Petra Capital, 5 August 2021:
Prime Time for EOS in Australia
While EOS’s prospective sales pipeline is continuingto swell, fuelled by projected demand for its IP, the key
enabler of which is SpaceLink, COVID-19 is crimping
near-term EPS. On the flip side, the pandemic is also
bringing forward Australian expenditures on defence
procurements, with the added intent of supporting
local industry to enhance the nation’s sovereign
defence capabilities. As evidenced by recent contract
awards and programme tenders, we expect EOS to be
a key beneficiary of Australian defence outlays. We
reiterate our Buy and revised target price of $6.23ps.
Major contract awards due in the next 6-9 months
While we expect EOS to run down its current order
backlog of $400-500m over the next 2-3 years, this is
likely to be progressively supplemented and ultimately
replaced by new Defence contract awards.
As per EOS’s AGM commentary, the company expects
final decisions on ~$2-3bn of contract tenders over the
next 6-12 months. These contracts will ensure EOS can
maintain sales above $200m p.a. into the medium-term.
It’s approaching prime time for EOS in Australia
EOS estimates the Australian Government will spend
$1 trillion on defence over the 20 years to 2040. With
EOS being one of only 2-3 defence prime contractors in
Australia, the potential upside to earnings is enormous.
While EOS is already in the process of demonstrating
its capabilities as a prime defence contractor via its C4
EDGE initiative, this pales in comparison to potential
inclusion in Australia’s sovereign missile programme.
As is likely to be the case with a number of EOS’s
product offerings, the value proposition for its sovereign
guided missile offering will be enhanced by SpaceLink,
which will form part of the armament’s overall lethality.
Model changes result in lower fair value estimate
Given the absence of major contract awards over the
last several years, we have reduced our tender success
rate for Defence. This has resulted in a revised fair value
estimate for EOS Defence of $4.33ps (from $6.13ps).
Reiterate Buy and cut TP to $6.23 (from $7.77ps)
With market-leading laser technology and best-in-class
engineering capabilities, we expect EOS to be a key
participant in the next wave of technology-focused
spending across defence and space communications.
We have cut our target price to $6.23ps (from $7.77ps),
comprising (i) 100% of our Defence DCF ($4.33ps), (ii)
50% of our NPV for SpaceLink ($1.77ps, diluted), and
(iii) 33% of our NPV for C4 EDGE ($0.13ps).
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