Investing is often all about timing. Get that right, and the rate of return on your capital is boosted exponentially. Get it wrong, and you can have dead money wallowing in underperforming investments for years if not decades. Sometimes it’s all about patience, knowing when to step up to the plate and have a swing.
Quickstep Holdings (QHL) must be one of the slowest burn companies listed on the ASX. QHL is a Sydney-based advanced manufacturer of high-value carbon-fibre products, predominantly for the defence industry and listed 14 years ago, raising $6m at 25c.
Between 2005 and 2019 QHL raised an additional $104m in capital, the shares fell 75% and the company never posted a profit. Clearly a less than rewarding period in which to have been invested.
More recently, things have changed. In 2017 the current managing director, Mark Burgess, was appointed and 3 long-standing directors were replaced. Contracts have been won, costs have been cut, operating cash-flow has improved and revenues have grown.
After all that invested capital and 15 years of work, QHL now boasts an expansive composites manufacturing facility in Bankstown employing more than 400 people with clients across the civil and defence aerospace, automotive, marine and medical sectors.
And there is no doubt that FY19 is a defined inflection point. The nurturing and growth of large government defence contracts (in FY19 QHL did more than $60m in work for Lockheed Martin and Northrop Grumman, up over 50% on FY18) meant that in FY19 the company posted a maiden profit of $2.7m. Combined with a balance sheet that holds no debt, the company is in a prime position to drive profitability further.
The company now expects the recent positive trajectory to continue with revenue growth above 20% and improved margins driving greater profitability. We believe this is extremely conservative given prior organic growth figures and potential new contract wins.
In addition, the current valuation looks remarkably attractive. Absolutely, with a 15 year path to profitability and a huge dilution of capital (shares on issue have exploded from 86m at listing to 710m), there is a large wedge of market participants that simply won’t be convinced of the current turnaround.
However because of this market scepticism the market capitalisation of QHL now sits at around $65m, less than 1x sales. For a profitable growing hi-tech domestic manufacturing play, we believe this company is an excellent pitch.
Dean Fergie is a Director & Portfolio Manager of Cyan Investment Management