DALLAS, TX -- May 8th, 2024-- Electro Optics Systems Holdings Ltd (ASX: EOS): Stonegate Capital Partners updates their coverage on Electro Optics Systems Holdings Ltd (ASX: EOS).
COMPANY UPDATES
- Continued Diversificiation: EOS continues to diversify its product offerings as well as the geographies that it services. We note the strong demand for counter drone products is driven by the current market conditions. As the Company continues to grow its RWS offerings we expect the same market conditions to drive demand. Going forward EOS has noted that it will be launching new terminals as well as High Energy Laser Weapons (HELW). This diversification in product offerings gives us confidence that the growth will continue. We also note the expansion into the European market. This is most evident by the opening of the Company’s European Entity which will provide a physical presence on the continent to better serve customers. In FY23 the Company generated ~33% of revenue from Europe, with further opportunities expected in FY24.
- Focus on Debt: The Company has made clear that it is focused on repaying its debt. Most recently EOS repaid A$20.5m 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. The next repayment is expected in October of 2025.
- Turnaround Program: Management has implemented a disciplined multiphase restructuring plan to turn EOS around. 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 1Q24, receipts from customers were A$52.1m, a decrease from A$62.1m in 1Q23, illustrating the lumpy nature of cash receipts.
- Strong Backlog: As of 2H23, the Company has a strong order backlog totaling A$622m 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 2024 and 2025. This backlog is almost double the A$312m seen in 2H22. Additionally, EOS ended the half with contract assets totaling A$68.0m.
- Top Line Growth: The Company saw year-over-year revenue growth of 127.4% up from A$34.0m in 1Q23 to A$77.3m in 1Q24. We believe that, given the strong backlog and continued expansion of product offering with new products like the “Slinger”, R800, and HELW line, 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. Our DCF analysis arrives at a valuation range of A$1.89 to A$2.13 with a midpoint of A$2.00. For the Comparable Analysis we arrive at a valuation range of A$1.79 to A$1.97 with a midpoint of A$1.88.
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