Just a reminder...

Given the free fall in markets and EOS it's important to step back and re-assess what you're invested in and whether you should still hold it. If you're lucky enough to be very long cash, you also might be thinking what to buy. For this post, I'll just stick to EOS - this is not advice and as always DYOR too

Well in times like this there are only a couple of things that really matter:
1. How strong is the balance sheet and liquidity
2. How robust are the earnings and sales (defensiveness) - this includes any impact from CV19


It's no surprise that there is always a flight to quality. So that resource company with lots of great stuff in the ground or that high growth tech company that is burning cash (and loss making) are probably not what you should be looking at (right now) unless you have an extremely high risk tolerance.

But back to EOS. While many holders know the business well, it is still considered a small cap and it has yet to be added to the ASX300 - we remain relatively unknown and many funds don't have a mandate to buy the stock given its size and where it sits - but this will change over time.

Unfortunately, if we take the recent market peak in late Feb to the close of yesterday it's not a pretty picture. EOS has fallen ~60% vs the ASX200 of ~30% - with further falls likely today. Yes, this might be a crude comparison as EOS had a very strong run but it does show what happens to smaller companies vs large caps and the broader index.

But is this an appropriate fall?



In a bear market / market crash scenario, if I go back to my two points above, how does EOS fair?

1. Balance sheet and liquidity:
As at Dec EOS had $78m in cash and $27m in receivables plus they've already invested in a ramp up in inventory to support sales. This is a VERY strong position to be in. In fact, the whole balance sheet is very strong - note the huge proportion of assets that are current. This remains a highly liquid and working capital intensive business. It's also worth remembering that despite the HIGH profit and SUPER FAST growth, this business is now JUST ~2x NTA (see below)






2. Robustness of sales and earnings
Unfortunately anything that touches a consumer has been and will continue to get smashed. Revenue will simply go to $0 for a number of businesses for a period, which in some cases will be catastrophic.

EOS is not B2C, nor is it B2B. It is B2G - that is Business to Government. EOS has a strict criteria of who they can sell to and it's certainly not individuals or businesses and many Governments also don't meet the required criteria. Selling to Governments is a very safe place to be. It might not be as good as selling masks, toilet paper or a vaccine but it's certainly right up there in the safe stakes.

Some of you may say, but if Government's are spending more on stimulus and health will defence get cut? Well it might but EOS is in a VERY good position as they have hard contracts and 2 years worth of revenue backlog.

Let that just sink in for a second - revenue is basically LOCKED IN! This is the absolute minimum - the true pipeline is much larger but this is a scorched Earth scenario.

EOS's only problem is ramping up fast enough to meet demand - there is simply no issue with sales or growth.

So the balance sheet is robust, liquidity is more than fine and we have very high degree of confidence on the sales outlook then in my view, that is an excellent position to be in and definitely does not warrant a stock to be falling at 2x the broader market. This strikes me as a rare moment of opportunity!

So if revenue is LOCKED in and costs are what they are then we have a high degree that PROFIT GUIDANCE of EBIT of $36-$38m shouldn't change. For those that have followed the company for a little bit you will know that management are very CONSERVATIVE in their guidance. I would be very surprised if that is not beaten, but again, let's be conservative given where we are...

So if we take the mid-point of guidance at say $37m EBIT take out tax, add in some interest and add back some FX gains given the sharp deterioration in the AUD, then we should get to NPAT of ~$26m for 2020 (calendar year), which works out to a PE of 17x

If we take a forward view - just one year, then it gets even better. If we assume that the EBIT margin remains the same at 13.5%, which I think is conservative given that assumes no scale efficiencies or benefits due to better capacity utilisation - but if I use 13.5% then on the higher revenue number I get to a PE of <12x. This is for a business that is growing at >50%!!

All of the above is why I have been accumulating at these levels. I don't know where the bottom is and it could fall further, but I know that once the rate of change slows with CV19 and fear dies down, then fundamentals become important again. I'm not here to trade this stock but when things start to normalise a conservative valuation of this business is at LEAST 2x the present share price (all IMO of course)

One last thing to leave you with. Buried deep within the latest financial statements was this nice line that hasn't really been discussed and relates to the very high potential SPACE business - once a contract is announced then that will be a major positive catalyst given the infrastructure is already set up. That should be highly accretive to earnings and cashflow too





GLTAH