If you are wanting exposure to the defence sector, then it could be worth considering Electro Optic Systems Holdings Ltd (ASX: EOS) shares.
That's because if Bell Potter is on the money with its recommendation, it could be destined to deliver huge returns for investors over the next 12 months.
What is the broker saying?
Bell Potter notes that EOS has just completed the acquisition of the MARSS Groups drone interceptor business.
While it will take time before there is a commercial product, the broker believes this is a good move by management given recent defence trends. It said:
EOS has acquired MARSS Groups drone interceptor business for an upfront consideration of €5.5m (A$10m) funded via existing cash reserves. Interceptor drones are an emerging hard-kill counter-unmanned aerial systems (C-UAS) technology. EOS expects 12-24 months of further development before full commercial launch, with ongoing investment of up to A$10m over the next three years, with potential for customer development funding.
Given recent political/industry attention and contract awards for this vertical we view this acquisition favourably, further leveraging EOS to the global C-UAS thematic. We believe EOS positioning the product as a lowest-cost solution is appropriate but expect competitive intensity to increase.
Bell Potter believes that interceptor revenue will start to be generated in FY 2027, and sees potential for double-digit growth from the business in the years that follow. It adds:
We have assumed an incremental $6m of Interceptor revenue in CY27e and expect this to grow at 10% thereafter, a conservative assumption, in our view.
Should you buy EOS shares?
While the broker thinks that a peace deal between Ukraine and Russia could weigh on its share price in the near term, it doesn't feel a deal will impact its growth forecasts. As a result, it is urging investors to pick up EOS shares today. It said:
We expect a Ukraine peace deal to weigh negatively on share price sentiment in the short term but would likely see no change to our forecasts given current global defence spending rhetoric.
We retain our Buy rating and downgrade our TP to $8.10. EOS is positioned as a market leader in C-UAS solutions and is leveraged to increasing budget allocations to C-UAS technologies. We see positive news flow over the next 6 months stemming from C-UAS and RWS contract awards. Following the award of the A$20m Slinger contract in Nov-25, we estimate that our CY26e revenue forecast is 59% secured by announced contracts. We see material upside to our CY27e and beyond forecasts if at least 1 laser contract is awarded in CY26e.
As mentioned above, Bell Potter has a buy rating and $8.10 price target on EOS shares. This implies potential upside of 75% for investors over the next 12 months.
