We don’t cover a lot of Australian teaser pitches here at Stock Gumshoe, but every now and then one percolates to the surface as its being heavily promoted by one of the Aussie publishers. This time around, it’s the Australian Small-Cap Investigator newsletter being promoted by Port Philip Publishing (which was started as the Australian offshoot of Agora about ten years ago), and the letter comes from Sam Volkering, who edits the letter and presumably picks the stocks.
Volkering’s letter is, as you’d guess from the title, focused on finding small-cap stocks with big potential — and Australian small cap stocks are not often easily traded by folks outside of Australia, so keep that in the back of your mind. Those who have international access to trading in Sydney can easily buy such stocks, but they’re not necessarily liquid or even buyable at all in the US without additional effort or fees (my favorite broker for trading in overseas markets is Interactive Brokers, in case you’re curious, but many other brokers offer international trading in select markets — sometimes it requires a phone call or other extra hurdle).
But what is it that’s being pitched here? It’s a pretty compelling-sounding idea, actually, a way to get rid of the problem of “space junk.”
We’ve been filling space with debris for 50 years now, mostly from dead or damaged satellites or from other space launch activity, and it’s logical that it will be a growing problem as more and more satellites are launched — so that’s the opening gambit of the newsletter, that Elon Musk is going to connect the world to the internet through low-orbit satellites… and then, after he gets us excited about that, he moves on to note that his favorite Aussie small-cap tech stock holds the key to those satellites not getting clobbered by other junk once they’re in orbit.
Here’s the intro:
“The genius behind PayPal, the Hyperloop, electric cars and tourist space travel unveils his biggest feat yet:
“Cheap, lightning-fast wireless internet beamed to every inch of the planet….
“And one tiny ASX-listed tech company holds the key to wirelessly connecting Earth’s entire population
“As an early investor, you could pocket 14 times your money, starting this year…”
That’s a common technique used by copywriters, taking a visible and exciting project or trend and then skipping multiple steps to connect that big trend to a particular small-cap company. That makes the small cap company seem like a bargain at any price, since they’ve got the “key” to a project that Elon Musk has been quoted as saying would cost $10 billion and take at least five years.
The real world is, of course, more complicated… with competing ideas and technologies, different strategies, and often very slow mass adoption of new technologies. Especially in space, where technologies that may seem old but are reliable are still in heavy use. Space exploration has brought us some of the core technologies that empower the modern world (and, of course, Tang), but those who deal with satellites that have to live for decades, or with keeping human astronauts safe, don’t necessarily update all systems to the hottest new thing every time.
But space junk is, of course, a big deal and it’s getting more important. It’s been a rising concern for almost 40 years, ever since Donald Kessler began warning about the possibility of “Kessler Syndrome” — which is basically a situation where one collision creates millions of tiny pieces of debris, each of which is moving far faster than a rifle bullet, and all those tiny pieces hit other things and create more debris, and the modern, satellite-powered world is destroyed almost overnight. That’s perhaps a bit of an exaggeration, given the vastness of space, but the problem is real — and is growing larger daily as more satellites go up, and as more older satellites that might not have been designed to “die” gracefully and leave orbit (as modern satellites generally are) are crowded near the most useful orbits.
There have been a few serious instances, like a Chinese anti-satellite weapon test that created a huge amount of orbiting shrapnel, and the defunct Russian satellite that collided with an Iridium satellite in 2009, destroying both and creating thousands of pieces of space junk — including some that the International Space Station had to maneuver to avoid. A lot of that junk was in orbital decay and gradually re-entered earth’s atmosphere and burned up, but certainly not all of it — and though tracking of space debris gets better all the time, this was just seven years ago and the trackers at the time had expected the satellites to pass half a kilometer from each other. It’s tough to track this stuff, particularly because much of it is moving at 20,000 miles an hour.
Back to the ad… what else do we learn about this Aussie company?
“… the high-tech solution to this is in the hands of a little Canberra-based specialist.
“This Aussie tech company is vital to the long term sustainability of Musk’s global wireless internet network.
“And for you it could be an opportunity to turn every $500 you put down into $6,935 starting today.
“That’s 14 times your money from a single $500 stake!”
Not sure where those numbers might be coming from, but then we get into more detail about what this Aussie company is doing:
“For years, tracking this debris was the only viable solution.
“And as The Australian reported, current alert systems are ‘neither accurate, nor timely enough for cost effective satellite manoeuvres.’
“Until now.Are you getting our free Daily Update
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“Because one Aussie tech company has created protective space technology that’s right out of the realms of Star Wars.
“In the space industry they call it space ablation. That’s a mouthful.
“But all it really means is using high-powered laser energy to move an object from a distant point…. blasting the space junk out of the way with a specially designed ‘space-laser’.”
More about this “space ablation” they’re going to be offering:
“The breakthrough technology they’ve invented allows them to both track and blast space debris from orbit.
“And today, you’ve got a rare opportunity to get in on a ground-floor company before the rest of the market realises what’s unfolding and piles in….
“In partnership with $60 billion Aerospace and Defence giant, Lockheed Martin, this ASX pioneer is about to open the doors on a brand new, West Australian-based space tracking facility.
“This is a world-class facility.
“According to their CEO, this facility ‘will provide a space debris tracking capacity equal to 25% of all capacity presently accessible to space industry globally, and with enhanced accuracy.’
“In other words, they’ll have the most powerful and accurate space ablation technology on the planet.
“Making them the ‘go-to’ company for the protection of multi-billion dollar ‘vulnerable space assets’ like Musk’s world-changing internet satellite constellation.”
Maybe “in other words” doesn’t mean what he thinks it means. Adding 25% to space debris tracking capacity sounds important, as does being more accurate — how that makes them the “go to” for ablation is unclear at the moment, particularly since space debris tracking is used by everyone and this “ablation” stuff is still really in “possible solutions” category.
But yes, that’s enough to ID our stock — the company they’re hinting about is Electro Optic Systems, sometimes also referred to as EOS — the ticker in Australia is EOS (EOS.AX on Yahoo Finance), there are two theoretical US OTC symbols, EOPSY for the 1:5 ADR (each ADR represents five shares of EOS.AX) and EOPSF for the 1:1 OTC symbol. Both of the OTC symbols trade pretty much not at all, though the EOPSY registered some trades recently (thanks, no doubt, to this newsletter tease). I was first asked about this ad on May 26, and that must be roughly when the campaign started because the stock went from about AU$1.20 to AU$2.20 in the course of about a week and a half… it has since come back down slightly and closed at AU$1.93, which would be $1.44 in the US, or $7.20 for the 1:5 ADR (BNY lists the latest ADR price as $8.01 on “0 volume”).
And the company really is working on “space ablation” plasma cannons, along with the less Star Wars-y “tracking” technology, though that’s not the only thing they do — and it really is a very small company, even with the latest surge in the share price the market cap is well below US$100 million. They have an active partnership with Lockheed Martin, which is working with them to develop that new observatory in West Australia, and they also have Northrop Grumman as a substantial (near 9%) investor.
The “space ablation” stuff that sounds like Star Wars, where a laser plasma cannon is fired at small space debris (from the earth’s surface) to move it out of orbit and into the atmosphere where it will be destroyed… but the space debris tracking stuff is very much real and in development. They are attempting to set up what would be a proprietary but hopefully universally used space debris tracking system using their own network of sensors, and because debris needs to be tracked continually by all interested parties (governments and other satellite owners) the data would be in constant demand so the service would be perpetual in nature. Which sounds like a nice business.
I’m getting all of this from the annual report, which clearly focuses on that debris tracking system as their core priority for the next couple years — it will cost them UA$100 million or so, and they say they’re funding it with partners who will take on half of the cost… here’s a bit of an excerpt from the report:
“To provide a reliable data service for space users, EOS is deploying sufficient sensors to find and track essentially all space debris of interest or concern to those space users. This information will be used to provide asset management and risk mitigation services.
“The delivery of space equipment still provides most revenue for Space Systems, but from 2017 the service
business model is expected to overtake equipment as the dominant revenue source.
“By late 2016 EOS expects to complete expansion of its long‑standing space data acquisition capacity by 7 times over 2015 levels, by bringing new sensors on line and exploiting better locations. This activity is fully funded and construction is well under way. During 2016 EOS expects to commence deployment of sufficient additional sensors to lift space data acquisition capacity in late 2017 to over 11 times over 2015 capacity. At this level EOS will be able to meet key initial commercial objectives for data volume and data reliability”
And as to the business model for making this network sustainable and profitable:
“The business model requires expensive infrastructure and EOS has entered into arrangements for project funding which have already met the initial US$105 million (AU$150 million) of project funding required to achieve 2016 capacity objectives stated above. EOS expects these arrangements will be extended during 2016 by AU$50 million to approximately AU$200 million to allow for the planned capacity expansion in 2017 described above. Further capacity expansion will be undertaken as data volume requirements increase, as reflected in executed customer contracts.
“EOS is providing approximately 50% of the AU$200 million estimated project funding requirement up to 2017 from previously sunk costs, ongoing profits and data pre‑payments from customers. EOS funding sources do not include any debt or sale of any rights to EOS intellectual property. To obtain the other (approximately) 50% of project funding to AU$200 million, EOS has ceded not more than 50% of net data services revenue from the 2017 infrastructure to investors who have funded and consequently own specific capital items in the deployed network, but who are otherwise completely financially independent of EOS.
“EOS is confident that it can meet the capital requirements for future growth beyond 2017 without sacrificing further share in net services revenue.”
The only missing piece, from what I’ve seen of the EOS filings in a quick browse, is what the expected revenue might be — and it could be that they don’t know. They do say that they expect to be profitable this year, and to have AU$10 million in cash on the books still at mid-year (which is right about now, though the most recent report is for 2015). They did grow revenue sharply in 2015, moving from a loss of about 5 cents a share to a profit of about 5 cents a share on the strength of revenue growth of 20%, which came primarily from the Space Systems division. The other division, Defense Systems, is primarily focused on designing and selling remotely-operated weapons systems like those used on the Aussie Bushmaster.
It looks like business is quite lumpy with the execution of substantial contracts not necessarily being all that predictable, here’s how they sum up the last two years of financials — you can see that Space Systems was higher margin this year thanks to a big growth spurt, and, from the note at the bottom, that a few major customers account for the vast majority of sales:
So I can see some logic to the recommendation — I have no idea what the economics of a subscription data service for space debris tracking might look like in 2017 or so, when such a service will presumably be available from EOS and their partners, but it does seem likely that such a service would provide a steady, predictable and long-term revenue stream. Whether that’s enough to offset any weakness from a couple big defense contracts not hitting in a particular year, I have no idea — and, not being an astronomer, I don’t know what the competition is like in this “space debris tracking” sector. I assume NASA and the big satellite companies would buy all the data they can get, assuming a price that can be absorbed by their business, but perhaps there’s enough competing data out there that EOS would have some pricing pressure, I don’t know.
The debris tracking, which apparently uses their laser technology, seems compelling and like the kind of data everyone in space needs, assuming that the data is as good as EOS hopes — whether EOS also ends up having the best solution for removing or disrupting the orbit of that space debris is another question, since lots of other researchers are also looking at that and the technology doesn’t appear to be ready for actual testing.
And, of course, we’re several years and tens of billions of dollars before we know whether Elon Musk is actually going to successfully use SpaceX to launch a low-earth-orbit array of satellites for internet communication. Musk did raise $1 billion from Google and Fidelity to get that project going, and the first test launches could come as soon as this year or next, but they would require hundreds of satellites and a lot more testing before they get a lot further. Other folks are also hoping to build internet-delivery “constellations” of satellites, including visionary Greg Wyler’s OneWeb, backed by Richard Branson… and presumably if EOS does indeed develop the most cost-effective data service for tracking internet debris, those folks would subscribe just like other satellite owners might subscribe.
So it’s an interesting little aerospace and defense company, they have taken some leadership in this space debris sector (they’re part of all of the research projects being operated by the Space Environment Research Center, which, not coincidentally, is also headquartered at EOS’s Mt. Stromlo observatory in Canberra), and I kind of like the shift in business plan to a data service and less reliance on equipment sales.
I don’t so much like the idea of a not-very-liquid stock that has risen 50% in a week because of buying pressure spurred by a low-cost newsletter that got a lot of small investors excited (Australian Small-Cap Investigator is only AU$49/year, so presumably they have at least 10,000 subscribers)… so I’ll keep this one in my back pocket and try to check back on it in a little while to see if the speculative fervor has died down, and if I learn some more about what the economics of their space debris monitoring service will look like.
Sound interesting to you? Have any thoughts on little EOS, or other ways to invest in the (eventual) eradication of space junk? Let us know with a comment below.
Disclosure: I own shares of Alphabet/Google (GOOG), I don’t have holdings in any of the other companies mentioned above. I will not trade in any stock covered for at least three days, per Stock Gumshoe’s trading rules.