Electro Optic Systems secures $120m deal to supply remote weapon systems to Ukraine

Shares in defence and communications company Electro Optic Systems (ASX: ESO) surged as high as 52 per cent today following news it secured a $USD 80 million (AUD$120 million) deal with Ukrainian state-owned SpetsTechnoExport (STE).

The deal is worth more than the Canberra-based company’s entire market capitalisation of $78 million, and comes as the group aims to get back on its feet following the collapse of its US subsidiary SpaceLink.

Under the agreement, EOS will supply STE with up to 100 EOS remotely controlled weapons stations (RWS) – a system that allows weapons to be fired accurately while soldiers operate from a protected location under armour.

To date, EOS has sold more than 2,500 RWS units, which are currently in use with several military services in Australia, North America, Europe and South-East Asia.

Off the back of the news, shares surged as high as 52 per cent to 70 cents each, but this still falls well short of the company’s all-time high of $9.85 per share in January 2020.  

“The contract is conditional on demonstration testing over the coming weeks, and subject to other customary terms for military contracts,” the company said in an announcement to shareholders today.

“In performing this contract, EOS will draw upon a support network and supply chain consisting of over one hundred suppliers located across Australia, and others internationally.”

Founded in 1983, EOS operates two divisions: defence systems, which specialises in technology for weapons systems optimisation and integration, and space systems – a sector that includes the operation of two entities, Space Technologies and EM Solutions.

The company has two manufacturing facilities in Australia and one in Huntsville, Alabama, as well as integration and sustainment centres in Singapore and Abu Dhabi.

One subsidiary previously under the space division was US based satellite developer SpaceLink, which was shut down five months ago after EOS failed to secure investment to keep the company afloat.  

EOS chairman Peter Leahy called on the Australian government to step in and provide longer-term funding for the company, which needed up to $250 million to achieve its commercial goals. At the time of collapse, the subsidiary had 32 full time employees, with offices in Northern Virginia and California’s Silicon Valley.

For the year ended 31 December 2022, SpaceLink recorded a loss after tax of $62 million, which included an impairment charge of $47.2 million. Including the collapse of SpaceLink, EOS reported an operating loss after tax of $115.6 million.

The company also recorded a 35 per cent decrease in revenue year-on-year to reach $137.9 million, which was driven by lower segment revenue in its defence arm - down from $184.5 million in 2021 to $105.9 million.

“The decrease was caused by the impact of supply chain constraints on continuing projects, where constraints impacted customers, third party suppliers to customers, and the Defence Systems business,” EOS said in its annual financial report to shareholders.  

“In addition, new projects were secured and initiated, but the impact of these was less than the impact of projects that were completed.”

The company commenced a strategic review during the third and fourth quarter of the year, aiming to reduce costs by $25 million and improve efficiency. As part of the move, EOS made more than 100 roles redundant throughout 2022. Costs of $3.5 million were incurred in implementing the restructure.

The company said it continues to work on other opportunities relating to Ukraine, including opportunities for direct supply to Ukraine and other countries providing support to Ukraine.

“There is no certainty that any particular outcome or transaction will result from these discussions,” the company said in an announcement today.

“EOS will keep the market updated as appropriate.”