DALLAS, TX -- September 7th, 2023 -- Electro Optics Systems Holdings Ltd (ASX: EOS): Stonegate Capital Partners updates their coverage on Electro Optics Systems Holdings Ltd (ASX: EOS).
COMPANY UPDATES
- Focus on Debt: The Company has made clear that it is focused on repaying its debt. Most recently EOS repaid A$26.9m of outstanding debt in accordance with debt agreements, before the due date. We view this as another sign of the Company’s commitment to improving its balance sheet and overall debt position.
- Turnaround Program: Management has implemented a disciplined multiphase restructuring plan to turn EOS around. The now completed phase 1 focused on cutting costs and acquiring additional funding. A significant action taken in phase one was ending the overinvested SpaceLink venture that was needlessly burning cash. Phase 2 is underway and is focused on collecting cash from existing customers and securing new orders. The turnaround is the Company’s new approach of giving honest expectations and clearly displaying their goals to repair its credibility and drive growth. In 1H23 the Company collected A$123.0m in cash receipts, an increase of 65% from A$74m in 1H22. This translated to a net operating cash flow of A$30.7m and a 1H23 cash balance of A$42.0m.
- Accelerated Market Growth: Global defense spending is at an all-time high, eclipsing USD$2 trillion for the first time with this trend is expected to continue in 2023 and 2024. The war in Ukraine and growing tensions in Asia have motivated countries to bolster their militaries. Ukraine’s military spending was USD$44 billion in 2022, increasing 640% over 2021. This presents EOS with an abundance of defense contract opportunities it plans to capitalize on. In 1H23 EOS signed >$400m in new contracts, including a conditional Ukraine contract worth A$181m.
- Strong Backlog: As of 1H23, the Company has a strong order backlog of future contracted work totaling A$645m which includes the conditional A$181m contract to supply Ukraine. The backlog makes up customer contracts primarily in the Defense and EM Solutions segments and work is expected to be done in 2023, 2024, and 2025. This backlog is almost double the A$323m seen in 1H22. Additionally, EOS ended the half with contract assets totaling A$104.8m.
- Top Line Growth: The Company saw year-over-year revenue growth of 38.2% up from A$53.8m in 1H22 to A$74.3m in 1H23. This outpaced our estimate of A$72.6m by 2.3%. The increase was driven by growth in both the defense segment and space segment of 33% and 51% respectively. We believe that, given the strong backlog and continued expansion of product offering with new products like the “Slinger”, the Company will continue to grow revenue at a strong rate in the short term.
- Valuation: We use both a DCF Analysis and Comparable Analysis to inform our valuation of EOS. Using a discount rate range of 10.25% to 10.75% we arrive at a valuation range of A$1.22 to A$1.50 with a midpoint of A$1.35. For the Comparable Analysis we selected an EV/EBITDA range of 14.0x to 16.0x to inform a valuation range of A$1.05 to A$1.26 with a midpoint of A$1.15.
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