- Defence contractor Electro Optic Systems (EOS) is attempting to raise $134 million from an institutional placement
- The company says a raise will help it stay liquid and enhance its growth
- EOS is in a difficult position to maintain its business model, however, as around 90 per cent of its output is sent overseas
- As a result, delivery has been interrupted by pandemic travel and quarantine restrictions
- This inability to deliver means there’s a shortfall in cash receipts, as EOS’ products are largely contracted on a cash-on-delivery basis
- The placement will fill the cash gap as delayed deliveries slowly roll out and money eventually rolls back in
- Revised financial guidance still shows a 25 per cent year-on-year earnings before tax and interest (EBIT) growth, despite the disruptions
- In the meantime, EOS has plenty of untapped funding and debt facilities, should the impacts of COVID-19 prove to be a longer-term problem
- EOS shares are in a trading halt pending completion of the placement – shares last traded for $5.75
Defence contractor Electro Optic Systems (EOS) is attempting to raise $134 million from an institutional placement to stay liquid and enhance growth as it navigates the new pandemic world order.
EOS is in a difficult position to maintain its business model, however, as around 90 per cent of its output is sent overseas.
While there are currently no supply chain issues — and EOS has enough inventory on hand to continue production for over three months — quarantine and travel restrictions have impacted the company’s ability to deliver its product.
This inability to deliver means there’s a shortfall in cash receipts as EOS’ products are largely contracted on a cash-on-delivery basis.
The money raised will be used to fund ongoing production and growth targets while those cash receipts are delayed.
The company expects the $134 million will be enough to keep it afloat until money does start flowing back in, and to continue its expansion strategies, readying itself for a post-pandemic world.
Under the terms of the placement, EOS will issue over 28 million new fully paid ordinary shares to eligible institutional investors — taking full advantage of the recent ASX waiver allowing companies to issue up to 25 per cent of its total shares without shareholder approval.
The shares will be priced at $4.75, representing a 17.4 per cent discount to yesterday’s closing price of $5.75, and a 10.9 per cent discount to the five-day volume-weighted asset price (VWAP) of $5.33.
EOS shares are expected to be in a trading halt until the placement is completed – most likely resuming trade tomorrow. The placement is fully underwritten by Citigroup.
Upon completion of the placement, EOS will offer a subsequent share purchase plan (SPP) to existing eligible shareholders to raise approximately $10 million more.
Participants can purchase up to $30,000 worth of shares at whichever price is lower, or the five-day VWAP leading up to the issue of shares under the SPP on May 14. The SPP offer booklet is expected on or around 22 April.
EOS maintains that, despite the logistical issues interrupting its delivery to market, its position remains strong, even if slightly delayed.
The company has over $3 billion in potential contracts to be delivered, with full funding and irrevocable letters of credit attached. The only issue is delivering the contracts and cashing out.
The money raised from the placement should ensure EOS can maintain its operational viability until the contracts can be delivered and money starts flowing in again.
The company also states it will be awarded a new contract from an existing customer in coming weeks, with no delivery delays anticipated and prompt payment terms.
Despite a slight shortfall in cash receipts for undelivered contracts, EOS is still reporting a 25 per cent growth in its year-on-year EBIT.
While this guidance does work on a few bold assumptions — for example, the most severe impacts of COVID-19 being contained to the 2020 financial year — the fact everything is just delayed rather than cancelled puts EOS in a substantially different position to many other manufacturers and retailers.
Once the placement is complete, and upon resumption of delayed contracts and payments, EOS expects to have considerable funding flexibility to continue production and growth.
The company also has ample untapped debt facilities to keep working should the impacts of COVID-19 lag longer than expected on a global scale.
Trading in EOS shares is currently halted pending the finalisation of the placement. Shares last traded for $5.75 each.