Monday, 1 December 2008

Record Sales Quarter But Analyst Reduces Target


AeroMechanical Services Ltd., (TSX:V-AMA)
Basic Shares: 82.5 million
Fully Diluted: 88 million

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Research Capital analyst Jacques Kavafian cut his target price on AMA stock based on the lack of orders out of China for the afirs technology because, as he says, "to be cautious given the numerous delays."
As a result, Mr. Kavafian snipped out all of the Chinese orders he had worked into his AeroMechanical (AMA) performance model, and decreased his target price from the previous $1.60 to $0.65.
But given AMA's strong third quarter sales performance and its robust pipeline of other customers around the world, the Research Capital analyst stuck with his BUY recommendation.
The issue is that AMA has an exclusive contract to provide voice and data products for an initial 515 Chinese commercial aircraft. That contract forms a large percentage of the roughly 766 aircraft AMA has in its sold pipeline and Mr. Kavafian is definitely in the 'show me" mood on the China issue.
AMA doesn't agree with Mr. Kavafian's pessimism.
Mr Kavafian noted that AMA is of the firm conviction it will fully act on its Chinese contract."But in order to be cautious given the numerous delays encountered in delivering on that backlog, we (Research Capital) have removed them (Chinese aircraft sales) from our calculations," Mr. Kavafian wrote in his quarterly report released Dec. 1st.
However, the well-respected analyst quickly added: "Despite this, the company has a very strong pipeline with 251 aircraft under contract, and once installation pace picks up, we may raise the multiple."
Mr. Kavafian cited two recent announcements that speak to the strength of AMA's business - fuel-saving consulting work for a large European airline and winning a contract to install AMA's technology on Hercules aircraft owned by a Middle East air force.
Late last week, AeroMechanical filed its third quarter results.
Despite a very tough year in which the chill of recession coupled with the burn of sky-high fuel aviation fuel prices, AMA recorded its best sales quarter yet.
Cash revenues in Q3/08 stood at $1.49 million, compared to $1.21 million in the same quarter last year. (Because of accounting rules, AMA can only record $789,994 thousand of that $1.49 million cash received as revenue.)
Importantly, AMA's recurring revenue increased by $241,600 over the same quarter in 2007.
Recurring revenue is a measure of the number of blueboxes that are installed in aircraft around the world for which airlines pay a monthly fee.
AeroMechanical noted its shipment of blueboxes was up 133% in Q3 2008, compared to the same quarter last year.
In addition, shipments of its technology were up 242% in the first nine months of 2008, compared to the same period last year.
Sales of blueboxes bring in some revenue every time one is shipped but it is the recurring monthly revenue that is the sweet spot in AMA's business plan. At the end of Q3, there were 132 installations, after subtracting one airline customer which went belly up.
In those Q3 filings, AMA President Richard Hayden noted he, too, was frustrated with the slow pace of sales to China.
However, he added that he believes, "the process is proceeding toward a full implementation of the contract."
And elsewhere in the management discussion and analysis, it was noted that an AMA executive still spends 90% of his time working on the contract in China. Despite the many financial accomplishments in Q3, there was a sour spot with the reduction in cash on hand down to $2 million from $4.1 million in Q2. (It should be noted that the cash spent in the third quarter included one time R&D expenses of $344 thousand.)
That caused some speculation AMA would have to return to the markets for a financing. But on that point, Mr. Kavafian chimed in writing:
"While cash has been decreasing the last couple of quarters, we (Research Capital) are not overly concerned with this because of (AMA's) active sales campaign."
We spoke with AMA management who said they, too, do not believe they will have to return to the markets in the near term, as long as the business they are persuing comes to fruition.
To view AMA's third quarter filing on SEDAR, please click here and follow the links.