The Electro Optic Systems Holdings Ltd (ASX: EOS) share price jumped after revealing a huge contract win in the Middle East.
EOS provides both defence systems and space systems. Defence systems relates to weapons intelligence, surveillance, reconnaissance and C4 systems for land warfare. It offers thinks like remote weapons systems, vehicle turrets, high-energy laser weapons and counter-drone systems.
The EOS share price jumped 19% at the open, though it’s up 5% now.
$700 million contract win
Electro Optic Systems said that it has entered into an agreement with the government of a Middle Eastern Gulf state (which is a Gulf Co-operation Council (GCC) member).
EOS will provide a nation-wide, counter-drone defence system valuated at £370 million (or around A$700 million). It’s the largest contract ever secured by EOS. The contract is subject to the satisfaction of a number of conditions.
The ASX defence share said that the contract requires the rapid deployment of a cellular, nationwide, counter-drone system with EOS’ NiDAR C2 at its core.
Electro Optic Systems said it’s the prime contractor and systems integrator, leveraging MARSS’ extensive product capability and engineering expertise.
This contract includes the supply of third-party sensors (electro-optical, radar and sonar) to detect threats at longer and medium ranges. Those sensors feed information into central command centres using NiDAR to fuse data inputs and create intelligent, user-friendly and actionable threat assessments.
The contract also includes the initial supply of third-party effectors, such as hard-kill interceptors and soft-kill jammers.
Financial aspects and conditions
The contract is expected to be profitable and cashflow positive over its term, though there will significant short-term working capital funding requirements in the early stages of the contract, which is expected to turn positive during mid-2027.
EOS expects 80% of revenue to be earned over the initial 12 to 24 months after the contract becomes unconditional. The other 20% of the contract’s value relates to ongoing support over a four-year period.
The company believes that completing this work may lead to further sales opportunities in the future, although there is no guarantee it will occur.
Conditions include EOS provided a performance bond guarantee for 10% of the contract value.
Electro Optic Systems is providing a bank of guarantee of £74 million and an advance payment of the same amount being paid by the customer to EOS.
Finally, EOS will need to obtain relevant export licences for the various components of the systems within two months after receipt of documentation from the customer.
EOS said it’s grateful for the support provided by both the UK Government and the Australian Government in enabling EOS to secure this opportunity.
Final thoughts on the EOS share price
There are sizeable operational risks with this contract, but it’s a positive update and a good sign that the Middle Eastern country wanted to choose EOS.
The company now trades on a high valuation, so it’s hard to say if this is a good Electro Optic Systems share price or not. How many more contracts can it win? How profitable will these contracts be? It’s hard to say, so I’m personally not looking to invest in my portfolio and picking other ASX growth shares.
