Quickstep (QHL)- Australia’s leading independent manufacturer of advanced carbon fibre composite components -   reported its 1H FY19 interim financial results.)

·          Total sales of A$33.8m, up 21.5% on the prior comparative period’s (1H FY18) A$27.9m.

·          EBITDA of A$2.9m (-A$1.0), EBIT of A$2m (A$0.9m), NPAT of A$0.9m (-A$2.9m). Note: EBIT of A$2m benefited by A$0.7m from accounting changes to revenue recognition and reassessment of plant and equipment useful lives.

·          1H FY19 gross profit margins of 23% improved significantly on the pcp’s margins of 12.5% ; the improvement was due to strong volume growth on the JSF programme, lean enterprise programs at the Bankstown and Geelong sites  and increasing efficiency.

·          Operating cash flow -A$0.9m (-A$4.3m); this was a material improvement YoY but was impacted by a build-up of inventory (primarily raw material) because of production delays during the period due to key machine outage in November and December 2018

·          Net debt increased by A$1.1m to A$11m to fund increased inventory.

·          Outlook: QHL expects to deliver positive NPAT and operating cash flow for the full financial year, despite the impact of a key machine (PMM) failure during the December 2018 quarter which will impact March 2019 production.

·          Successes in defence manufacturing were recently recognised with QHL taking the winners’ awards at the Premier’s Export Awards in the NSW Defence Industries category and the Defence Business of the Year Award at the 2018 Optus MyBusiness Awards.

·          Four-year Enterprise Agreement successfully negotiated with two unions at Bankstown, the Australian Manufacturing Worker’s Union (AMWU) and the Australian Workers Union (AWU).

·          QHL expects to win new composite manufacturing contracts, primarily in the aerospace sector, using both traditional techniques and its proprietary advanced manufacturing Qure and QPS technologies.

State One comment

·          Revenue is on track to meet our full year FY19E forecast of A$71.1m.

·          Interim EBIT of A$2m (A$1.3m backing out accounting changes) indicates that our full-year forecast of A$2.3m could be on the conservative side.

·          Interim NPAT of A$0.9m indicates that the group is on track to (comfortably) meet our full-year forecast of A$1.3m.

·          Interim EPS of 0.15c are well on the way to meeting our forecast full year EPS of 0.2c.

Predicated on our forecast EPS of 0.2c in FY19E, 1.3c in FY20E and 2.4c in FY21E, we calculate that QHL is trading on a current PE multiple of 32.2x, a one-year PE of 5.3x, and a two-year PE of 3.0x.  We suggest that these ratings are not challenging and could attract a new cohort of growth-based investors.

In addition, the announcement of new material contracts (we believe potentially before the end of the financial year) could be a significant near-term share price catalyst.

QHL offers significant upside potential relative to our NPV/EPS-derived target price of 15c (unchanged). Recommendation: Buy (High Risk).