Why the Electro Optic (ASX:EOS) share price has faltered in 2020

The Electro Optic Systems Holding Ltd (ASX: EOS) share price has been a weak performer in 2020. Here, we take a look at what happened.

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The Electro Optic Systems Holding Ltd (ASX: EOS) share price has been a weak performer in 2020. After a strong start to the year, the company was marred by severe disruptions to its operations.

Let’s take a closer look at what’s been impacting the Electro Optic share price in 2020.

Electro Optic Systems 2020 overview

At the beginning of the year, the Electro Optic Systems share price took off to reach an all-time high of $10.80 in February. The business first made tailwinds by acquiring Audacy Corporation, a space communications company based in the United States. EOS advised the takeover would represent a new step towards the company entering the space communications market.

Roughly a month later, Electro Optic Systems reported a sound result on its 2019 full-year scorecard. Group revenue increased to $166 million, up 91% over the prior corresponding period (pcp). Earnings before interest and tax (EBIT) rose to $21.7 million, a 194% jump over the same time last year.

The pandemic hits

All seemed rosy until COVID-19 took the world by surprise in March. The sweeping pandemic threw logistical challenges to Electro Optic Systems as countries closed their borders for an unforeseen period of time. This, in turn, hit EOS’ multiple revenue streams as contracts were put on hold and equipment ready for delivery was unable to transit.

In response to the deepening situation, and the hole it was leaving in EOS’ pocket, the company initiated a capital raise. A $134 million placement was completed in April through institutional investors at an offer price of $4.75. The successful placement was undertaken to enhance liquidity and continue funding ongoing growth initiatives, as well as working capital requirements.

As the new financial year was about to dawn, the Australian Government announced a $270 billion defence spending package for the next 10 years. The initial purchase of 251 remote weapon stations for $100 million sent investors into a frenzy, causing the Electro Optic Systems share price to surge as high as $7.30 .

In late August, EOS reported its half-year results for the 2020 financial year. Revenue lifted to $75 million, 31% above the pcp, however the company saw an EBIT loss of $18.2 million, reflecting a 288% drop. The disappointing performance sent the EOS share price back down to around the $5 mark.

However, in September, the company announced a raft of positive updates. These included the release of a new counter drone product, the resumption of a major overseas delivery, and the completion of the Australian Government contract negotiations. The EOS share price started to gain traction again, rising to as high as $5.94 at the end of the month.

Most recently, Electro Optic Systems withdrew its profit guidance because of the short-term impacts of COVID-19. The original forecast of EBIT guidance of $20 million to $30 million is expected to flow into the next calendar year. Management said the company is experiencing a delay of around 12 days in shipments to foreign governments.

What’s next for the company?

While COVID-19 vaccines are being deployed to the public in an effort to halt the spread of the virus, Electro Optic Systems is patiently awaiting a return to ‘normal’ trading conditions. Closed international borders have affected supply chain logistics and resulted in EOS still having orders awaiting delivery.

On a positive note, broker Citi initiated a target price for Electro Optic Systems shares of $7.80 over the next 12 months. This represents a 30% gain on the current price of $5.98 (at the time of writing).

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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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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