Electro Optic (ASX:EOS) share price sinks 8% following AGM

The defence contractor’s shares are well in the red today despite it forecasting strong revenue growth.

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The Electro Optic Systems Holdings Ltd (ASX: EOS) share price was a big winner on Thursday. The company’s shares gained 6.62% yesterday to close at $4.19 following news of its partnership agreement with Diehl Defence.

But the Electro Optic share price has given back those gains on Friday, falling 7.88% to $3.86 at the time of writing. This comes following release of the company’s AGM presentation and financial guidance for 2021.

Electro Optic shares slide despite positive growth outlook

The Electro Optic share price is dipping lower today despite the company forecasting 2021 revenue of $235 million to $245 million, representing a 30% to 36% increase on 2020 figures. EOS described the forecast as a “key growth target as it funds mandatory corporate compliance processes for the next stage of managed growth”.

The company expects this revenue to translate into underlying earnings before interest and tax (EBIT) of between $20 million and $25 million, before its SpaceLink acquisition costs (which total $17 million). This compares to its $28.5 million EBIT loss in 2020 and $21.8 million EBIT in 2019.

The company flags the potential risks that COVID-19 could continue to have on its financial and operational performance, and today’s guidance is provided on the basis that market conditions do not change.

On a more positive note, Electro Optic Systems highlighted the likelihood for potential material contract awards in 2H21 that could drive earnings upside.

COVID-19 challenges

The weakness experienced by the Electro Optic share price amidst the height of the pandemic was largely driven by delivery and supply chain related challenges. The company noted that it derives 95% of its revenue from exports which are air freighted.

Exports ceased in March 2020 for several reasons, including a severe reduction in air freight capacity, COVID-19 lockdowns and closure of key defence sites designed as customer delivery points. Other factors contributing to the challenging trading conditions included the national lockout of the company’s engineers, who are essential to the final pre-delivery process, and access to customer testing facilities required for product acceptance.

The bottleneck across both production and the timing of cash flows had a significant impact on the Electro Optic share price last year. Today’s announcement advised that all these issues have now been overcome, with the company recently receiving $30 million in export payments. It also has over $100 million worth of finished product positioned near specific customer delivery sites.

Key factors to drive growth

As part of the company’s growth outlook commentary, it highlighted a number of factors that could drive value moving forward.

Electro Optic has ambitious plans for its SpaceLink business. The company plans to build and operate a medium earth orbit (MEO) satellite constellation, optimsed for defence and government customers. The project is expected to be operational by 2024, producing a positive operating cash flow. Today’s announcement advised that SpaceLink funding for the initial constellation of satellites will begin in 3Q21, and will create an “initial value event for EOS shareholders”.

The company expects to see a surge in growth opportunities, describing the situation as a “demand tsunami on [the] horizon”. According to EOS, it is globally well-positioned in the fastest-growing defence market segments including counter-unmanned aerial vehicles, directed energy and remotely-operated combat systems.

The company could also be hoping Australia will be a significant growth driver, with its planned $1 trillion spending on defence over 20 years to 2040. Electro Optic advises it is one of only two to three Australian defence prime contractors providing direct access to this market. Other key growth drivers identified by EOS include the growing demand for space products and services, and the world’s largest defence market, the United States.

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Kerry Sun 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. 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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