Electro Optic Systems Holdings Limited

EOS Details

Contract Received by Subsidiary: Electro Optic Systems Holdings Limited (ASX: EOS) is in designing, development and production of advanced electro-optic technology devices and systems for the space and defence markets. On 17^th September 2021, Geoffrey Charles Brown has made a change to his holdings in the company through the acquisition of 5,562 fully paid Ordinary Shares at a consideration of $19,993.13. The company’s subsidiary EM Solutions secured an order of $15 million to supply its new 2-metre Fleet Satellite Communications Terminals to three leading NATO navies.

• This order is likely to deliver terminals for several European frigates as well as warships during 2022 and 2023.
• As a result of this contract, EM’s order book has surged to over $38 million.

1H FY21 Financial Summary:

• Increase in Revenue: Despite the disruptions caused by COVID-19, the company managed to generate growth of ~30% in revenue to $97.8 million against $75.4 million in 1H FY20.
• Small EBIT loss in Business: As a result of continuous investments, the company recorded a small EBIT loss before SpaceLink costs of -$2.1 million.
• Turnaround in Operating Cash Flow: During the half-year, EOS witnessed a turnaround in operating cash flow, which became an inflow of $4.6 million against the outflow of $62.6 million in 1H FY20.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Forex Headwinds: The company’s financial performance could be impacted by adverse movement in foreign currency.
• Technology Risk: Any change in technology may impact its performance, as EOS works in a more technical environment.

Outlook:

• For FY21, the company expects to report revenue in the range of $235 million to $245 million and Underlying EBIT Before SpaceLink Costs & FX in the ambit of $20 million to $25 million.
• During 2H FY21, EOS anticipates receiving cash flows of $100 million from contract assets.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: As on 30^th June 2021, the cash balance of the company stood at $51.1 million against $128.1 million as on 30^th June 2020. The stock of EOS is trading near to its 52-week low levels of $3.290, offering decent opportunity for accumulation. The stock of EOS has been corrected by ~12.89% and ~23.20% in the past one and three months, respectively. The stock has been valued using EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight premium to its peers’ average EV/Sales multiple, considering increase in revenue, a turnaround in cash flows, and increase in current ratio. For the purpose of valuation, peers such as Quickstep Holdings Ltd (ASX: QHL), Orbital Corporation Ltd (ASX: OEC), Austal Ltd (ASX: ASB), and others have been considered. Considering the expected upside in valuation, rising revenue, improvement in cash flows, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $3.310, down by ~4.058% as on 06 October 2021.

EOS Daily Technical Chart, Data Source: REFINITIV 

Fluence Corporation Limited

FLC Details

Fluence Corporation Limited (ASX: FLC) is engaged in the delivery of innovative, cost-effective decentralized water, wastewater, and reuse solutions for businesses and communities globally.

1H FY21 Financial Summary:

• Fall in Revenue: For 1H FY21, the company recorded revenues amounting to ~US$39.7 million against ~US$53.8 million in 1H FY20. However, FLC witnessed a growth of 45% in China revenue.
• Contract Backlog: During the half-year, the company recorded a contracted backlog of US$175 million, out of which US$18.7 million is from the SPS backlog, which indicates solid momentum in SPS.
• Sales of MABR Plants: The company sold 34 MABR plants in 1H FY21, which brought the total sales to 281 MABR plants.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Regulatory Risk: The company is exposed to a complex regulatory environment; any failure in compliance may lead the business to penalties, fines etc.
• Competition: FLC’s business could be impacted by the stiff competition from peers and a change in consumer sentiments.

Outlook:

• Looking forward, the company’s priority revolves around continuing strategic repositioning in order to focus on SPS and Recurring Revenue.
• FLC is also seeking to secure new contract wins in markets such as the US, Asia, and the Middle East.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The company reported operating cash flow for the year to June 30, 2021, of US$19.6 million. In addition, FLC closed 1H FY21 with a cash balance of US$23.7 million and US$35.0 million of short and long-term liquid investments. The stock of FLC is trading below its 52-week low-high average of $0.160 - $0.330. The stock of FLC has been corrected by ~22.44% in the past six month. The stock has been valued using EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ median EV/Sales multiple, considering the high debt-to-equity ratio, low gross margin, and risks like competition and tight regulation. For the purpose of valuation, peers such as Korvest Ltd (ASX: KOV), XRF Scientific Ltd (ASX: XRF), Amaero International Ltd (ASX: 3DA), and others have been considered. Considering the expected upside in valuation, decent contract backlog, sale of MABR plants, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.180 as on 6 October 2021, 10:47 AM, (GMT+10), Sydney, Eastern Australia.

FLC Daily Technical Chart, Data Source: REFINITIV  

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

Kalkine New Zealand Limited is authorised to provide general advice only. The information on this website does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.