F-35 JSF deliveries increased 36% QoQ to 399 parts (309 fuselage and 90 VTF parts), bringing 1H total deliveries to 692. Importantly, management is maintaining FY18E full-year production/delivery guidance of ~1,500 parts; this implies a 17% increase in the second half of FY18E to 808 parts. Six Lockheed Martin C-130J shipsets and one spare (6.25 shipsets) were delivered in the quarter (vs 6 in the September quarter).

Reflecting the increase in output, quarterly sales revenue of A$15.4m was up 24% on the prior quarter - although cash receipts were negatively impacted by seasonal C-130J advance payments in the first quarter. Operating cash outflow of A$4.4m included a working capital increase of A$1.6m, R&D costs of A$0.7m, A$2.4m in deferred income, and initial OneQuickstep activities. On the back of increasing output and ongoing cost-cutting initiatives, management expects the group to post a positive EBIT in 2H FY18E and in full-year FY19E.

Target price: A$0.15ps (unchanged)

We have kept our forecast FY18E full-year JSF and C-130J production figures unchanged at 1,500 parts and 24 shipsets respectively. Our NPV/PER-derived target price of A$0.15 indicates significant upside potential relative to current share price levels of A$0.083. Recommendation: BUY (Higher Risk).