Why this ASX defence stock soared 16% on Wednesday

Growing defence spending is helping this little ASX company find its feet again.

Mitchell Lawler

Mitchell stumbled upon the concept of investing when in high school, devotedly urging his parents to put some money into a handful of technology companies with increasingly popular products among his demographic – many of which have gone on to great success. It wouldn’t be until 2017, some five years later, that Mitchell became an investor of his own money. Having studied and worked as a mechanical engineer in the building services industry, Mitchell takes a methodical and analytical approach to evaluating businesses. Rather than relying purely on numbers, Mitchell drills beyond a company’s metaphorical mantle to unearth obscure patterns or competitive advantages that would go otherwise unnoticed. His expertise resides within areas such as software, consumer goods, and building services equipment. However, his quest to find quality companies that set the industry standard and flex some degree of an impenetrable position has no limits – small cap to mega cap, cosmetics to healthcare – if it’s an exceptional business it’s on his radar.

Published February 28, 2024 5:44 pm AEDT

This ASX defence stock blitzed the All Ordinaries Index (ASX: XAO) today, ranking as the fourth best-performing share on the list. Electro Optic Systems Holdings Ltd (ASX: EOS) relished in the bidding after releasing its full-year 2023 results.

Shares in the ASX defence company closed the day 17.5% higher at $1.88. Investors quickly warmed up to the latest figures, propelling shares beyond their $1.66 opening price.

defence personnel operating and discussing defence technology — Image source: Getty Images

Turnaround takes this ASX defence stock skyward

Record revenue of $219.3 million, up 59% from from prior year
Gross margin of 44% up from 34%
Underlying EBITDA of $5.7 million, up from a $42.9 million loss
Record operating cash flow of $113.1 million, up from $51.6 million of negative cash flow
Net loss after tax narrowed to $34.1 million from $53.6 million

What else went on during FY23?

After a few harrowing years, progress is being made on righting the ship at Electro Optic Systems. The company is still booking losses, but orders and cash flow are heading in the right direction.

Between the two segments, defence and space, the former posted the largest increase in revenue. Specifically, defence revenue from continuing operations rose 49.4% to $155.4 million in FY23. Whereas space revenue climbed 31.9% to $63.9 million.

EOS landed several significant contracts throughout the year. In April 2023, the company secured two contracts to supply Ukraine with remote weapon systems valued at US$120 million. Later on, in May, EOS signed another deal valued at A$202 million to 'modernise communications across the Royal Australian Navy fleet'.

The current geopolitical uncertainty was highlighted in today's FY23 presentation. The conditions push defence spending higher, creating a 'supportive market' for Electro Optic Systems.

Additionally, the company is seeing a shift to cannon-based air defence as drones become more common in conflict. Two defence products targeting this segment were launched in 2023: the Counter-Drone Kinetic System and the Integrated Counter-Drone Laser Dazzler.

Lastly, bolstered cash flows were used to pay down debt during the year. Still, $50 million of debt remains (down from $70 million), amounting to $72.6 million with interest.

Looking ahead

No forecast was shared in the FY23 results, which tends to be typical in this industry. Nevertheless, an optimistic image was painted amid ongoing unrest across multiple regions, driving increased enquiries among NATO countries.

One of the presentation slides read, "Market conditions are expected to remain supportive for the foreseeable future", which is vague but positive.

How has this ASX defence stock performed?

Clawing out of a deep hole, the EOS share price has been on a tear over the last 12 months. What was once a 54 cents per share stock is now $1.88, equating to an increase of 248%.

Few companies can attest to delivering that level of performance over the past year. Not even fellow ASX defence stock DroneShield Ltd (ASX: DRO) has undergone such a rally during this timeframe, despite posting its own record result today.

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