Currently, the EMS order backlog stands at A$24 million for the...

Currently, the EMS order backlog stands at A$24 million for the next two years, and EOS has a strong sales pipeline of A$174 million on a risk-weighted basis over three years across all products and geographies, including North America and Europe.

For the Defence Systems vertical, the order backlog currently stands at A$570 million, and the strong sales pipeline along with normal rates of conversion are expected to increase the order backlog in due course of 2021 significantly.

Pipeline and Backlog (Source: ASX Announcement 31 August 2020)

EOS anticipates FY2020 profit to fall in the range of A$20 million to A$30 million EBIT. The impacts of COVID-19 are injecting volatility into the timing of contracts being signed and delivered, causing revenue and profit outcomes for the full year to be difficult to predict, notwithstanding factory output is still meeting forecasts.

The sales pipeline has grown to A$3.1 billion on a risk-weighted basis. However, the outlook for FY2021 is to strengthen growth as activity delayed from FY2020 is stuck, previous work build-up is managed, and pipeline works are honoured.

More significantly, several events unfolding in the present scenario are expected to drive favourable tailwind for all the activities of the Company. Some of these include the following:

• Strong commitment to maintain or increase defence spending amongst almost all Australian allies driven by escalating regional and geopolitical tensions.
• COVID-19 recovery plans typically consisting of accelerating employment in production, with resilient programs in the globally located facilities of EOS.
• Stronger emphasis on the superior technology and cost-effective performance of EOS products driven by increased deployment of asymmetric military technologies such as drones and hypersonic attack against Australia and its allies.
• EOS’s momentum towards having production and supply centres in the Americas, Australia, Asia, and the Middle East is an advantage amid the fragile nature of global supply chains revealed by COVID-19.

Net loss after tax of A$14.262 million, revenue deferment due to COVID-19, and a possible share price correction following a ~6% rise the previous day, likely hurt Electro Optic’s share price.

While EOS’ for 1H FY2020 was affected by the dislocation in the supply chain influenced by COVID-19, there remains significant optimism for the Company in the future as the uncertainties gradually wipe off and the supply chain operations get back to normal. A rise in defence spending worldwide, the Company’s intent on having production centres in multiple geographies, a substantial cash balance, and a sales pipeline of ~A$3.1 billion (risk-weighted), are expected to aid EOS share price gains in the future.