Stonegate Initiates Coverage on Electro Optics Systems Holdings Ltd (ASX: EOS)

DALLAS, TX -- May 30th, 2023 --  Electro Optics Systems Holdings Ltd (ASX: EOS): Stonegate Capital Partners initiates their coverage on Electro Optics Systems Holdings Ltd (ASX: EOS). The full report can be accessed by clicking on the following link: EOS.AX Initiation Report

COMPANY UPDATES

• Revamped Management: In 2H22, EOS appointed Gary Hounsell (Chair), Andreas Schwer (CEO), and Clive Cuthell (CFO) to guide the company’s turnaround efforts. They bring in decades of experience and are focused on cutting costs and improving cashflow so EOS can reach its full potential with a profitable and sustainable future. Their goal is to improve the trust customers and investors have in the Company by giving honest and down-to-earth expectations of the company’s performance. In a sense, they aim to under promise and overperform going forward.
• 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.
• 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.
• Strong Backlog: As of December 31, 2022, the Company has a strong order backlog of future contracted work totaling US$250 million which includes the US$80 million 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 into 2024. Collecting cash flows from these contracts is vital to continue to build up its operations and improve manufacturing capacity.
• Terminated SpaceLink: In 4Q22, EOS exited the SpaceLink venture and thus ended the ensuing cash outflows. From this, the Company freed up $26.6 million that was being drained by the venture. SpaceLink was considered too capital and time intensive to effectively commercialize and management felt it was better to redeploy that capital more efficiently. This was an initial phase of the Company’s restructuring program and has freed up capital to find better use in other parts of the business that could bring sustainable growth.
• 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$0.83 to A$1.15 with a midpoint of A$0.92. For the Comparable Analysis we selected an EV/EBITDA range of 11.0x to 12.0x to inform a valuation range of A$0.88 to A$1.00 with a midpoint of A$0.94.