Electro Optic Systems (ASX:EOS) share price tumbles on guidance downgrade

The EOS share price is on the move on Wednesday…

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The Electro Optic Systems Hldg Ltd (ASX: EOS) share price has returned from its trading halt and is tumbling lower.

At the time of writing, the communications, defence, and space company’s shares are down 3.5% to $3.48.

Why is the EOS share price tumbling lower?

Investors have been selling down the Electro Optic Systems (EOS) share price today after the release of an announcement.

Although the company has announced the receipt of a major customer payment, this has been offset by a downgrade to its earnings guidance for FY 2022.

According to the release, EOS has received $65 million of cash receipts relating to a major export contract. This has boosted its total cash at bank to in excess of $100 million, including a $35 million working capital facility.

This cash receipt relates to a $440 million contract to supply significant quantities of its remote weapons systems to the UAE, which has been experiencing delivery disruptions.

Looking ahead, because EOS is producing continuously for this $440 million contract, it notes that the value of the contract asset going forward will vary according to the production, invoicing and payment cycles under the contract. As a result, in future the company intends to comment on this contract in the normal course of reporting.

Earnings guidance

Taking the shine off the above and weighing on the EOS share price is news that the company is downgrading its earnings guidance.

It now expects FY 2022 underlying EBIT before SpaceLink costs to be between $4 million and $8 million. This is a reduction from its prior guidance of $18 million to $21 million

Including SpaceLink costs, EOS’ underlying EBIT is expected to be a loss of between $11 million and $15 million. This compares to its previous guidance for a profit of $1 million to $4 million.

The company advised that this reflects $11 million of profit deferred to 2022, $3 million increased investment in business development, and $2 million expansion of SpaceLink outlays.

SpaceLink funding requirements

EOS also provided the market with an update on its funding requirements for the SpaceLink business. Much like Elon Musk’s SpaceX, the SpaceLink business is aiming to create a constellation of satellites in Medium Earth Orbit to provide internet connectivity anywhere on Earth.

Management notes that the funding requirement for SpaceLink will be ~US$700 million through to positive cash flow. Positively, this is less than initially budgeted.

EOS intends to apply at least US$300 million of debt, with around US$400 million of equity capital split over multiple tranches to meet the US$700 million requirement.

The first tranche of the funding requirement will be met through a SpaceLink pre-IPO convertible note, which is currently under discussion with investors.

The EOS share price is now down 41% in 2021.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Electro Optic Systems Holdings Limited. The Motley Fool Australia owns shares of and 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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