Friday, 29 May 2009

Analyst: AMA's Ruts & Smooth Road to Profits

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


A corporation and marathon runner have a lot in common.

Both face the greatest difficulties coming into the home stretch.

A relatively young corporation like AeroMechanical, has to draw on all its smarts and heart now to go the final distance to its first major milestone - profitability.

Equally, it's all willpower, discipline and heart that get a marathon runner through that last gruelling third of the race.

In his latest update, Research Capital aviation analyst Jacques Kavafian eloquently laid out all the ruts he believes AMA must avoid and the even pavement it must stay on to reach that goal.

A goal Mr. Kavafian is counting on for next year.

Playing off AMA's first quarter report for 2009, filed here, Mr. Kavafian noted how the toxic combination of sky-high fuel prices in the early part of 2008, crashing stock markets and plummeting passenger lists in the latter half of the year and first quarter of this year, conspired to slow AMA's sales and all-important installations of its technology.

Most airlines simply shut down spending on anything but the absolute fundamentals, Mr. Kavafian noted.

But the situation appears to be turning around, he added.

First, there are encouraging reports from around the world that airline traffic has stabilized.

Second, a host of airlines hedged their fuel costs and are just now coming off paying relatively high locked-in prices - higher than today's fuel costs but lower than the crazy prices airlines were faced with when they hedged their fuel costs.

That will free up a lot of cash, he predicted.

But given how oil prices are on an upward march again, Mr. Kavafian wrote:
"High oil prices should help airlines re-engage into thinking of ways to reduce fuel burn. And that is good news for AeroMechanical's fuel management program," Mr. Kavafian said, noting AMA's program can show airlines how to slash up to $200,000 in annual fuel bills per plane.


The fear of a return to $100 per barrel oil prices "will make airlines take pre-emptive action to shield themselves in case of another oil shock," he predicted.

Mr. Kavafian also wrote that AMA's recent partnership with Sierra Nevada Corporation (SNC), will see SNC take over some of AMA's research and development costs and that will help AMA on the expense side.

Given all of the above, Mr. Kavafian wrote that he still believes, "the company should be able to meet its near-term working capital requirements."


In AeroMechanical's Q1/F09 filing, working capital stood at $934 thousand, compared to $1.3 million in the same quarter last year.


He did, however, caution that if the pace of installations did not pick up or if existing customers do not sign on for its fuel-management program, "AeroMechanical may need to raise more capital at the latest by September 2009."

Despite that bold-lettered warning, he recommended investors continue to buy AMA stock in the current range because he expects the stock to hit $0.65 cents, a 160 % return from a $0.25 cent share price.

Why?
Because he doesn't believe the ruts will be so bad that AMA will not reach the 2010 goal of profitability.


AeroMechanical applies a standard comment to any analyst's report, noting AMA doesn't necessarily share the analyst's views.


To read Mr. Kavafian's full report, please click here.