Guess which undervalued ASX All Ords stock could rocket 65%

Bell Potter thinks the market is seriously undervaluing this stock.

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Investors with a high tolerance for risk might want to take a look at the ASX All Ords stock in this article.

That's because one leading broker is tipping it to deliver mouth-watering returns over the next 12 months.

Which ASX All Ords stock?

The share in question is Electro Optic Systems Holdings Ltd (ASX: EOS).

Electro Optic Systems, or EOS, operates two business divisions: Defence Systems and Space Systems.

The Defence Systems business specialises in technology for weapon systems optimisation and integration, as well as ISR (intelligence, surveillance and reconnaissance) and C4 systems for land warfare.

Whereas the Space Systems business operates under two entities: Space Technologies and EM Solutions. Space Technologies specialises in applying EOS-developed optical sensors and effectors to detect, track and characterise objects in space. EM Solutions delivers world-leading RF and optical space communications technology.

What is the broker saying?

According to a note out of Bell Potter, its analysts believe that the ASX All Ords stock is being undervalued by the market. It said:

In an effort to highlight the disconnect between EOS's intrinsic valuation and the current market valuation, we have undertaken a simple valuation of EM Solutions separate from the core operations of the EOS business. We estimate EMS will generate $70.3m in revenue for CY24 (+22% YoY) and assuming an EBITDA margin of ~29%, this implies an underlying EBITDA of $20.4m. Our valuation assumptions are intentionally conservative, utilising a 13.0x EV/EBITDA multiple and applying 100% of the company's CY24e net debt, our relative valuation generates an implied equity value of $292.0m or $1.70 per share. Based on the current EOS share price, if we ascribe zero value to the Defence Systems and Space Systems (exc. EMS) divisions, the market is currently valuing EMS at approximately 9.3x CY24e EBITDA.

Bell Potter thinks this is wrong and that the Defence Systems business has a lot of value given its leadership position and favourable operating conditions. It said:

The lack of value attributed to EOS Defence Systems is in direct contradiction to its market position and current operating conditions. EOS is a market leader in the RWS market with a growing product portfolio and current beneficiary of significant industry tailwinds. The company recently completed a $35m placement to invest in long lead time RWS cannons based on strong visibility over market demand. This division is at an inflection point, with a relatively fixed operating base (BPe ~$62m) and 40% gross margins, the $155m of revenue in CY23 was the EBITDA breakeven point and thus our forecast revenue growth in future periods will drive substantial increases in bottom-line earnings.

Big return potential

The note reveals that Bell Potter has a buy rating and $2.10 price target on the ASX All Ords share.

Based on its current share price of $1.27, this implies 65% upside for investors over the next 12 months. It concludes:

In our view, the current market valuation of EOS undervalues the EM Solutions business and essentially provides a free call option on the Defence and Space (exc. EMS) divisions, which we believe are well positioned to produce substantial earnings growth in future periods.

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. has positions in and has recommended Electro Optic Systems. The Motley Fool Australia has no position in any of the stocks mentioned. 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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