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#Government Press Release
Last edited a month ago

As I mentioned earlier today, a lot of movement in the Defence space. Scomo held a press conference at the EOS facilities and the PM's office has put out a press release on the following (I expect an ASX announcement and Trading to resume, Bid Price was at $7.90 at time of writing):

"The Morrison Government will acquire 251 Remote Weapon Stations that will better protect Army personnel on operations while boosting Australian jobs and opportunities for small businesses."

"More than 80 per cent of the parts that Electro Optic Systems use for these weapons are sourced through the Australian supply chain and that’s good for jobs and small businesses."

https://www.pm.gov.au/media/new-weapons-boost-army-capability-and-secure-jobs?utm_source=miragenews&utm_medium=miragenews&utm_campaign=news

This doesn't even touch on the Satelite or Space capability investment that will be a facet of this Defence spending. Great news for EOS and domestic Defence companies today.

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#Acquisition - Collinear
Added a month ago

Intersting the annoncement was not price sensitive.   Two key points:

1) CEO of communications Appointed.  Mr Glen Tindall.   He looks to be a high calibre individual (look here: https://www.linkedin.com/in/glentindall/) , with deep knowledge and connections in the space communciations sector. 

2) Acquisition of Collinear, as US based communications business, with a unique hybrid communicaitons technology that appears to fit in well with the EOS strategy.  They have a team of about 40 employees, so I am guessing they generate around $8 Million in revenue, which is a bit under 5% of EOS revenue.   

Will be interesting to watch the satellite constellation develop ove rhte next 3-4 years.   

PS -  EOS are building 4 satellites, and I believe one of them is a spare one in case the launch of one satellite fails.  Remember this if one satellite launch goes wrong......

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#Acquisition of Audacy gets App
Added 2 months ago

EOS has received regulatory approval to acquire Audacy, which means EOS is going into space.   

More detail was provided in the announcmment, namely:

1) The constellaiton will consist of four satellites, not three, which was the original Audacy plan.

2) Constellation will cost $1.2 Billion (yes I know).  

3) Interest free finance is available on satellites, meaning the $0.9 Billion satellite cosot will not require payment until 2024.  

4) The initial constellation will not include EOS's optical technology, and will rely on RF technology. 

5) EOS has launched research collaborations to commercialise its optical satellite technology, initially in a hybrid of optical and RF communications.    

6) The constellation will provide constant communication link capability to low earth orbit satellites, which Audacy reported to have a TAM of $10 billion USD (EOS have over $100 M pa USD in commitments).   I understand EOS will have the first satellite constellation to provide this service and as a result, has first mover advantage. this will be enhanced by their optical communications technology that will roll out in around 5-10 years time.   

I certainly hope the RWS business is pumping out cash by 2024. 

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#media
Added 3 weeks ago

Sounds like good news for EOS:

" The government of Australia announced Monday (13 July) that it would be making substantial investments in various space technologies as part of its defence upgrades. The government said it would be investing in Australia’s first fully owned and controlled military satellite communications constellation as part of its $7 billion investment in space capabilities over the next 10 years"

and

" A Request for Tender is set to be released in late 2020 for the sovereign controlled satellite communications capability, which aims to engage a single prime contractor to deliver, upgrade and sustain the capability over its life of type."

Full article at: https://asiapacificdefencereporter.com/australian-government-investing-in-space-technology/

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#ASX Announcements
Added 4 weeks ago
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#media
Added a month ago

EOS was mentioned in this piece on recent defence spending announcment. 

https://www.aumanufacturing.com.au/science-and-industrys-role-in-our-new-defence-posture

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#Defence Strategic Update
Added a month ago

Following on from Rapstar's great Straw and Information, the Minister for Defence is hositng a live session on YouTube (https://www.youtube.com/watch?v=7tLR344Dwrg) to give an update on their Strategy, scheduled for 12:30 AEST

This is an inference but may tie into EOS trading halt and it may contain some more material announcements of future oppurtunities and work. Possibly the mention of commercial partnership going forward.

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#ASX Announcements
Added a month ago
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#ASX Announcements
Added a month ago
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#ASX Announcements
Added 2 months ago
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#ASX Announcements
Added 2 months ago
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#Fundy/Analyst Views
Added 2 months 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 3 months 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 3 months 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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#ASX Announcements
Added 2 months ago
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#Company Presentations
Added 2 months ago

29 May 2020:  CEO Presentation for AGM today.

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#ASX Announcements
Added 2 months ago
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#SPP: Share Purchase Plan
Added 4 months 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 4 months 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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#ASX Announcements
Added 4 weeks ago
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#Financials
Added a month ago

Cash flow issue. EOS did report that cash flow would be affected by $100m for upto 6months due to a delivery/supply issue. Could this be the problem highlighted on The Call? 

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#SPP: Share Purchase Plan
Last edited 3 months 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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#Bull Case
Added 4 weeks ago

Government contract negotiation will push this up. Once further news on actual dollars etc... comes out price will stabilise. Exciting future. 

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#Acquisitions
Added 6 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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#Risks
Added 6 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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