Tuesday, 29 July 2008

Analyst Says BUY AeroMechanical With A Caution

AeroMechanical Services Ltd., (TSX:V-AMA)
Basic Shares: 81 million
Fully Diluted: 93 million


Research Capital analyst Jacques Kavafian maintained his BUY recommendation in an updated report on AeroMechanical Services but lowered his share target price from an earlier estimate of $3.00 down to $1.60.
Mr. Kavafian wrote in his July 29th report (his third report on AMA) that he lowered his target price because of slower-than-expected installations this year that were brought about primarily because of high fuel prices coupled with United States economic woes.
In addition, the highly-respected analyst wrote that China has now delayed any installations until after the Beijing Summer Olympics.
Previously, AMA was told that Shanghai Airlines was to install two of AMA's Afirs units this month prior to the Olympics followed by five units in another Chinese carrier's aircraft and 11 units per month thereafter for the remaining 515 Chinese aircraft under contract.
However, Mr. Kavafian wrote that the Chinese government, "suspended any activity until at least after the Olympics (which start August 8th and end on the 24th.)"
He added that he did not include any Chinese installations in 2008 in his calculations to arrive at his most recent target price. But he is counting on installations for 2009 and 2010.
Mr. Kavafian cautioned that he was very concerned about the numerous delays in China and if no installations take place by the end of August, "we will remove China orders from (AMA's) backlog and review our estimates accordingly."
On a more upbeat note, Mr. Kavafian wrote that despite the initially negative impact of the airline slump, the economic turmoil is positive for AMA.
He reasoned that AMA's technology actually helps airlines save money. However, that realization was lost in the past four months because airline managers were solely focused on evaluating their fleets.
But now that the fleet evaluations are complete, Mr. Kavafian concluded those same managers can now focus on the benefits (chief among them, fuel savings) AMA's technology can bring.
"The company still has a very strong pipeline, with 726 aircraft under contract by 32 carriers, or 211 aircraft excluding the ones from China," Mr. Kavafian wrote.
"Currently, there are 115 units installed, excluding the 27 Aloha Airlines units due to the bankruptcy of that airline. The company has 50 installations year-to-date (44 last reported as of June 30th) and expects a further 50 to be installed the rest of the year, primarily in the fourth quarter, because airlines have no downtime in the third quarter being the high season for the industry. We now expect the company to install 100, 319, and 377 in fiscals 2008 through 2010."
"We remain a BUY on the stock and believe that the current share price level presents a good buying opportunity."