Petra target 4,05

28 February 2019 

Electro Optic Systems (EOS) Strong FY18 result, new product launch 

EOS announced yesterday a strong set of FY18 results, which illustrate that the business has successfully transitioned from an R&D company to a large scale, manufacturer delivering industry-leading margins. NPAT was well ahead of our expectations on a lower revenue base due to management’s focus on maximising returns from its backlog. We have left our NPAT forecasts for FY19F and FY20F unchanged. EOS also launched its Turrets product yesterday and has already bid on A$1bn of tenders. We reiterate our Buy recommendation and A$4.05 target price. 

Solid FY18 result and Outlook for FY19 

• EOS reported FY18 NPAT of A$15.1m, 50% above the most recent guidance and 3x original FY18 guidance.
  
• This was largely driven by favourable currency movements, which accounted for A$7.7m NPAT.
  
• Normalised NPAT of A$7.4m was ~50% above of original guidance, driven by a strong operational performance. In addition, both the Space and Defence divisions were ahead of expectations.
  
• Operating cash outflow of A$15.7m was weaker than anticipated due to working capital investment.
  
• However, the balance sheet remains extremely strong with a net cash of A$49.5m.
  
• FY19F NPAT Guidance of ~A$20m reiterated. Both divisions performed strongly
  

• Defence performed strongly, generating an NPAT margin of 11.9% with a plant operating at 55% capacity.
  
• This translated into NPAT of A$10.1m, 14% above original management guidance (early 2018).
  
• Space also performed strongly, generating a loss of $2.2m, ~60% better than anticipated.
  Turrets product launched
  

• The Minister for Defence launched EOS’s Turrets product yesterday at an industry expo in Geelong.
  
• The product, T200, has a number of features, which far exceeds technology currently available.
  
• EOS has bid on A$1bn of tenders, with more likely in the short term. We do not expect contracts before 2020.
  Forecasts and Valuation
  

• Management has guided to FY19F revenue of A$170m and NPAT of ~A$20m. We have reduced our top-line forecasts accordingly and left our NPAT unchanged.
  
• We have made no changes to our FY20F forecasts.
  
• We reiterate our Buy recommendation and A$4.05 target price.