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Why the Electro Optic Systems (ASX:EOS) share price is shooting higher today

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The Electro Optic Systems Holding Ltd (ASX: EOS) share price is shooting higher today follow the company’s release of its SpaceLink presentation. At the time of writing, the Electro Optic Systems share price is up 2.59% to $6.73. In comparison, the All Ordinaries Index (ASX: XAO) is edging 0.9% higher to 6,829 points.

Let’s take a look at what’s driving the Electro Optic Systems share price today.

What’s moving the EOS share price?

The Electro Optic Systems share price is on the move after the company advised it will build and operate a medium earth orbit (MEO) satellite constellation. It projects to have the system launched and operational in 2024, producing a positive operating cash flow.

The new era of satellite communications will be optimised for defence and government customers. The company said that a vast majority of current commercial systems are unsuitable for the special needs of its target market.

Most satellite constellations are either geosynchronous equatorial orbit (GEO) or low earth orbit (LEO) satellites. Both are considered expensive and limited by the availability of radio frequencies. This hinders continuous connectivity in downloading data in real-time, especially in ocean regions or insecure land networks.

MEO satellites provide high bandwidth and low latency satellite communications. In addition, security levels are much more heightened when compared to the current constellations used.

SpaceLink target market

Electro Optic Systems will seek to target defence and government customers from the Five Eyes alliance for its SpaceLink market. Five Eyes is a signals alliance between the United States, Canada, Australia, the United Kingdom, and New Zealand.

According to estimates, it’s projected that the total Five Eyes defence budget will exceed US$6.3 billion by 2024. This is a lift from US$4.6 billion today, representing an annual compound growth rate of 7.8%.

Most pleasingly for the company, is that it already has long-standing relationships with key Five Eyes customers.

Project cost

Looking at the project from an economics prospective, capital expenditure is forecast to be around US$800 million to US$1 billion. This will equate to roughly four tranches of $200 million to $250 million over a four-year period.

Electro Optic Systems revealed there will be a mix of debt and equity funding. The project will be 70% financed from vendors and export credit agencies. The other 30% will come from external sources into a special purpose vehicle.

The company will look to secure firm customer commitments for US$150 million to underwrite project funding. Based on Electro Optic Systems’ business plan, the internal rate of return is predicted to be above 20%.

More about the Electro Optic Systems share price

The Electro Optic Systems share price went on a mini-rollercoaster ride when COVID-19 hit the global economy. Although defence orders for its products remained, supply chain logistics became disrupted. In turn, this sent its share price south, hitting a low of $2.95 in March.

The Electro Optic Systems share price is still nearly 38% off its all-time high of $10.80 reached in February.

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Aaron Teboneras owns shares of Electro Optic Systems Holdings Limited. 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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Aaron Teboneras