The Electro Optic Systems Holdings Ltd (ASX: EOS) share price was a phenomenal growth story that soared more than 200% in 2019 – ascending to almost market darling status with the likes of Pointsbet Holdings Ltd (ASX: PBH), EML Payments Ltd (ASX: EML), and the WAAAX consortium of shares.
The company’s rapid share price growth meant that it was on track to enter the S&P/ASX 200 Index (ASX: XJO). However it has slumped more than 50% since its record all-time high in late January. Could this be a buying opportunity?
Electro Optic Systems is a technology play that operates in the aerospace and defence markets. It focuses on the development, manufacturing and sale of telescopes and dome enclosures, space debris and satellite management solutions, and remotely controlled weapon systems and ancillary products.
The company provided a business update last week as part of its recent capital raising presentation. Electro Optic Systems reported that it hasn’t had any customer cancellations and believes that, given its contracts support long term government defence programs in allied and coalition governments, any reduction or cancellations in contract is unlikely.
It also stated that its pipeline activity is unchanged, and confirmed there has also been an increased level of acquisition activity from key customer programs.
The company outlined that its FY20 guidance has been revised to $230 million revenue and $27 million earnings before interest and tax (EBIT), representing 25% growth over FY19 EBIT. This guidance is slightly lower due to the deferral of $70 million of export revenue and $9 million of EBIT from FY20 to FY21. The company’s FY21 outlook and priority is for strengthening growth as activity deferred from FY20 is caught up, backlog is processed and pipeline awards are made.
On 16 April, Electro Optic Systems successfully completed a $134 million institutional placement at an offer price of $4.75 per new share. This is a proportionately significant capital raise, given its $528 million market capitalisation at today’s share price.
The offer proceeds will be used predominantly for working capital for inventory expansion given the delivery and payment disruption caused by COVID-19 and fund the production of its new space communications business to maintain growth initiatives.
The EOS capital raising represents a significant dilution of its current outstanding shares. That said, the capital will be used to fund key production given delivery and payment disruptions, fund its new space communications business and provide additional cash liquidity moving forward.
There may be some short-term share price tailwinds given the disruption of FY20 growth figures and significant share dilution. However, given the nature of the company’s government clients and roll-over of earnings into FY21, I believe the Electro Optic Systems growth story is very much intact.
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Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Electro Optic Systems Holdings Limited. The Motley Fool Australia has recommended Electro Optic Systems Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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