Petra Capital, 5 August 2021:Prime Time for EOS in...

Petra Capital, 5 August 2021:

Prime Time for EOS in Australia

While EOS’s prospective sales pipeline is continuing

to 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).