Quickstep Has The Right Stuff

This story features QUICKSTEP HOLDINGS LIMITED. For more info SHARE ANALYSIS: QHL



By Greg Peel

Last night US President Barack Obama was able to claim a victory as the US Senate voted in favour of the President’s policy to cease funding for the F-22 Raptor stealth fighter. The policy was intended to relieve an overstretched fiscal deficit by retiring the high-tech, high-cost, and ridiculously high-maintenance-cost planes. Funding will now be directed to a more conventional, but more practical F-35 Joint Strike Fighter (“Lightning II”) once the last F-22s roll off the assembly line. The US defence force is expected to pour US$40bn into buying in excess of 3000 of the new fighters, believed to be the biggest single defence contract in history.

One enthusiast website reviewed the F-35 as such:

“The F-35’s main power source is a Pratt & Whitney F135 engine, capable of pushing the Lightning II to speeds up to Mach 1.67 and a range of 1,400 nautical miles. It will include a 25 mm cannon, a bevy of air-to-air and air-to-ground missiles and a wide range of bomb capacity. While some will certainly miss the history and value of the F-22 Raptor, the F-35 Joint Strike Fighter is an ample upgrade to continue the dominance of the US Armed Forces in the skies”. (GadgetCrave.com)

God bless America.

The F-35 is produced by Texas-based global aerospace company Lockheed Martin, as was the F-22. But Lockheed Martin cannot build every part of its plane alone. Since its F-35 program began, Lockheed has been negotiating with other companies, including Australian defence industry companies, to join the production team for this huge contract. Australia has proven a world leader in the field of “composites” manufacture.

Parts manufactured from composite material such as resin-reinforced fibreglass, Kevlar and carbon fibre are quietly replacing equivalent metal parts in high-tech applications due to superior strength-for-weight ratios. Once the preserve of Formula One cars and Sydney-Hobart racing yachts, composite use is becoming more mainstream as fuel cost and climate concerns mount. Just as aluminium once replaced steel for the same reason, composites are replacing aluminium. New-era hybrid electric cars are being built using composites, and Boeing’s new 787 Dreamliner will contain just 20% aluminium, with composites used to build all the aircraft’s skin.

But composite manufacture is far more technically complex than beating and riveting sheets of aluminium. Composite parts are moulded using high-pressure, high-temperature vacuum autoclaves. Not getting this technology quite right is one reason the Dreamliner has been delayed for as long as it has. Boeing outsourced the composite manufacture to South Carolina’s Vought Aircraft Industries, but was then forced to buy out the company in an attempt to speed things up. Vought has built parts for Boeing since the first 747 was commissioned in 1968.

One would think Australian companies would thus have fallen about themselves with enthusiasm when Lockheed Martin came knocking on the door with talk of potentially history’s biggest ever defence contract. But embarrassingly, this was not the case. Lockheed is offering a $2bn deal to build composite parts and other high-tech gadgetry for the F-35 but local companies will not be able to meet such a commitment without initial government assistance. The ongoing deal is possibly worth $9 billion and could create up to 2000 technical and engineering jobs.

So you think the Rudd government would also have fallen about itself, quickly spotting a brilliant opportunity in the current climate to don hard hats and yellow vests and announce how its stimulus package would help to create so many jobs in the current recession. Take that one, Malcolm. But no – according to the Adelaide Advertiser there is a “deep mistrust” held by the bureaucrats of the Departments of Defence and Industry towards the local defence industry, and thus respective ministers are not getting all the facts. There has thus been no big announcement.

The “Tiser reports Lockheed will send executives out to Australia this week in a last-ditch effort to find someone – anyone – to help in composite manufacture. Even more embarrassing is that Australia has also ordered one hundred F-35s for its own air force, at the cost of $16bn to the taxpayer. Yet we are turning away the chance to offset the cost of construction with jobs, profits, and ongoing relationships.

But wait. There is still hope.

Western Australia’s State One Stockbroking has been tracking the fortunes of listed local composite manufacturer Quickstep Holdings ((QHL)). Recent press suggests Quickstep may emerge as the only Australian company with the capacity to be able to satisfy at least some of Lockheed’s requirements. In order to be considered, local companies must hold an international AS9100 Aerospace Certificate, and Quickstep has just completed certification. The only other two locally-based, AS9100-certified companies in the running – Hawker De Havilland and Aerospace Australia – do not have the spare autoclave capacity to produce the required parts.

Earlier this month, Quickstep signed a formal agreement with Australia’s largest defence company, BAE Systems Australia, which is a subsidiary of the global BAE Systems. BAE is already a principal sub-contractor on Lockheed’s F-35 contract, and Quickstep has teamed up with the local group to design and manufacture lightweight composite SATCOM antennae for military and commercial applications. But the ‘Tiser believes Quickstep is now in discussions with Lockheed on expanding to aircraft skin manufacture. Quickstep may emerge as the only local company able to exploit the Lockheed goldmine.

Despite aforementioned bureaucratic resistance, State One is prepared to speculate that once the government is properly in the picture, the opportunity will not be wasted. If Quickstep can emerge with an extended Lockheed contract to its name, one cannot believe Kevin Rudd would let a hard-hat-and-yellow-vest opportunity like this go begging. Government support could well be forthcoming.

Indeed, Quickstep already has one government grant – being $2.6m over three years as part of the AusIndustry Climate Ready program. Throw in carbon-related tax rebates and Quickstep could be looking at up to 80% government funding for its $5.2m RST technology development.

Not only is Quickstep one of few companies across the globe proficient in composite autoclave processes, it has developed its own Resin Spray Transmission (RST) technology which greatly reduces the cost of the process by reducing manufacturing times and labour costs. State One notes RST could deliver exactly what the auto industry needs to satisfy carbon-reduction requirements set in exchange for government industry support. The greater use of composites in car manufacture could reduce the weight of a steel car by up to 70%, and thus reduce carbon emissions by up to 55%, State One reports.

Earlier in the month, Quickstep signed a Memorandum of Understanding with Composites Technology Research Malaysia. CRTM is the fifth largest composite supplier to French-based Airbus – maker of the new generation A380, which is the competitor to Boeing’s Dreamliner. Together, Quickstep and CTRM hope to introduce RST technology as a viable parts manufacturing process for Airbus and other aircraft manufacturers.

So in short, Quickstep appears it may have the whole sky opening up for it. This is all mere speculation of course, in terms of assuming a flood of deals from Lockheed, Airbus or anyone else, or in assuming government grants. But for those investors with a healthy attitude towards risk, Quickstep shares are currently trading around 25c. State One has placed a Speculative Buy rating on the stock, and set a 12-month price target of 40c. But if everything falls into place, the sky might be the limit.

State One notes that Quickstep has a strong cash position on its balance sheet, with loan facilities of $12.7m available (not including the $2.6m grant). At the end of the March quarter the company had only drawn down $2.7m of its facilities. In the meantime, it has completed the construction of a new production facility in Fremantle which has been filled with state of the art, high-tech equipment. State One notes the barriers to entry in the complex composite game are very high.

State One also makes note that once a foot is in the door of the high-tech aerospace industry, long term profitable relationships usually follow. Note Vought Aircraft Industries’ forty-year contract with Boeing. When Boeing bought out Vought recently, it paid an EBITDA multiple of 14.8x. As Quickstep is in a developmental rather than an earnings phase, an EBITDA multiple is not currently comparable.

The F-35:

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