Friday, 6 January 2012

Aeromechanical - The Howard Group Watches From The Sidelines

AeroMechanical Services Ltd. (TSX:V-AMA)
Basic Shares: 118.58 million
Fully Diluted: 134.33 million


It is an understatement that there have been a lot of ups and downs with AMA since The Howard Group first signed on in January 2006 to provide the company with investor and financial relations services. While our involvement with AMA through 2011 was a small behind the scenes role, the end of the year saw the formal relationship come to an end.

Our group, which includes the associated Insight Limited Partnership, was introduced to the company in the fall of 2005. We very much liked the technology, the recurring revenue model and the potential but the situation was very high risk, especially in context of AMA's weak financial position. In fact, our initial quarter-million dollar investment before that yearend only took care of some of the company's payables. With some chagrin, the stock then is where it is now, in the low $0.20 range!

Along the way we brought many beneficial relationships to AMA, helped grow the shareholder base by a factor of ten and invested in a series of placements right up to the $1 range. We stayed with the story for the same reasons that it caught the attention of new investors, fund managers and brokers; everyone saw AMA was gaining ground and then there was all that potential! In fact, HG used this period as a case study of how a groundswell of support can be built for a company click here.

A lot of excitement built around the story and it was well through $1 in late 2007, early 2008. The expectation was that AMA would crack China and the order book would rival the flow of the Yangtze River.

Unfortunately, expectation is only good if it is followed with delivery. Once again, the Great Wall kept out the invading hordes. This non-event, AMA's industrial type growth, the economic abyss of 2008, the fall-out of which we continue to live with and a broad retreat from junior stocks has meant that owning the stock has been akin to watching paint dry, the past year in particular. Just over 34 million shares traded in 2011 in a very narrow range of pennies with the average buy price being just under $0.21.

Have we soured on the stock and the company and are going to hit the sell button on a healthy seven figure position now that we are no longer in a formal relationship? Not at all! The actual discussion around the HG halls has been of increasing the ownership position.

To management's credit, the company has been "re-tooled" in terms of how it approaches the business today versus several years ago. In our view, AMA is now a head down - keep grinding attitude company that continues to secure deals for its technology with small and regional airlines while methodically and surgically working to bring a "major" onside.

We don't know when or if AMA will sign an agreement with an international aircraft manufacturer to have its technology become part of the factory offering or if it will finally ink "the" deal in the commercial jet market that would be a major breakthrough or if Chinese airlines will suddenly open the order book in a large way. What we do believe is that AMA has spent at least the last two years making believers of the powers that be of the merits and advantages of its technology. However, will that be enough to "get the deal". As a reminder, it took the inventor of the original black box ten years to see his genius finally make it into a large way into aircraft and that was largely driven by regulation.

We sense that AMA's focus has become acute through the turmoil of the last few years and importantly, there is a balance between expectation and how to get to delivery.We know that many people have wondered why AMA has become so subdued and is noticeably absent from pounding the pavement and tables in North American financial centres.

We've had this chat with CEO and recently re-appointed President, Bill Tempany. He's clear that when AMA decides to once again step into the spotlight, there will be an exceptionally good reason for the decision. We view the approach as realistic and most sensible.

We like good surprises and very much hope that Bill and team deliver the main event early in the new year.

The fact is that with AMA's history as a "stock" and in context of the foreseeable malaise that will linger in the junior markets, it is going to take a material event to break open the dam.

On that note, we wish on behalf of all patient investors the very best to Bill and CFO, Tom French, Tammy, Matt and a host of others at AMA.

We want to see you on centre stage very very soon.