FLYHT Aerospace Solutions
Ltd.
TSX Venture: FLY
Shares Issued: 142.5 million
Fully Diluted: 182.1 million
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TSX Venture: FLY
Shares Issued: 142.5 million
Fully Diluted: 182.1 million
*************************
Late Friday Hugh Cleland, Portfolio Manager at Blumont
Capital, circulated an update on FLYHT to his clients and other interested
investors. In it he laid out exactly why he expects the share price to continue
its latest rise to $0.40 - $0.60 by the end of this year.
Here is a full copy
of his report.
FLYHT: many of Flyht’s major, long-term initiatives are
coming together at the same time, and management has reiterated the company will be
cash flow positive in Q4-13.
Before addressing business developments, I am going to take
a stab at addressing misperceptions around Flyht’s balance sheet, because what
appears at first look to be horrifyingly bad is actually reasonably healthy. Here goes:
At March 31, 2013, the company reported negative working
capital of $3,545,752—a scary number which has prevented many an investor from taking the
time to look closer.
However, as discussed in detail in the MD&A, both customer deposits
and the current portion of “unearned revenue” are included as current liabilities, despite the
fact that NEITHER of those items are refundable (i.e., neither of them are a potential liability
in any sense of the word). So, adjusting reported working capital by taking those items out
of current liabilities in fact gives a more accurate picture of the company’s situation, and
results in a “Modified Working Capital” of negative $457,027. Although much better, this is still not a
good number. However, this modified number includes something which management has
publicly indicated will likely be resolved in Flyht’s favour in the near future: the
outstanding accounts payable to Sierra Nevada Corporation (SNC) of $1,827,312. Of course, until it is
actually legally resolved once and for all, this liability will still be there, but I am familiar
enough with the history of the SNC relationship to believe that management’s confidence in the
resolution of this dispute is not misplaced. If we then also take this item out of current
liabilities, the March 31 “as if” working capital becomes +$1,370,285. And if we then add in the
proceeds of the recent financing—now complete and closed—we are looking at a healthy working
capital balance more in the +$3.3million range. I am looking forward to the resolution
of the SNC situation before the end of Q3, so that investors new to the story won’t be so quick
to run screaming from the balance sheet.
So why do I still believe that Flyht can be one of the big
winners for the fund? The next 4 months promise to be the most exciting in the company’s
history, with many of the long-term, game-changing initiatives beginning to bear fruit simultaneously.
Perhaps the most significant from an industry standpoint is
the beginning of assembly line installation at Airbus in Q3 (under the L-3 contract), with
shipping from the Airbus factory to commence by the end of 2013. An equally significant
opportunity is for the retrofit of existing Airbus fleets at major airlines: during the Q1 conference
call on May 8, management was very specific that they expect to announce 2 fleet retrofits by
the end of 2013; during the Q2 conference call, management stated that there are more than
2 such opportunities, and that, specifically, the 150+plane opportunity with a South
American operator (discussed on the Q1 conference call) was “secured” with respect to the
L3-to-end-customer side of the equation, and that the PO to Flyht would come “in due course”. As to
what Airbus’s future plans might befor the AFIRS system on the Airbus assembly line, a November
14, 2012 speech by Mr Marc Ballion (International Safety Program Director at Airbus)
gave a tantalizing hint. He was quoted by a Nigerian newspaper, as follows: “Mr Marc Ballion
said AFIRS would automatically be fixed on all Airbus planes from 2015…He said...’We have
to be predictive and pro-active in our approach to the safety of airplanes and passengers…We
don’t have to wait for an accident to occur before we take steps.”
Another game-changing initiative of Flyht’s that is coming
to fruition is in China. The developments in China have been dramatic, with the Civil Aviation
Administration of China
(CAAC) firming up the timelines for their satcom mandate
first published in October 2012:
From the link above: “According to the plan, Chinese airline
companies should install the [satcom] system on 20% of its fleet by the end of 2013. And
by the end of 2016, all commercial aircraft should have such equipment.” We now know
that the CAAC has reaffirmed the 2016 deadline for full-fleet installation, and has
imposed a deadline of November 30 2013 for the airlines to have their roll-out plans submitted to
CAAC, with installations mandated to begin in early 2014. One of many good things from a Flyht
perspective is that for installations to begin in early 2014, a PO will have to be issued to Flyht
well before the end of 2013.
By the end of 2016, China’s commercial fleet will have over
1,900 aircraft that will be mandated to have satcom equipment on board. There are 2 reasons I am
expecting Flyht to achieve well over 50% market share for these installs:
1) only two types of satcom equipment have been approved for
installation in China (the Iridium/AFIRS system and systems that use the Inmarsat
satellite network), and the Iridium/AFIRS system is significantly smaller, lighter and
cheaper (both on an upfront and ongoing data/voice charges basis) than systems using the
Inmarsat network;
2) because of the Airbus/L-3 relationship, Flyht should
expect to get 100% of the Airbus
installs. (Airbus had about 45% market share of the
commercial fleet in China as of September 2011.)
Encouragingly, six of the major Chinese airlines have
already done initial installations, and are setting up procedures for pilot training and large scale
installations in 2014. I am hoping to see the first large PO from China in late Q3 or Q4 of this year.
Of course, one of the many positive knock-on effects of the China mandate is that many OEMs will
likely be forced to accommodate installation of the Iridium/AFIRS system, both on the
assembly line and in the after-market.
Bombardier was forced into assembly line installations in
2012, as per the following press
release:
It would be reasonable to expect that other OEMs (such as
Boeing, Embraer and Dassault) will be forced to likewise accommodate installations of the
Iridium/AFIRS system for the Chinese market, and maybe—just maybe—this forced adoption will end
up convincing them of the merits of the system so that they end up being proponents
and willing adopters—like Airbus.
On the NetJets front, Flyht management indicated at the May
7 AGM that the interruption
caused by the bankruptcy of Hawker Beech is finally over:
the first jet in the NetJets Europe
fleet went live on May 6, and now all 10 of the installed units
are live. Although the Hawker
Beech bankruptcy has changed the trajectory of the adoption
process, with many customers’
own evaluations showing that Flyht’s AFIRS system
demonstrates savings of over $100,000/plane/year, I would expect to see this program gain
momentum, both at NetJets
Europe and NetJets USA, over the next two years.
A smaller but still significant and very visible opportunity
is in Nigeria: a mandate to have
AFIRS installed on all planes operated by Nigerian airlines
means that another 80 planes will
have the AFIRS system installed and running by the end of
2014.
Developments such as these above, as well as developments
with operators of C-130 fleets, have reinforced my confidence that we will see
Flyht’s stock somewhere in the $1-$3 range within 3 years; shorter-term, I
think we’ve got a good shot at the $0.40-$0.60 range by yearend.
