Deleveraging as cash flows improve                                                       

Sales growth forecast to accelerate to FY20E

QHL sales of A$59m in FY18 represent a 14%increase on FY17’s A$52m. We forecast revenue increasing by 26% to A$75m inFY19E on the back of increased sales of F-35 JSF parts. Note: our forecast revenue growth is above QHL’s disclosed guidance of “at least 20%” in FY19.

Our revenue forecast of A$103m in FY20E (+38%on FY19E) assumes a further increase in JSF part sales.  Importantly, we assume that by FY20E, business developments announced over the past six months- housings for countermeasure flares for the F-35, Approved Supplier status with Boeing and Airbus, and a LOI with US-based aerospace parts producer  some A$12m in revenue in FY20E (equal to 12% ofFY20E group revenue).

In FY21E, we forecast group revenue of A$124m (+20% on FY20E), with new aerospace business accounting for A$24m or19% of FY21E’s top-line. 

Operating cash flow increases – but also capex & financing costs

On the back of our forecast rising revenueprofile, and with margins expected to benefit from operational leverage and on going cost-cutting initiatives (OneQuickstep), we forecastoperating cashflows improving significantly from A$0.2m in FY18A to A$2.6m in FY19E, andto A$8.4m and A$14.8m in FY20E in FY21E respectively.

Despite this operational turnaround, our view is that the group’s cash position will remain largely unchanged over the next three years as capital expenditure (to support new business development) and debt repayments absorb operating cash flows. As at 30 June 2018, QHL’s had A$13.6mof debt including capitalised interest with maturity dates ranging between 2019and 2021.

However, by FY22E, we forecast that with debt paid off, QHL could be able to distribute dividends; we forecast amaiden dividend of 0.5c in FY22E (~ 6% yield).   

Primed for maiden positive EPS in FY19E

A maiden positive interim EBITDA (in 2H FY18)indicates that the group has reached a critical inflection point. In FY19E weforecast QHL posting EBITDA of A$4.2m, underlying net profit of A$0.6m, and amaiden positive EPS of 0.1c. In FY20E we forecast QHL posting EBITDA ofA$11.1m, underlying net profit of A$7.7m, and EPS of 1.3c. At current share price levels, we calculate that QHL is trading on an attractive two-year PER of6.5x.