Avcorp Industries: Top Gun’s Maverick or Iceman?


It might be a distant memory, but we all remember Tom Cruise as the dapper Naval aviator, Lt. Pete Mitchel a.k.a. Maverick, from the 1986 blockbuster Top Gun.

Well, Avcorp Industries (TSE: AVP) bears quite a resemblance to the character. It recently announced the signing of a contract extension with Boeing to provide the Wheel Well Fairing assemblies for the Boeing 737 MAX, growing the order backlog to CAD$486 million. Although this extension represents a tremendous opportunity for even greater collaboration between the two companies, will Avcorp prove to be the poised and composed Iceman or continue being the unpredictable and erratic Maverick?

The Avcorp Group designs and builds major airframe structures for some of the world’s leading aircraft companies, including BAE Systems, Boeing, Bombardier, Lockheed Martin and Subaru Corporation.  The Avcorp Group has more than 65 years of experience, over 500 skilled employees and 560,000 square feet of facilities.

Earnings Analysis

The onset of the global pandemic has significantly impacted the demand for travel, as various governments announced restrictions to curb the COVID-19 virus and variant progression. The 737 MAX grounding had also caused a significant drop in revenue for the Company’s Boeing programs in the proceeding 2 years.

Following the US Federal Aviation Administration and other aviation regulators around the world rescinding the ban on 737 MAX, deliveries and productions rates have increased and are expected to gradually increase through early 2022. This is a hige relief for Avcorp who in the wake of all this had been left to fend for itself, as its assembly lines and integration assignments came to a screeching halt.

While this year hasn’t been particularly lucrative, the company has managed to bring in some revenue. Both Q1 and Q2 2021 witnessed tapering revenues, at $23,933,000 and $24,385,000 respectively.

The company’s earnings have not only managed to stay intact but have gained compared to Q1 and Q2 2020. This was purely due to a combination of Government and Management’s Rescue Efforts such as Canada Emergency Wage Subsidies, loan forgiveness on SBA Paycheck Protection Program, and gain on modification of bank indebtedness as a result of executing an amendment agreement.

It is quintessential that Avcorp continues to focus on liquidity, debt management, productivity improvements and opportunities within sustainable technologies to achieve full potential as the industry recovers from the pandemic.

Undervalued or Valuation Trap?

AVP seems to be of ‘too good to be true value’ with its PE at 1.8x when flanked against the Industry Avg. PE of 23x. This raises some serious red flags and points us directly towards the CAD 87.7M debt Avcorp owes.

Although the company is currently profitable, most of it was driven by the protection programs and not Cash from operations. These all may be construed as signs of a Valuation Trap, and no one wants a situation of ‘Over-promising’ and ‘Under-delivering’.

What’s Up with the Negative SE situation and the Good News?

The Company has improved the shareholders’ deficiency to $30,380,000 as at June 30, 2021 (December 31, 2020: deficiency of $49,140,000). This was the result of the Company entering into a multiparty amended and restated Accommodation Agreement with a customer and Panta Canada B.V on March 12, 2021. This eliminated the amortized cash advance, provided a mutual release and forgiveness of certain historic and future guarantee fees payable to the customer, and a legal claim. The company, in line with this vision, may even decide to initiate a Buy Back to ramp up stock prices in the future.

The Sweet Spot

The company seems to be on point with technical supremacy, which explains how it is consistently bagging orders. But this beefed-up order book is of little use if not delivered. The company may have pulled off a solid rescue operation for now, but in order to maintain consistent value and investor confidence, Avcorp must get to brass tacks and hit the ground running!

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