EOS enters binding agreement to divest non-core naval SatCom subsidiary - EM Solutions

• Cohort to acquire 100% of EM Solutions for an enterprise value of $144 million
• Net proceeds of the sale to be used to support growth in EOS’ core business, including in the counter-drone market
• Sale demonstrates EOS' strategic and capital allocation discipline
• Subject to satisfaction of certain conditions, including customer and security approvals
• Foreign Investment Review Board (“FIRB”) approval received

EM Solutions, based in Brisbane, Australia was acquired by EOS in 2019 in a scrip-based transaction which valued EM Solutions at approximately $26 million. The 2019 acquisition of EM Solutions was intended to support the EOS SpaceLink venture which EOS terminated in 2022. While an attractive, growing and profitable business, EM Solutions has become non-core to EOS’ current growth strategy, which is focussed on counter-drone systems

Completion of the Proposed Transaction will automatically trigger the repayment of EOS’ outstanding debt facility with Washington H. Soul Pattinson and Company Limited (“WHSP”) in full (which EOS would otherwise have repaid from organic cashflows upon maturity in October 2025). The total amount to be repaid to WHSP (including future monthly interest amounts) is currently $64.4m.

Following this repayment, EOS will have no borrowings and have the balance sheet strength to support future growth.

TAKEAWAYS

• Management continues to execute against a very focused strategy of remote weapon systems, directed energy and space control
• Exits a business that is non-core for what looks like a good price and gain and fully closes out the termination of the EOS SpaceLink venture
• Significantly strengthens the balance sheet - $64.4m debt is fully repaid, no borrowings, funds become available to support future growth

Can't quite see a negative in what seems like a sensible move at a good price, consistent with the strategy that EOS continues to work towards. Will see what else management to say in the call tomorrow morning.

Discl: Held IRL and in SM

Small but important win in the Space space (pun intended) as (1) it enables customer funded new capability development work in Space technologies (2) broadens the recent wins in a non-directly-war-related space and (3) continues to demonstrate that the new EOS management HAS a clear strategy and is focused on pursuing that strategy.

Discl: Held IRL and in SM

Catching up on the EOS Trading Update of 16 July.

• Nice pop in the 1HFY24 revenue, growth across all business
• Working capital has gone up HoH, but fallen QoQ - maintaining its view that this investment will be realised in the next 12 months
• Cash balance 30 June 24 $52.2m

Continues flow of positive news! Looking forward to the formal 1HFY2024 results for more detail.

Discl: Held IRL and in SM

-----------

1H 2024 Revenue 

• Unaudited 1H 2024 revenue was approximately $142.6m, an increase of 92% on the $74.3m result for 1H 2023. EOS previously announced Q1 2024 revenue of $77.3m, an increase of 127% on the $34.0m result for Q1 2023. 
• The increase in unaudited revenue for 1H 2024 includes growth across all of EOS businesses, including the impact of accelerating production and delivery of Remote Weapons Systems (RWS) under an existing contract with a customer in the Middle East; growth in the EM Solutions business and growth in the Space Technologies business. 

Contract Asset 

• At 30 June 2024, EOS had a working capital investment in a gross contract asset balance of $89.7m. This represents an increase of $21.7m on the 31 December 2023 balance of $68.0m and a decrease of $7.8m on the $97.5m balance at 31 March 2024. 
• EOS expects this increased working capital investment made during 1H 2024 to continue to be progressively realised during 2H 2024 and 1H 2025. 

Bank Guarantee Collateral Reduction 

• EOS made a further scheduled debt repayment of $20.5m during April 2024. This follows the $26.9m repayment of the initial Working Capital Facility in September 2023. A further debt repayment of $52.1m is due in October 2025. 
• Following the April 2024 debt repayment, during June 2024 EOS finalised an arrangement with its funding providers to reduce the level of cash security deposits required to support existing bank guarantees by $8.3m. This resulted in an $8.3m cashflow receipt (from investing activities) during June 2024. 

Cash Position at 30 June 2024 

• EOS’ unaudited cash balance at 30 June 2024 was $52.2m. This compares to a cash balance of $72.4m at 31 March 2024, and follows the previously announced repayment of $20.5m of debt during April 2024. 

SUMMARY

• Steady quarter with no surprises
• Steady manufacturing and delivery progress, reducing the Gross Asset working balance as the deliveries convert to cash
• Orders and BD moving along at a steady cadence

Discl: Held IRL and in SM

KEY ACTIVITIES

Manufacturing & Delivery - steady progress of deliveries to key customers, continued reduction in the Gross Asset working balance

Customer Order Activity

• New strategic RWS Middle East customer purchases a RWS for testing on vehicles, to assist in evaluation for future potential orders
• EOS Space Technologies $9m strategically important work, Australia
• EM Solutions $15m new orders, continuing expansion in Europe

Order Book Development Activity - continued negotiations:

• Land 400 Phase 3 RWS opportunity in Australia, up to $100m for 2026-2027 delivery
• Potential new R800 RWS customer in North America, up to $30m, 2025 delivery
• Continued work on Ukrainian opportunities
• Continued market development activity

FINANCIAL SUMMARY

• Cash balance up $2.8m to $55.0m
• Net Cash from Operating Activities up a significant $18.5m to go from ($8.0m) to $10.5m
• Gross contract asset down $10.6m to $79.1m - good, steady delivery progress to bring this down and convert to cash
• Net contract asset value continues to drop to $43.0m, close to half of 3QFY2023

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.

Continuing the positive flow of news, this time in the other divisions. Price action seems to be hovering around the SPP price. Glad I topped up when it dipped last week.

Discl: Held IRL and in SM

EOS repaid $20.5m debt on schedule and have now repaid, on schedule:

• 50% of the principal amounts originally due to SOL
• 100% of the Working Capital Facility amounts

This is the continuation of the positive news from EOS and what I feel, has been clear communications from management in terms of the plan, what to expect, then the delivery of that plan. Andreas' German precision and clarity has made a big difference in how EOS has managed shareholder expectations since he came onboard, which I appreciate very much.

Topped up at $1.57, with what I would have purchased via the Retail Share Purchase Plan. The SPP will clearly be a flop given how the share price has moved. I got a call from the EOS broker managing the SPP asking if I was participating ...

I think EOS is very well placed to capture significant demand with conflicts breaking out everywhere. Management is very much on the ball in its response.

Discl: Held IRL and in SM

Details released this morning:

• $35m fully underwritten Institutional Placement of 20.6m at $1.70, 12% of existing issued share capital
• Share Purchase Plan to raise a further $5m, not underwritten, also at $1.70
• 18.3% discount to the last closing price of $2.08

In the last 18 or so months, since Andreas came onboard, it feels that EOS has quite decisively morphed from doghouse -> Turnaround -> steady contract growth and resolution of cash flow issues -> accelerating growth.

This raise thus makes sense to me and I'm in.

Discl: Held IRL and in SM

EOS went in a Trading Halt this morning.

AFR reports EOS ".... is seeking up to $40 million from investors, wall crossing fund managers on Tuesday night. Proceeds would fund working capital needed to fulfil customer orders."

It does make sense to me to do this and reduce reliance on very expensive debt. EOS is in a good position with its Turnaround and has had a very strong 100% run up in share price in the last 6 or so months. The need for funding for working capital lines up with the consistent management commentary of demand going gang-busters.

No mention of whether there is a Retail offer but I would have no hesitation signing up to it, if there was one as I have been looking to top up again.

Discl: Held IRL and in SM.

Wonderful to see EOS having to respond to a ASX speeding ticket today for the price movement from $1.235 on 8 Feb to $1.645 today 12 Feb.

Despite what many swear against, I do believe turnarounds ARE possible, but only IF the right ingredients are in place - CAT, EOS, EML, C79 are standouts for my portfolio .... I need NAN, ALC and maybe JAN to make the not so possible, possible ... !

Notes from the EOS Investor Update call earlier today, following the release of its Appendix 4C yesterday. In summary:

• Cashflow and operational challenges of 2019-2020 seem to now be well under control
• Good bullish sales momentum - the timing of how the Turnaround has been initiated and rapid progress on that journey has positioned EOS very nicely for 2023 and 2024. Steady flow of sales contracts have been announced
• Debt is now under control - good contract, collection and overall cashflow discipline against a backdrop of a bullish market provides strong confidence that debt repayments will be comfortably met
• Low capex requirements ahead, focus is on monetising R&D in recent years

My 3 concerns in July 2023 were: (1) sustainability of the turnaround (2) translation of the turnaround to improved sales, revenue, delivery and cashflow and (3) “top up when the Working Capital debt is mostly repaid”. 

Decided to accelerate the top up today as the track record in FY2023 suggests that EOS is on a good, disciplined trajectory with a bullish market ahead, meaning (1) and (2) are mostly met which significantly improves the risk profile.

Discl: Topped up Today IRL and placed Buy order in SM.

• Very bullish market currently, and is expected to remain bullish all of FY2024/CY2024
• At the start of a 2-3 year trend in these areas:
• EOS products are the “weapon of choice” to address the threat of drones in current war conflicts - traditional missile defences are (1) unaffordable (2) suffer from congested airspace issues - key differentiators for EOS is precise positioning, high reliability, high fire power/hit probability
• Robotic unmanned battlefield vehicles is a key demand as operations increasingly move from manned to unmanned operations
• Laser systems - 2024 is the launch year of commercialisation, expecting 1-2 contracts to kickstart sales after completing development investment in 2023
• A unique offering is to have these laser systems used in classic/conventional weapon systems
• 29 Jan 24 deal to sell Slinger Counter-Drone Systems to Diehl Defence was a major breakthrough into the German market - small contract size but a highly strategic win
• Recent deals have significantly broaden EOS’ customer base - addresses the previous issue of high business concentration on a few customers
• Talking to ~20 countries in Europe at the moment - likely to need to open a European office and logistics centre to increase supply reliability to customers
• US manufacturing facility in Huntsville will be increasingly key in the future as US sales will likely need to be manufactured onshore in the US - having to find ways of expediting sales and delivery to customers which minimise red tape
• Sales is focused in the following areas:
• Conflict Driven Ukraine, Middle East - key focus in 2024 is how to support the “immediate demand”-type sales. EOS has good pricing power in these sort of sales.
• Non-Conflict, long-term growth - Large quantity orders over a longer term supply period, strategic in nature, bullish will continue to grow order book in 2024

FINANCIAL UPDATES

• Strong focus on cashflow clearly seen in cashflow results
• Strong continued discipline in ensuring new contracts have a good cash flow positive profile - actions to remediate key Middle East contract completed in Feb 2023
• FY2023 cashflow was the highest ever achieved with $325.4m received
• $71.0m cash balance after paying of $26.2m debt in Sep 2023
• Other than the potential European office, minimal requirements for capex going forward - EOS does not need Capex to scale up and is now mostly focused on monetising prior year investments in development

Debt is in a good place following the resolution of the lender fee dispute with WHSP

No breach of borrowing covenants relating to cash inflows and cash outflows calculated on a rolling 3M basis in the last Quarter

TRANSFORMATION/TURNAROUND

Progress in the last 12-18M against the Turnaround plan has gone exceptionally well, beyond initial expectations

One of my email accounts gets a bunch of feeds from various investment services and newsletters. Sometimes they make me laugh.

Today's from Simply Wall Street is a cracker:

"Electro Optics Systems Holdings: New Minor Risk - Profitability"

Disc: Not held.

I held a small position once as an MF PRO 2 recommendation in 2019-2020, but over time as I dug into it, I realised it wasn't for me. It still isn't. I suffered a 20% loss on that investment when I sold at $4.40. Which goes to show that sometimes your best investment decisions can be to sell at a loss. EOS closed at $0.935 today, although it is "on a tear" from a low earlier this year of $0.435.

EOS Defence Systems has secured a new contract to supply approximately A$28m of R600 Remote Weapon System (“RWS”) unit spares to a customer in South East Asia.

• Deliveries under the contract are scheduled to commence in late 2024 and continue into 2025 and 2026.
• This sale was secured pursuant to EOS strategic initiatives to widen the product base, customer base and manufacturing base of the Group.  
• The products to be supplied under this contract will mainly be manufactured at EOS facilities in the United States.

Really liking the sales momentum and breadth in recent months at EOS. Once they can solve that irritating dispute with WHSP, life will be much better holding on to EOS ....

Discl: Held IRL

Another Friday after market announcement by EOS (terms dictated to be a little fair):

The WHSP $4.5m can issue has been kicked down the road another 2 weeks to 24 November.

Hopefully this is enough time for them to sort it out... or draft another aftermarket Friday announcement!

The EOS Marketing guys are justifying their high salaries by keeping EOS in the news ...

https://www.abc.net.au/news/2023-10-02/australian-drone-killer-system-ukraine-730/102876242

The publicity can't hurt ...!

https://www.abc.net.au/news/2023-09-02/drone-killing-laser-gives-glimpse-into-aukus-future/102806468

Notes on the EOS Activity Statement Qtr Ended 30 Jun 23. I liked and followed the headers that @Bradbury uses - it really does help clear my head and crystallise the key points.

Discl: Held IRL

WHAT WAS GOOD

• Cash balance as at 28 July was $84m, double the 30 Jun 23 cash balance of $42.0m - this has really improved
• Cash flow has benefited from contractual changes with significant Middle East customer in Feb 23 allowing earlier invoicing - Q2FY23 receipts from customers $61.1m, total 1HFY23 receipts $123.2m vs pcp $74.5m
• Continued good flow of cash positive new contracts this quarter - approx AUD435m
• Contract Asset Balance continues to fall as payments are received from customers - gross contract asset 30 Jun 23 = $109m, $30m less than gross contract asset at 31 Mar 23
• More cash flow improvements in 2HFY23 are expected from (1) termination of SpaceLink Venture (2) $25m cost reduction program
• Positive global market for EOS products during Q2 from Ukraine conflict and impact on demand from NATO countries
• Continued to deliver products in Defence Systems, Space Technologies, EM Solutions
• Continued to develop and commercialise Anti-Drone Counter Uncrewed Aerial System
• Continued to ensure working capital loan covenants not breached - first $20m principal due 6 Sep 2023 - well placed to repay given $84m cash balance on 28 Jul 2023
• No surprises as all the above has been announced during the Quarter - transparency and detail from the new management in recent months have helped boost confidence of the Turnaround journey

WHAT WAS NOT SO GOOD

Nothing to not like from this report for a change!

WHAT TO LOOK OUT FOR

• Continued sales momentum
• Continued momentum in contract delivery and conversion to cash receipts
• Continued meeting of working capital loan covenants and ability to repay the first $20m due in Sep 2023 - this looks comfortable
• Further progress in EOS 2.0 Turnaround Phase 2 planned for 2023-2024 - Implementation of Strategy

WATCH STATUS:

Very Encouraged, but not yet ready to add to holdings

SUMMARY

• The flow of news from EOS has been overwhelmingly more positive than negative this CY
• New management have defined a Turnaround Plan, have executed Phase 1 of the plan and this is translating to improved sales, revenue, delivery and cashflow
• The question is whether EOS will sustain this course to the point where it is back into growth mode - the signs are positive, but would like to see Part 2 of the Turnaround Plan implemented and sustained first to be sure
• Happy to continue to hold, but am not quite prepared to top-up just yet, until perhaps when the Working Capital debt is mostly repaid

Went through the FY23 AGM notes and preso and took stock of what to do with my (painful!) holdings of EOS.

Discl: Hold EOS 1.02% IRL

AGM FY23 Summary

• FY 2022 was a year of existential crisis
• Completely new managementn now in place
• $70m debt funding from SOL - came at very significant cost, but was a survival lifeline to keep the company going
• Completed restructuring and rightsizing program - reduced global workforce from 550 to 400, 30% headcount reduction
• Exited SpaceLink - capital intensive program, unable to raise capital
• Embedding new culture of (1) commercially minded (2) cost-conscious culture (3) fiscal discipline
• Weathered the most challenging period in EOS’ history
• FY2023 to be a period of stabilisation
• EOS foundations - technologies, people, are sound
• Global geopolitical and technological currents - headwinds - Ukraine war, increased national defence security spending across the globe
• Drones, counter-drone systems, unmanned vehicles have taken centre stage in Ukraine war - defence programs seeking innovative technologies that can provide operational advantages on the battlefield - EOS’ current and emerging product suite has the solutions, provide the opportunity to anchor demand
• Recent contracts for the supply of the EOS Remote Weapon System and new contract to supply the Royal Australian Navy sends message that EOS remains very much open for business

Positive Changes

• The SOL debt funding in Oct 2022 in exchange for equity was a vote of (no dount, highly opportunistic from a SOL perspective) confidence
• The debt covenants keeps EOS on a very short monthly cash flow leash - track record has been that those debt covenants have been met through to April 2023
• Complete revamp of management who, in the AGM, clearly acknowledged the existential crisis that engulfed EOS
• Initial turnaround actions have been executed - now appear significantly more focused on cash flow and cost management, significantly leaner organisation 
• Successfully re-negotiated contracts from the Middle East now favour better cash inflows
• Green shoots of increasing sales momentum from recent wins

Risks

• Inability to meet SOL debt covenants - entirely possible, but there is now a 3M track record of meeting the covenants
• Sales is very lumpy and uncertain - this is the nature of the business, however, appears to have the right technologies in place, with plans to grow the product offerings
• Reduced cost base does not stick/sustain
• Turnaround actions do not embed/stick - entirely possible, trajectory thus far is positive, but needs close monitoring

Why Remain Invested/Why Not Exit

• Holdings currently valued at $9.0k - have adequate cash in the portfolio - exiting EOS today at 86.5c, will have an immaterial impact on the overall portfolio cash balance
• Provides good direct exposure to increased defence spending on new disruptive defence technologies - defence spending is only going to go up in the coming years, in Australia and globally - EOS is well positioned to capitalise on this if they can get their act together
• Share price recovery has been positive and steady - price has doubled since the low of 43c on 29 Mar 2023, but is way, way below historical prices, supports the positive steps in the turnaround journey
• Not prepared to top up until at least when the SOL debt is paid off, and the company is able to stand on its own operationally

Well aware that turnarounds rarely succeed, but total loss from this point on is ~$9.0k vs an unknown upside - not a bad risk reward position in the overall context of the portfolio.

With the release today of the Australian government's Defence Strategic Review I wonder what impact, if any, it has for the future prospects of EOS?

While the flagged increase in Defence spending over the coming decades is a tailwind for the industry as a whole, the refocusing on the Navy and reduction in infantry vehicles for the Army is surely not positive for EOS.

I'd be keen to hear others thoughts.

EOS announced that have actually increased their cash balance by 23.8m in Q3 from 21.7m at the end of December (ie over doubled it). If it can hold onto or improved on this in Q4 then it will be the first half that EOS has increased it’s cash balance since H2 FY19 when it raised 80m, but this time it will be done on operating receipts.

Price is down, so market not impressed with this or a couple of small order updates also mentioned. However, it may just be the first substantial sign that the focus on improving cash flow and tighter capital spending management that was mentioned as part of the year end (31 Dec). Also making some dent into collecting the 164m in contract assets that has done nothing but grow over the last 3 years and almost killed the company by making it insolvent. 

Perhaps the note on needing to comply with debt covenants and the irregularities of cash flows for their industry and customer concentration has put a shiver into the market price. The comfort I take on this point is that the debt is with Sol Pat’s and despite very high cost, it’s with a group that is invested in the company and will benefit from it’s success, not to mention that have a good track record of backing winners, so sticking with EOS indicates some faith in the future.

Disc: I own

Price pop on A$120m contract to supply EOS's heavy Remote Weapon Systems (RWS) to Ukraine.

It's only take a year of war that has drained the world of weaponry for them to get a deal... and that deal is subject to conditional early termination rights in favour of the Ukraine (ie war ends, contract ends, = inventory is all yours EOS).

Well better than no deal, but lets hope they can actually start managing their business well enough to benefit shareholders this time.

Disc I own

This was actually announced in November, but EOS has officially confirmed the wind up of their SpaceLink venture.

"Electro Optic Systems Holdings (“EOS” or the “Company”) announces today that it has ceased investment in SpaceLink Corporation (“SpaceLink”) and commenced proceedings to wind up SpaceLink."

Thankfully no further impairments are expected to be made in relation to SpaceLink so hopefully all the skeletons are out of the closet on this one and 2023 can be a clean slate.

This announcement and decision to wind up SpaceLink also confirms they were unable to find a buyer for the SpaceLink business which is quite telling both about the state of the business and the markets appetitie for such businesses these days.

Full announcement: https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02598739-2A1413990?access_token=83ff96335c2d45a094df02a206a39ff4

EOS has appointed a new CFO, Clive Cuthell, who commenced on the 5th September.

That means they have a brand new CEO (started 1st August) and CFO, which was very much needed after the shocking performance of the last team. I'd also like to see some heads role at board level as well.

Details on the new CFO here: https://asiapacificdefencereporter.com/eos-names-new-cfo/

Like @Rapstar I have sold out - too much weirdness going on. I do like some of their products and may come back but for now I'm out.

@Rapstar - re your comment on government buying the competitor RWS on the Abrams purchase - Defence is very focussed on keeping that platform as close as possible to US config and as a US FMS purchase it is unlikely to differ very much if at all. Not sure it was ever an option to have the EOS RWS but it would be nice if government did support them more proactively like most other countries do for their local industry.

Full disclosure - I sold out of EOS yesterday.

Reasons why I sold out:

1) CEO said EOS RWS had clear competitive advantages, and was winning most of the contracts it entered. I just learnt yesterday, the recent purchase of Abrams tanks includes the competitors product (Konsberg). WTF! If the EOS product is so good, why did the Australian Dept. of defence select a foreign competitor?

2) Unable to secure off take agreements for Spacelink in originally promised timeline.

3) They had to downgrade the Spacelink constellation, as they clearly could not fund the full monty.

4) The CFO resigned, without notice, with the announcement released at the close on a Friday.

5) Rumours abound that Rheinmetall has won the lucrative IFV contract, the announcement of which is delayed, possibly due to problems with the Boxer contract (in order for defence to gain leverage on Rheinmetall.

6) Strategic review underway - indicating big problems internally.

If you continue to hold, I wish you luck, but I would expect the CEO to go, and a capital raise in the near future.

At 3:52 pm on a Friday, EOS announces the resignation of their CFO.

The resignation had immediate effect, and no explanation was given for his exit.

Financial Review exclusive: Raytheon, Lockheed Martin at the pointy end of missile deal

Key takeaways:

1) The government is also expected to name the winning tender for its armoured personnel carrier contract (IFVs), a deal worth up to $27 billion, with sources saying defence officials had recommended the German Rheinmetall design.

2) Sovereign Missile Alliance -Looks like it is a dead duck.

Industry sources said the major stumbling block remained the transfer of US intellectual property to Australia. Although the White House and Congress are broadly supportive, it will only happen if the US is assured their companies can keep a tight rein on it.

That complicates what role two local consortiums, the Australian Missile Corporation and Sovereign Missile Alliance (EOS), could have in the project. Both consortiums were created for the sovereign missile enterprise.

Sources said Defence and the government swung between allowing the consortiums access, mindful of the need to support local industry, versus the desire to get the best technology.

Defence Minister Peter Dutton was said to be in favour of getting the most capable weapons as quickly as possible, even if that came at the expense of local involvement, in light of the deteriorating strategic circumstances.

It is expected both American companies will argue they need to be in charge of final assembly of their missiles. One suggestion has been a government-owned common facility to assemble both companies’ missiles, although that could meet resistance.

“If Defence gets its hands too dirty into dictating a supply chain, they might well be unwilling to transfer their IP,” one industry source said.

Another source said the US government was more likely to allow the transfer of intellectual property to the Australian subsidiaries of US defence companies.

It's not looking good, but depends on whether the government follows Defence recommendations or not...they may use a colour coded spreadsheet to make their final decision.

Long suffering shareholders - suffer no more - A strategic review is underway! LOL.

Most concerning line in the announcement:

"Given the SCALE of the Spacelink funding commitment, conflicting demands on capital and the linkages with EOS shareholder value..."

In another words, EOS needs more capital to fund its ambitions, and perhaps getting funding / capital injection on reasonable terms for Spacelink has been unsuccessful.

But, there are a a couple of potential positive catalysts in the near term as follows:

1. LAND 400 Phase 3 is sure to be announced in the federal election campaign. If the Hanwa team wins, this will be a significant boost for EOS.
2. Spacelink offtake agreements - I had a reminder in my calendar that we needed to see these flowing by the end of the month to firm up financing - This announcement does not bode well for any success in closing contracts. Perhaps the Aust. government will make announcement regarding this in the election campaign ??? But an offtake agreement with Australian defence will not be enough to get this off the ground.

I am giving them a little more rope until end of April.....

DISC - I HOLD (for now)

EOS have announced the development a new turret variant. Video here.

SpaceLink is part of EOS’s Communication division (1 of 3 core divisions) but is effectively operating as a separate company via an investment vehicle (US Subsidiary – SpaceLink Corporation).  Todays (20/10/21) announcement (attached combined with last weeks) of an Authorisation to Proceed on the previously announced negotiations with OHB Systems AG to establish the first Constellation for US$300m leaves me asking:

What is the value to EOS shareholders?

Tracking back through previous announcements and notes, there is very little information on potential value other than an internal estimate from the EOS SpaceLink Investor Webinar (24/11/20) at the bottom of page 8 which suggests a NPV of US$1bn per constellation (IRR of 20%). Page 11 expects the first constellation to be operational in 2024 and second in 2027, I am taking this as the point in time they have a PV of AU$1bn.  So lets start with that and assume a market discount rate of 10%:

PV of 2024 constellation = A$1.00bn (1bn discounted at 10% for 3 years & FX of 0.75)

PV of 2027 constellation = A$0.75bn(1bn discounted at 10% for 6 years & FX of 0.75)

So total PV = A$1.75bn

However, EOS is funding the venture via issuing equity and debt, so will not “own” the full value of the subsidiary.  In the 2020 annual report (p6) they state that they expect to retain majority share in SpaceLink, so lets say 51% which is the most conservative end of the options.

EOS owned PV = A$895m (51% of A$1.75bn)

So if you believe what management have put forward then the current market cap of A$540m is a 60% discount to the value of the SpaceLink operation, assuming the rest of the business is worth nothing…

Another way to value it is if we knew the % of the business OHB is buying for US$25m (A$33m) as a cornerstone investor.  If fare value is A$1.75bn then they should get 2%, but I suspect it would be closer to 5% (if they need to raise US$300m by completion and half is debt) which values the subsidiary at A$666m, assuming this is right it still implies the market cap is understated if SpaceLink is worth A$340m (EOS 51% share of 666m) and EOS’s current market cap is A$540m.

Until there is a lot more detail available and real money starts to flow I am sure the market will apply a very high discount to the above figures (and rightly so), but it is interesting to get a view on the potential even at just 2 constellations (more are possible).  Note that downside risk to EOS is limited because all the funding is going to be via third parties for SpaceLink and it’s a separate entity, at the cost of sharing the upside of course.

Disc: I own EOS

EOS has announced OHB are the preferred tenderer for satellite manufacturing project.  Key features of the announcement:

1) Expect contract to be finalised and signed next week, with  contract value in excess of $300 Million USD.  

2) Satellites to be delivered by March 31, 2024.  It is unclear to me if deliver means complete manufacture, or launch into orbit.  

3) The contract will require progress payments on achievement of milestones.  This is a different arrangement to what was originally flagged when the project was initiated. Originally, the CEO said he expected the manufacturing to be financed by governments hungry to secure space manufacturing work.   Now, Spacelink will need to secure funding. More on that below. 

4) Intial payment tranche will be funded by OHB, who will take a $25 million stake in Spacelink.   It is unclear how much ownership this $25 million convertible note stake will deliver to OHB.  

My thoughts are, that the risks are somewhat higher than what we were led to believe.  EOS will now need to raise capital to fund the manufacture of the satellites within the next 6 months.  This, in turn will need them to sign up offtake agreements within the next 4-5 months. 

If they don't, shareholders will be left holding the bag. 

DISC - I HOLD. 

Korean Army to trial AS21 redback (fitted with EOS T2000 turret), taking one of the 3 prototypes from the Australian risk mitigation trial in 2022.....article here..

DISC - long suffering shareholder....!!

I have been a long suffering shareholder of EOS for some years now.   I have been struggling with thesis creep, as managment are very adept at kicking the can down the road, and selling the blue skies ahead for the business.  

Their H1 results were more of the same, with the following notable items:

1) Spacelink stratgy change.  Now they need to fund via debt, as they can't find business partners at startup.  The plna now is to initiate construciton via debt and finance, and then onboard investors as they sign contracts (which they reckon they have MOUs of $200 M USD to convert).  This is qutie a change, and increases risk.  They hav eindicated the contracts will begin to flow by end of Q1 2022.  

2) $1 BN in tenders slipping form H2 and into Q1 next year.   Conversion timeline slipping again,

3) $100 M cantrct asset conversion.  If you trust maangement, this is resolved, and will be able to repor ton cash conversion by end of October.  I'll trust them on this.  

So what to do......let the thesis and execution continue to slide?  Well, it is understandable contract timelines can slip when dealing with governments.   So I am going to give them slack until March 30, 2022.  If they don't deliver the following, I am out:

1. Been awarded $1 BN in contracts as promised in August? Incl. NATO ROCV Contract?
2. Have they signed commercial agreements for Spacelink yet – They guided for this.
3. UAE Contract asset should be history by now……
4. Land 400 Phase 3 contract – has it been awarded?

It's in my diary.!

DISC- I HOLD

EOS reported HY results for FY 2021.  Key takeaways:

1) Contract Asset Saga Continues.  EOS has negotiated amendments to contract, which have apparrently been agreed to and awaiting sign off with Defence Ministry.  EOS report they will invoice +$68 million once sign off is received, and they will update on when payment will be received in the Q3 4C report (due late October).   The CEO advises phase 2 will not have the same issues in realtion to long debtor cylces. 

2) CEO reports defnce segment contract tender cycles have lengthened, with procurement delays for NATO ROCV contract, and the counter-drone contracts.   EOS aiming to close most of $1 BN in contracts by close of Q4. 

3) Contract award for satellite construviton to be awarded over the next 30 days.  Debt to be used to fund 40% of Spacelink, with equity partners to be onboarded in stages.   The reasoning being, Spacelink's enterprise value will grow over time, as it is awarded contracts, and as the enterprise vlaue increases, so will the required dilution of EOS ownership.  CEO re-iterates, no futher capital required form EOS shareholders.  Risk weighted revenue pipeline now at $200 M USD per annum ($150 M was business plan goal).  

4) Communications business travelling well with record backlog.

5) Space sector experiencing delays in the contract tendering cycle, and htis will continue into FY2022. 

So, the short thesis is not quite busted..........the question is, are EOS management kicking the can down the road as it were in relation to contract issues / Spacelink risks, or are managements assurances legitimate?  Looks like we will need to keep waiting to find out.

DISC - I HOLD.   

Chairman, Fred Bart, has resigned from the board. 

Mr Bart is also Chairman of Audio Pixels Holdings Ltd, Director of Weebit Nano, and Noxopharm.  It is fair to say he has had a colourful history, most notably at APH.  

I see his departure as a positive, and may go some way towards restoring investor confidence over the longer term. 

DISC - I HOLD

Some very significant news for EOS in today’s 4C (attached) release in terms of future cashflows and addressing issues on cash receipts (as Rapstar noted earlier today) that has caused the share price to half from pre-Covid highs and may see a return to those highs.  Operating Cash flow as positive (+$17.3m) for the first time in 2 years and FCF positive (+$11.2m) for the first time in around 3 years.

There were good product and development updates for each division (Defence Systems, Communication Systems and SpaceLink), but the Cooperation Agreement with Diehl Defence (explained below) and news on Defence System payments (cut and pasted at the bottom – no summarising it) go a long way to address the cash draining concerns the market has about this business. FY21 guidance released in May was reiterated (FY21 sales $235-245m, EBIT $3-8m after $17m for SpaceLink expenses).

I hold EOS and will continue to hold based on this information.  Once the half year report is out (and hopefully more details on terms for the Diehl agreement) I will update my valuation.

EOS Cooperation Agreement with Diehl Defence for European and NATO markets: Under the agreement Diehl will produce EOS’s Remote Operated Weapon Systems (RWS) for European and NATO markets.  Not detailed but this sounds like a licencing arrangement, which enables higher sales for EOS without additional capital intensive production capacity and at higher margins.  Also flagged are similar opportunities on Space and High Power Electro-Magnetics, laser and missile technologies between the two companies…

Defence Systems received first payment from customer on major overseas contract

“Total cash receipts from customers during the June quarter were $65.5 million, of which $30 million was payment from the customer on the major overseas contract. From March 2020 to March 2021 EOS increased its investment in its inventory of finished goods to a total of $138 million to allow production to continue against a firm export order while delivery and payment processes were restored from COVID-19 disruption. This investment preserved the EOS supply chain and maintained EOS’ own production processes. EOS continues to produce and deliver against this contract and anticipates further cash receipts of over $100 million from this business in H2 2021.”

Key takeaways:

1) Cashflow - Its positive! With $65.5 M hitting the coffers, up form $51 M in prior quarter.  Over $100 M illion in cash from the UAE contract to come in H2 2021.  Probably another $30 million in cash coming via DoD Hawkei RWS contract in H2 as well.  SUMMING UP, CASHFLOW CONCERNS LOOK TO BE DISCOUNTED BY THIS REPORT. 

2) >$1 Billion in contract awards potentially award in H2, 2021. 

3) Spacelink report confirmed negoitiations regarding financing ontrack for resoluton by end of Q3 2021.  Although news on the sales front was sketchy, but it would be impossible to be more transparent at this stage. 

4) Titanis trials / demonstrations over H2 2021.  

5) Partnership with Diehl Defence to build a production line in Germany for Defence products for sale into Europe. 

DISC - I hold. 

EOS reported $20 M of contact wins with ADF, which will be delivered over the next 24 months.  

The majority of revenue will be recognised on FY2022, and is a good lead in to projects beyond 2022.  

One contract is for 3 Cobra terminals for 3 of the 6 ships in the SEA 1180 program, and 12 ships in the SEA1445 program.  So, there is a long pipeline of contracts in the years ahead. 

DISC - I HOLD.

Full ASX Announcement
EOS has been awarded $20 million worth of contracts with the Australian Defence Force (ADF) over the last month.

The contracts cover advanced technology research and development activities in electro-optic sensors, EM Solutions Cobra terminals and sustainment.

The contracts will be delivered over the next 24 months under standard payment terms.

The contracts will not have a material impact on the company’s previously issued 2021 revenue and profit guidance, but are significant for underpinning revenues in 2022 and for prospective growth projects thereafter.

EM Solutions Cobra terminals contracts have been signed for the next three shipsets of the Royal Australian Navy’s SEA1180 program for Offshore Patrol Vessels and the SEA1445 program for Enhanced Cape Class Patrol Boats. The sustainment element of the contract is to support the currently installed Cobra terminal population used by the Royal Australian Navy over the next 12 months.

Disc: hold shares in RL portfolio

I've been doing a bit of digging, and it appears the defence contractor EOS is working with in the Middle East is NIMR Automotive, a subsidiary of Emitrates Defence Industries Companies.  

NIMR automotive develop and manufacture infantry fighting vehicles and infantry transport vehicles, with a focus on desert terrain / environment.  

They are expanding into SE Asia, and perhaps this is why EOS have a presence established in Singapore.  

My concern is the time it takes for EOS to get paid by this client.  EOS is yet to be paid for most of the product it made last year. That requires substantial capital to fund. 

Ok,  Key takeaways:

• Revenue expected to exceed $240 M of FY2021 - About 35% growth on PCP. 
• Underlying EBIT guidance of $20-25 M (excludes Spacelink establishment costs).   Spacelink costs $17 million. 
• Indications from EOS customers guide for revenue growth well above 30% far beyond 2023. Recovery to +50% growth not expected before 2023.
• No new capital required, unless revenue growth exceeds 70%. 
• Spacelink funding to be secured in Q3 2021.  
• +$1 billion of contracts in advanced stages of development with existing EOS customers.  
• Preferred tenderer on 2 counter drone contrcts worth more than $1 Billion USD.  
• "Demand tsunami on the horizon".  Is this statement just hyperbole?  

Backlog of $428 M and $535 million of cashflow.   

EOS state thaey have achieved minimum scale required to meet mandatory compliance requirements for next stage of growth......

With $41M in cash at the end of Q1, I think they need to give some more clarity around cashflows - We need to see +$80 M cash per quarter hitting the coffers for the remainder of the year to give us confidence they can fund projected growth.  

DISC - I HOLD.   

EOS is one of my largest holdings.  With escalating short interest in the business, I thought I would write down what I think this thesis is, and whether it holds water.  Here Goes:

EOS's Profitability is in Paper Form, and will Never Convert to Cash. 

FY2019 Revenue: $166 M

FY2019 cash receipts:  $109.2 M

FY2019 Contract assets*: $98.3 M

FY2020 Revenue: $180.2 M (up 8.6% on pcp)

FY2020 cash receipts:  $107.6 M (down 1.5% on pcp)

FY2020 Contract assets*: $191.8 M (up 95.1% on pcp)

* Includes contract assets and inventory

Clearly, the balance sheet has expanded boosting revenue, despite cashflow falling slightly.  

This change in contract assests over the 2020 would have flagged EOS as a shot candidtate to quant analysts.  

Management / Board 

In the full year results, on February 26, 2021, the management stated: “Contract asset conversion to cash to deliver >$120m cash flow in H1”

The above timeline failed to eventuate. On May 12, 2021, EOS announced under the headline: “EOS Cash Receipts Accelerate” -  “EOS anticipates further cash receipts of over $100 million from this business by Q4 2021”.  This is a 6 month delay from what was guided previously, with management seemingly spinning the announcement as an upgrade to cashflow guidance.  

This announcement revealed the second part of of the short thesis: Management can't be trusted, and are hiding a deeper malaise. 

One could dig deeper into the board, and there is a board member with what may be regarded as a colourful history, who has links with other businesses that promise much, and deliver little for shareholders.    

My Thoughts

I believe the reasons for the expansion of the balance sheet have been well explained and are justifiable in the short term, given supply chain and contract disruptions due to the pandemic.   However, the delay in cash conversion is a concern, and I believe management need to work hard on explaining how cash receipts can be delayed by up to 6 months in such a short space of time, and give shareholders a clear picture on when this contract will be converted to cash, and importantly, whether delays in payment will neccessitate a capital raise to fund phase 2 of the contract.  

On management,  I trust the CEO, and he comes across as a genuine person, however, I do not feel the same what about the board, who I think may be letting him down.   The CEO needs to be more open and honest in his communication, but I think this may be adversley influenced by board members.  This is just my theory, and I have no inside information on board discussions.  It is just my impression from behaviours of certain board members in other companies.  

I have EOS on a tight leash, and I am keen to see management address their communication style (less spin, more substance).  

If anyone has a deeper knowledge of the short thesis, I would love to hear from you. 

DISC - I HOLD

Correction.

EOS reported cash receipts from $138 M inventory build up are now flowing.    EOS confirmed the $138 M inventory will be converted to cash by the end of December (IR clarified today).   This is 6 months behind what EOS managment guided for in February.  One would ask the question, if cash receipts are 6 months behind, what about the commencement of Phase 2 of the project? 

Given this clarification, Q2/Q3/Q4 cash receipts will exceed $60 M per quarter (given there is about $100 M in ADF contract to be delivered this year as well).   This is not as great as I first interpreted in the announcement.  

There has been growing short interest, based on the thesis that inventories and work in progress may be fictional and not convert to cash.   

Given cash burn was $100 M since Q1 2020, and management over promising/under delivering, I can understand the short thesis.    

DISC - I HOLD.  

Summary of key Points: 

1. Operating Cashflow - -$12.6 M.  EOS have burnt $104M in cash since Jan 2020.  There was $125M in contract assets on the balance sheet as of Jan 1 2021.  Management report most of this will be converted to cash by June 30, 2021 - Something to watch closely. 
2. Defence reported $120 Million inventory delivered to customer for testing and acceptance over quarter - refer item 1 above.
3. Defence reported R400 product achieved new industry benchmark for range and precision, extending their market leadership. 
4. EOS expect an initial order for RWS as part of Remote Operated Combat Vehicles (ROCV) from NATO member (Netherlands?) by June 30.  Follow on orders expected in 2022. 
5. Mopoke counter UAS system - Full Mopoke system deployed for field tests. 90 days of customer evaluations underway, with contract awards expected from H2 2021.  
6. Communications Systems - EM Solution xperiencing record demand with stong ongoing pipeline. 
7. Spacelink - On track for June 2024 deployment. Concept design finalised.  Contrat award for satellite construction by July.  
8. Spacelink sales "progressing well" - MOUs signed (Aus & US).  Revenue pipeline is forecast to exceed $100 M per year by 2025.  
9. Spacelink funding and financing expected to be completed by July.  

Some valuable takeaways: 

Defence Systems:

1) Risk weighted Pipeline: $3.5 BN, but major awards not awarded to late 2021 and 2022.  So, backlog will not start growing until 2022-23.  Backlog is currenlty $403M, which will be competed by 2023. BACKLOG LOOKS TO BE A LITTLE LIGHT ON, GIVEN THEY HAVE PRODUCTION CAPACITY OF $450 M pa. 

2) $120 M of inventory to convert to cash in Q2 2021.  

3) Large CUAS project to be determined in Q3, via a "shoot-out" with competitor.  EOS state they are very confident of winning the "shoot-out", as they assert their Mopoke product is the pre-eminent product on the market - the contract is expected to be awarded in Q4.  THIS IS SOMETHING TO WATCH CLOSELY, AS IF THEY DO NOT WIN THIS CONTRACT, THEIR COMPETITIVE ADVANTAGE MAY BE JUST MANAGEMENT SMOKE AND MIRRORS. Also, if they win this product, it will likely lead to further opportunities, as the Mopoke product will be tried and tested and come up on top of the competition. 

4) EOS have commenced production of their directed energy (laser beams) product, as they anticipate strong demand for the product.  

Spacelink:

1) Spacelink constellatIon funding expected to be announced in Q2 2021. 

2) SpaceLink maturity now allows a capital raising in the US without recourse to the ASX listed entity

Space Systems:

1) $49 M risk weighted pipeline, with $754 M in contracts to be awarded in 2021 and 2022. 

EM Solutions:

1) $173 M risk weaighted pipeline, with awards falling in 2021 and 2022. 

GUIDANCE

Management expects strong revenue growth and a return to normal levels of profitability in 2021. EOS expects to issue specific guidance at the AGM on 28 May 2021.

Management are guiding for a big 2022, flagging significant contract awards to come in 2022.  TIME WILL TELL. 

DISC - I HOLD

Barnaby Joyce has brought shares in EOS, after questioning EOS executives in a Federal Parliamnetary inquiry into the Space industry.   

He said he brought the shares after seeing they have gone up a bit lately.    

EOS have denied providing insider information to Barnaby, and have denied meeting or communicating with Barnaby outside the inquiry.   

Perhaps Barnaby knows the government is looking to throw money at a sovereign space industry.....

Notworthy management hurdles are as follows:

June 2018 Share loan issue-

Tranche B -  a Share Price Hurdle of $7.50 by 31 December 2021 (this hurdle must be reached on at least 30 trading days, not necessarily consecutive, by 31 December 2021)

Issue of shares during the year ended 31 December 2020-

Tranche A - A share Price Hurdle of $9.50 by 31 December 2021 (this hurdle must be reached on at least 30 trading days, not necessarily consecutive, by 31 December 2021)

Tranche B - A Share Price Hurdle of $11.50 by 31 December 2022 (this hurdle must be reached on at least 30 trading days, not necessarily consecutive, by 31 December 2022).

Shares issued under the share loan scheme are forfeited if the above conditions are not met.

9/4/21 EOS Develops New Laser Technology for Space Debris Mitigation

Electro Optic Systems Holdings Limited (“EOS” or “Company”) (ASX: EOS) has achieved a major breakthrough in laser technology which significantly advances the global effort to mitigate space debris. The innovation involves the use of a Guide Star Laser to allow high speed adaptive optics to form laser beams that can track and move space debris at lower altitudes and faster speeds than ever previously possible. This intellectual property has been developed by EOS in collaboration with the Space Environment Research Centre (“SERC”), and will now be commercialised and owned by EOS, with applications including space debris mitigation and high bandwidth satellite communications.

Disc: I hold

This was on the "today Show" this morning...unfortunately I only saw the snippets to say it was "coming up'

In more insider buying, new EOS director, David Black, acquired $50 k in shares.   

I woul dlike to see more buying from EOS directors - would prefer they held more shares....

DISC - I HOLD

Results for 2020 were heavily impacted, with COVID-19 disruptions resulting in a $25 M loss for the year.    However, looking forward, there are strong positives:

1) $100-130 m in cash to hit the balance sheet over the next 5 months, as contract assets convert to cash.  

2) Technology improvements in their RWS, and optical communications extends its competitive advantages.  

3) Spacelink breakthrough.  EOS will jump to the hybrid RF-optical technology, as the development has exceeded expectations to a point it is production ready for the stage 1 satellites.  This means he satellite will have 2-3x the bandwidth of the original proposal.   

4) Over $500 M pipeline for Spacelink.   EOS is finalising financing and confirmed no additional capital will be required from shareholders to establish the business, and EOS advise they will retain controlling onership o fthe business.   NPV of business case is $1 Bn USD.   

5) Trials underway for European ROCV contract.  With contract likely to be negotiated by October this year.   

6) Risk adjuested pipeline of $3.6 Bn.  

7) Defence systems business will have propduction cpaaity to deliver $900 m in product per annum in the medium term (current capacity: $450 M pa).   

8) Directed energy (lasers) product to enter production by mid-year. 

9) Defence systems market opportunity is claimed ot be over $40 Bn USD over the next 10 years.   

Market update / forevast to be given at AGM.  

DIC: - I hold.

EOS has signed the contract with the Austrlaian Govt for 251 RWS previosuly announced.  The contract value is around $94 M, with $28.5 M being paid in cash in Q4 2020, with the remainder for the contract being executed in 2021.   

Reassuring boost to cashflow, which will raise hopes of no further capital raises,in the near term (noting the satellites are going to cost $1 Billion).   

EOS Announced on September 8, 2020 a new product range, called "Mopoke", which is the world's first comprehensive counter-UAS (drone) system.   Key highlights:

1) First comprehensive solution on the market. 

2) Only solution that includes directed energy (lasers) weapons (Development of technology courtesy of EOS Space Systems). 

3) The EOS system's 10 elements (features) have surpassed all other competitors in terms of performance in recent trials. 

4) Estimated TAM to be $21 Billion over next 10 years.  

5) EOS selected as the preferred provider for ajor international CUAS requirement.  First phase of contract negotiaitons to be concluded in the next 6 months.   

6) Further 4 customers have initiated "discussions" with EOS. 

Great news, and demonstrates EOS's optionality, but damn these defence sales cyces are long.  

EOS is a defense and aerospace business that was privatised by the commonwealth government in 1983 and then listed in 2002.

It's been a very lumpy performer, and on balance a loss maker. Although the past three years have seen a sharp uptick in sales and growth expectations.

It has three segments -- defense, space and communications, although defense is by far the largest.

The company has spent $800m on R&D in thje past 20 years, most of which it says remains unexploited.

Sales for the current year should come in close to 10x where they were in 2017, and the company has a $570m order backlog. They also reckon there's a $12b market opportunity over the coming few years, of which it has tendered for ~$3b worth.

EOS currently has a $450m pa production capacity that is being upgraded to $900m pa by 2024, in anticpiation of more orders.

There certainly appears to be a strong tailwind with defense spending. (which is rather depressing). It's hard to get a seat at the table in this space, so EOS's long experience and connections are a definite advantage.

EOS has $128m in cash and no debt. It expects $20-30m in EBIT for FY20 (it reports on a calendar basis).

If the company can effectively boost revenues to $500-600 in the next 3-4 years, and maintain reasonable margins, I think EOS represents a good opportunity.

I would note however that this is a tough space with a lot of well-funded global competitors. Contract wins are long and difficult and sales orders very lumpy. A quick look back through past annual reports shows that big orders are always on the horizon -- but not always realised.

It takes a lot of hard assets and ongoing R&D to sustain operations too. There's a big CAPEX requirement.

On balance, I think EOS holds promise for those with a 3+ year view. But i also recognise my limited knowledge in this area, and appreciate that if sales growth doesnt materliase as expected there is more than a bit of downside.

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.

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.  

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.   

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

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.   

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......

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.

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

29 May 2020:  CEO Presentation for AGM today.

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. 

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.

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.]

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.]

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.

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. 

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. 

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...

EOS annonced a capital raise, raising $68 million, at $6.66.  This represents about 10% of listed capital.   

The reason is because EOS can't meet demand for its technology, and has had to accelerate the capacity expansion to meet the demand.  EOS has a manufacturing backlog of $630 million, and they expect to win another $2 billion in contracts by 2022 (this is their weapons division only).   EOS has not lost a contract to a competitor in the last 3 years, which shows it market leadership.   

EOS report strong demand for their counter drone technology, with $700 million in contracts tendered, and due to be awarded on FY2020. 

The additional capital will be used to increase production capacity, through building their supply chain (increased inventory?), and expanding production capability.   

With the acceleration in production output, they have foecast EBITDA growth will accelerate to 70% pa for the next few years.   

Yoy can see the build up in inventory resulting in negative cashflow, as work in progress increases ahead of revenue.   

Some more colour in their recent presentation:  Manufacturing facility can produce 40 units per month in one shift, at $625k revenue per unit.   Potentially, additional shifts could be added, to increase output from each factory, with little further capital expenditure.   Margins should improve over time, assuming competition doesn't apply pressure to prices.