EOS reported cash receipts form $138 M inventory build up are now flowing. EOS confirmed the $138 M inventory will be converted to cash by the end of September.
Given this clarification, Q2 cash receipts should exceed $100 M, and Q3 cash receipts should be around $80 M.
There has been growing short interest, base 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, I can understnad the short thesis. However, I also appreciate there is unfortunately a very long lag between production and payment for a defence sector sub-contractor, which was exacerbated by the COVID-19 disruption.
I suspect there may be a short squeeze in the near term as shorts unwind.
DISC - I HOLD.
it is difficult to see cash burn reducing in the sort to medium term. So, as you say, at >100m pa heading out the door, there is going to have to be some really impressive traction with all the sales pipelines to avoid another cap raise and dilution.
Further to that, if they do not close some large orders soon it is going to be challenging to see how all this great science and promise of a night future is going to translate into a viable company.
I have a moderate holding and am tempted to increase but will likely watch until evidence of cash coming in, even if that means paying a higher price.
would appreciate others thoughts on the subject.
Summary of key Points:
Some valuable takeaways:
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.
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
1) $49 M risk weighted pipeline, with $754 M in contracts to be awarded in 2021 and 2022.
1) $173 M risk weaighted pipeline, with awards falling in 2021 and 2022.
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.
Just to summarise what they did, the new laser detects all the distortion between the source and the target. They use this information to then distort the lens at the source, in a way that counteracts all the detected distortions. So when they blast the impact laser (or wherever it is) it's more focused on the target. Very cool and solidifies a thesis that involved their expansion into cleaning up space debris.
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'
The Government's announcement today regarding the development of a domestically produced guided missile as part of a multi-billion dollar program is good news for EOS. While a larger defence firm (Raytheon, Lockheed, BAE) will be the primary contractor, I would be surprised if EOS were not engaged as part of the development considering some of their expertise in relevant fields, and a desire from Government to ensure local firms are beneficiaries from the spending. The specific project will add value, but the real benefit will be the longer-term exposure to missile development. Hypersonics is a game-changer, and Australia will (with allies) be spending a ton on this over the coming decade.
6 jobs available in Huntsville Alabama and another 6 in Canberra. 6% headcount increase in Australia and 7% in US past 6mo.
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.
Update to FY 2020 Profit Guidance
Electro Optic Systems Holdings Limited (“EOS” or “Company”) (ASX: EOS) has experienced short term impacts to the EBIT result for FY 2020 ending 31 December 2020, which require the Company to withdraw the previous EBIT guidance of $20-30m. Cash flow for both FY 2020 and FY 2021 is unaffected by these events.
As their shipments to customers have only been delayed, not cancelled, I see this could be a possible buying opportunity. Shares today are currently $6.00, have been as low as $5.75 from prev COB $6.33
Disc:I hold EOS
EOS wins a $34.4 M project with Dept. of Defence as head contractor to deliver contract under "C4 EDGE" program.
Contract to be completed in FY2021, so it is probably a 10% boost to FY2021 revenue, and could lead to further opportunities in the future......
More details revealed on the development of this business. Key takeaways:
1) Project to be funded via a comination fo 70% debt and 30% equity via SPV. By this, it appears third parties will take a 30% interest in the business, with no capital input required by EOS. EOS will retain majority ownership.
2) Project is conservatively estimated to be 20%, based on a capital cost discount rate of 8%. With discounted cashflow valuation of $1 billion US per constellation. Note: There will be three constallations developed over the next 10 years, with improving capacity and ROI.
3) EOS Spacelink has limited competition, through Airbus and SES, but they lack the bandwidth and technology EOS possesses.
4) EOS Spacelink has perpetual access to 64% of RF bandwidth, initally with 100 GPs capacity. Quite a moat here.
5) 2nd generation constellation will be a partical hybrid of RF and optical communications, with 4x the bandidth of 1st generation. Expected to be commissioned in 2027.
6) 3rd generation constellation will be full hybrid optical of RF and optical communications, with +10x the bandwidth. Expected to be commissioned in 2030.
By 2028, EOS Spacelink, 1st generation, will be generating $262M USD in revenue. By my numbers, generating $80 M USD in profit to EOS. With 2nd generation coming online at that time.
EOS Space Systems awarded A$5.1 mln ($3.61 mln) contract through its space systems subsidary by the Australian Deperatment of Defence for technical development.
Contract to run for two years, starting in Q4 2020
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.
Electro Optic Systems Holdings Limited (EOS or Company) (ASX: EOS) will announce its results for the half year ended 30 June 2020 (1H20) on Monday 31 August 2020.
The Group CEO, Dr Ben Greene, and Chief Strategy Officer, Mr Neil Carter, will hold an analyst and investor conference call on Monday 31 August 2020 at 10:30 AEST to discuss the Company’s 1H20 results. Following the presentation, participants will have the opportunity to join a Q&A session.
I hold EOS shares
If you liked the company yesterday, I think you'll still like the company today. No great surprises and all competition will be in the same boat regarding shipping logistical nightmares. A good bit of cash and lots in the pipeline. Once fully operational the business will take off. As a long term investor I am happy to buy on any weakness.
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.
Sounds like good news for EOS:
" The government of Australia announced Monday (13 July) that it would be making substantial investments in various space technologies as part of its defence upgrades. The government said it would be investing in Australia’s first fully owned and controlled military satellite communications constellation as part of its $7 billion investment in space capabilities over the next 10 years"
" A Request for Tender is set to be released in late 2020 for the sovereign controlled satellite communications capability, which aims to engage a single prime contractor to deliver, upgrade and sustain the capability over its life of type."
Full article at: https://asiapacificdefencereporter.com/australian-government-investing-in-space-technology/
Government contract negotiation will push this up. Once further news on actual dollars etc... comes out price will stabilise. Exciting future.
Foolnomore had a question about EOS's negative cashflow. I don't know the absolute answer to this, but I think it is a function of the contract business model. EOS bids for contracts worth hundreds of millions of dollars, they then need to purchases bits and bobs from suppliers to fullfil the contracts and then as they deliver to milestones they are paid money, which may take a number of years. If the number of contracts increases/grows, which is the case for EOS, there is a backlog. This increase in contracts then requires them to spend more to get the supplies to meet those contracts, which then results in a negative cash flow, because the timeframe for getting the milestone payment is a year or more in the future.
Obviously I am not an accountant (but it makes sense in my head), but if anyone can give a more nuanced explanation that would be great!
I agree with Rapstar. The original trading halt announcment on Thursday indicated that an announcement would be made on that day. The contract is either bigger or there is haggling over details. $100M sounds a little cheap for 251 (why not 250) of the remote weapon systems (RWS, ~$4M each), but I wouldn't really know.
It will depend on the time frame as well. The 2019 Dec quarter was $54.3M. Presumably it will take some time to build 251 automatic firing turrets, so what time frame is does that $100M get spread over?. EOS has a big back log on contracts. Maybe they should expand?
Disclosure I hold EOS
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.
New Weapons Boost Army Capability and Secure Jobs
The Morrison Government will acquire 251 Remote Weapon Stations that will better protect Army personnel on operations while boosting Australian jobs and opportunities for small businesses.
The Remote Weapon Stations, which allow a gunner to operate a weaponised system from a protected position, will be added to the Army’s Bushmaster and Hawkei protected mobility vehicles.
Prime Minister Scott Morrison said the new weapons were part of the $270 billion capability upgrade for the Australian Defence Force, under the new 2020 Force Structure Plan.
“The Federal Government is committed to ensuring Australian Defence Force personnel have the tools they need to protect themselves and keep Australians safe,” the Prime Minister said.
“At the same time we must have a robust and resilient defence industry that maximises opportunities for small businesses and supports Australian jobs and local investment.”
Minister for Defence Senator Linda Reynolds CSC said the 2020 Defence Strategic Update and the 2020 Force Structure Plan would strengthen the ADF’s capabilities to respond to an increasingly challenging strategic environment.
“The Morrison Government is investing a record $270 billion in Defence capability and infrastructure over the next decade,” Minister Reynolds said.
“Investments such as the acquisition of Remote Weapon Stations will make the ADF more capable for the wide range of potential scenarios and threats Australia will face in the future.”
Minister for Defence Industry Melissa Price said the investment in new remote weapon stations would provide job stability for over 200 of Electro Optic Systems’ workforce directly involved in engineering and support.
“This investment not only secures local jobs but it also provides certainty for over 100 supply chain businesses across Australia,” Minister Price said.
“More than 80 per cent of the parts that Electro Optic Systems use for these weapons are sourced through the Australian supply chain and that’s good for jobs and small businesses.
“While the Federal Government’s focus is on keeping Australians safe, our investments in Defence have a significant benefit for Australian businesses and workers – around 15,000 businesses and 70,000 workers benefit from our investments and that’s set to grow.”
As I mentioned earlier today, a lot of movement in the Defence space. Scomo held a press conference at the EOS facilities and the PM's office has put out a press release on the following (I expect an ASX announcement and Trading to resume, Bid Price was at $7.90 at time of writing):
"The Morrison Government will acquire 251 Remote Weapon Stations that will better protect Army personnel on operations while boosting Australian jobs and opportunities for small businesses."
"More than 80 per cent of the parts that Electro Optic Systems use for these weapons are sourced through the Australian supply chain and that’s good for jobs and small businesses."
This doesn't even touch on the Satelite or Space capability investment that will be a facet of this Defence spending. Great news for EOS and domestic Defence companies today.
Starts around 7 minute mark, Scomo tours EOS
EOS was mentioned in this piece on recent defence spending announcment.
Following on from Rapstar's great Straw and Information, the Minister for Defence is hositng a live session on YouTube (https://www.youtube.com/watch?v=7tLR344Dwrg) to give an update on their Strategy, scheduled for 12:30 AEST
This is an inference but may tie into EOS trading halt and it may contain some more material announcements of future oppurtunities and work. Possibly the mention of commercial partnership going forward.
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......
Cash flow issue. EOS did report that cash flow would be affected by $100m for upto 6months due to a delivery/supply issue. Could this be the problem highlighted on The Call?
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:
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.
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:
(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:
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).
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.
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.
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.
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.