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!

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

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

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.”