Company was "on watch" for me (ie thesis close to being broken). To maintain a position, I required a good 1H result as management had previously stated that H2FY22 had been impacted out of their control and that H1FY23 would essentially be a catch-up half. To continue to hold I required the company would be on track with the previous management guidance for FY23.

Quickstep released a preliminary results announcement today in which the profitability for H1 was negative, with a negative operating cash flow. I had expected both profit and operating cash flow to be positive and a strong turnaround from last half as previously stated by management.

This was on top of an announcement that the CBA debt facility would be expanded to $15 million. I had previously been worried about the debt position of the company so didn't want to see this increase. This is a result of another poor half in my opinion. Unless cash flow turns around to be strongly positive over the next year or so, I don't see how a capital raise won't be required at some point to pay down debt.  

To top it all off management removed guidance for the year so a clear signal they will get nowhere near previous guidance which I didn't think was strenuous. For example, guidance of "PBT improvement on FY22" (which was around $1mil) shouldn't have been hard. My read therefore is management are saying the company will make a loss this year. Thesis required the company to becoming more and more profitable over time which isn't occurring.

As a result of the announcement I have sold out of Quickstep.

Quickstep today announced a contract with Dronamics for $4.5-5.5 million worth of work for 10 aircraft in total, on a full cost-reimbursement-plus-fee basis. Work will start in March 23 and first delivery is due in Oct 23. Dronamics is a "cargo drone airline", Quickstep will produce "The Black Swan" which is an unmanned aircraft capable of carrying 350kg of cargo over 2500km.

Positive announcement as this is another case of Quickstep turning MOUs into real contracts, need to see this continue to occur over the next year or so.

Today Quickstep released an investor update and FY23 forecast. Notes and comments from the release are below:

• New "US go to market strategy" including establishing a manufacturing capability in the US. I like this move overall, however, do they have the capital to do this without a dilutive capital raise would be the question?
• FY23 forecast of results:
• $100 million revenue
• Underlying EBITDA = $6.5 million
• PBT improvement on FY22.
• The revenue growth comes from the new lines of business that QHL has established over the past few years. A positive sign, however, the revenue growth was an expectation due to the poor H2FY22 result (ie how much is catch up?).

Overall Comment:

The FY22 results were not up to original expectations this time last year. This is a result of COVID, flooding and supply issues. Management emphasis on delays rather than lost revenue which should result in a bumper FY23. This must happen, I consider Quickstep to be on watch for a sell if unable to execute over the next 6-12 months. The very positive recent announcements of actual contracted work rather than the many MOUs that were coming out in previous FYs. Shows management is starting to create additional revenues from the ground work they were doing 1-3 years ago. 

General Notes

• Financials:
• Revenue of $86.7 mil - flat.
• EBIT of $1.4m.
• NPAT of $786k.
• NTA per share 27.6c
• Cash from operating activities $3.3m (down from $7.8m FY21). 
• Share register could do with a tightening. 1194 holders with 1000 or less shares (ie less than $500 worth at current price) and 2067 with 5000 shares or less, given total number of holders is 4860.

Positives

• Management have been fair with underlying figures, this FY the underlying figure was lower than statutory and not hidden this.
• Announcement on 1st September, new orders from an Australian drone company has required the size of its Geelong facility to be doubled to accommodate firm and anticipated demand. Very positive sign for the applied composites segment of the business. The strategic supply agreement with Swoop Aero has increased from $1.4m to $5m. Dronamics was another MOU was another example of a drone related partnership.
• Investments in Carbonix and Swoop Aero during the period. I like these investments as they could create revenue streams and provide a capital gain upside. I think the manufacture of drone composites is a real growth driver of the business into the future.
• Recent announcement of up to $195m (of which US$105 is firm) worth of orders over the next 6 years was agreed upon for supply of F-35 centre fuselage parts. This covers 6 lots, previously orders were only in single lots, hopefully a good indication of the confidence that Northrop Grumman has in Quickstep as a supplier. The F-35 is the base of Quickstep's revenues and this agreement provides certainty to income and revenue. Provided all lots covered by the price agreement become firm orders, this will result in around $46m AUD in revenue per a year over the next 6 years (averaged across the period). Note this is for centre fuselage components only. The announcement also confirmed, the vertical tail parts for lots 15 and 16 will provide revenue of just under $33m.

Negatives

• Quickstep needed to take out an additional loan of $5m to assist with the working capital requirements due to the H2FY22 operational challenges. There is a cash flow issue that has been created by the delays. 
• Aerostructures segment of the business saw a fall revenue of approximately 32% in Q4FY22 as a result of the operational issues.
• Operational issues during the second half were due to (previous announcement):
• Flooding with only superficial damage caused with minor shutdown.
• Supply chain issues - supplier absenteeism and material shortages.
• Staff absenteeism from COVID. March had an average absenteeism of 19.6% for direct labour.
• The operational issues above are disappointing given the previous resilience during other COVID times. It is expected that revenues are delayed rather than lost, this must be followed through on by management in FY23 (especially H1).
• No presentation? Why? 
• Loan covenants were technically breached by poor 2H results. Management obtained a waiver until March 2023 for debt service cover and end of FY23 for debt to EBITDA.

Has the thesis been broken?

• No, but still on watch. The results were poor but indicate that this next half and the FY23 will be a good year as the company catches up with the COVID and supply issue related delays. If this doesn't happen then I must sell. After the last FY results I noted there were a lot announcements but nothing leading to an increase in actual revenues. The recent announcements indicate the partnerships are turning into contracts and revenues. So some progress from that perspective. If I this hadn't occurred I would have likely been selling but from my perspective there is a positive outlook for the next year in terms of financials and growth of the company. Still one to watch carefully. 

What are you expecting and what do you need to see over the next reporting season or generally into the future?

• Management statements to be executed:
• Inventory build-up will unwind in FY23.
• Revenue lost in Q4FY22 is only delayed, therefore 1HFY23 is a significant improvement and a good result.
• Continued execution of the three-segment strategy with more announcements of actual contracts and for the previously announced work to result in increased revenues and profitability of the company. 

Quickstep today announced at the Farnborough International Airshow that it will be the first strategic manufacturing partner for Dronamics. Dronamics is a cargo drone company, its current prototype drone named "Black Swan" can carry up to 350kg for up to 2500km. They claim they can do this cheaper than any aircraft can do by 80%. Dronamics recently became the first cargo drone company to obtain a European drone airline licence and is looking to launch their commercial operations in Europe before the end of 2022 and launch in Australia in 2023. The regulatory framework for Dronamics operations is currently limited but a new and evolving area so growth of the business could very much be limited by that.

For Quickstep, yet another partnership to add to the list. However, again it is not substantial in any way at this point. I think the drone space is a perfect application for their Qure technologies/IP. It should be noted that this announcement wasn't made to the ASX to emphasise the material nature being insignificant.

Quickstep has announced a jointly funded project with Defence (through Defence Science and Technology Group, DMTC), "to identify, analyse and test high temperature materials as a first step towards the development of future hypersonic aerostructures." This project is named Hype-X.

Quickstep will obtain commercialisation rights to any new IP, however, the IP ownership will be retained by DMTC for Australia's defence capability. Technical experts from UNSW will be involved.

Any fruits from this project will most likely be at least 5 years away. Hypersonic missiles are only just coming into service and/or are in flight testing stages for the worlds most advanced militaries. The positive for me as a shareholder out of this announcement is the continued ability of QHL to create such partnerships. There have been quite a few announcements recently of partnerships that could create new opportunities. The question is whether they will eventuate into materially higher profits over the longer term, these types of partnerships may eventuate to nothing or be the next stage of the life of the company. Another positive that could be inferred is the previous board renewal with members with close ties to defence/government may be paying off. The market reaction was positive with a 10% jump in share price (off a low base it must be said).

General Notes

Key financials:

• Revenue up 14.1% to $47.3 mil
• Underlying NPAT = $2.1 mil (statutory $3.3 mil due to writebacks)
• EPS = 4.3c
• Gross profit up 19.2% to $9.1 mil
• Net $4.1 mil from operating activities including $2.8 mil build in inventories
• Total bank debt down $800k to $6.9 mil
• FCF = approx $2.3 mil

Other notes:

• New working capital facility of $6.0 mil executed with a term of 2 year ending Dec 2023.
• Investor day schedules for 17/3/22 to outline company strategy and growth plans. 
• Business will operate in three lines: Aerostructures, Aftermarket and Applied Composites.
• Over the period Quickstep has made two investments in drone companies: Swoop Aero - A drone logistics services company and Carbonix - Drone company that captures data from the air.

Positives

• Revenue growth of 14% to $47.3 mil compared to PCP. Supported by the additional parts being produced for F35.
• Operating cash flow = $4.0 mil with FCF of approximately $2.3 mil. 
• Carbonix investment has resulted in Quickstep using Qure technology to produce drones for Carbonix. This is important for the thesis that the Qure technology is being used in practical applications.

Negatives

• COVID-19 border closures impacted revenues for aftermarket MRO business (Quickstep Aerospace Services).
• While revenue was up this was mostly due to F35 work. Further concentrating revenues to the one source (though very stable)

Has the thesis been broken?

• No, still on watch but good signs with bank debt down, continued profitability and positive cash flows and the diversification of the business showing positive signs. I like the investments in the drone space. 

What are you expecting and what do you need to see over the next reporting season or generally into the future?

• R+D expenditure reduced due to QHL transitioning to the commercial application of Qure. Need to see this eventuate now. 
• Debt continuing to come down.
• Management's promises for FY22 need to be achieved:

General Comments:

Nothing new. Outlook as expected but a very good minimum hurdle. There continues to be contract announcements and new avenues for growth but nothing that makes a material difference or that next step. To answer the CEOs question that is why the market doesn’t value the shares highly. Need to convert contract wins into revenue and profit growth. QCure needs to start having a material impact. I will be out if management outlooks are not reached or if there isn’t clear development of MRO or QAAM into extra revenues/profits over the next year.

Quickstep announced a resolution for the consolidation of shares 10 for 1. To be voted on at the annual general meeting.

Shares up 17% on the news, just shows how silly the market can be, this change has no material effect on the company. The price action was at the beginning of the day with the announcement released around 1345. I have found this to be a common occurrence where the price moves before an announcement... 

General/Neutral Notes

• Underlying profit comparable to FY20. (FY20 = $4.4 mil).
• No reaction from the market.

Positives

• Operating cash flow up to $7.8 mil. A result of better inventory control and cash management. Very good result given market cap of $40 mil.
• Bank debt down by $1.8 mil to $4.6 mil.

Negatives

• Revenues only up 3.4% to $85 mil. Was expecting 5-10%.
• Need to write off flare housing facility as Chemring flare housings proposal unsuccessful.

Has the thesis been broken?

• No. Update meets expectations. However some things to watch:
  • The lack of revenue increase is concerning. However, the cash flow figure is very positive.
  • No update on Aerocure. Not much mention of it either. Need to monitor how the technology is progressing more closely.

Valuation

• Still cheap based on P/E of around 10 and Price /Operating cash flow around 5. Given thesis is based on Aerocure technology (yet to create significant revenue), Aerocure isn't valued by the market in my opinion. I think it QHL is priced with a free option on the Aerocure technology.

Additional notes from CEO interview article:

• The purchased Boeing MRO facility will start allowing Quickstep to offer composite repairs for several types of aircraft. Aircraft types will not be limited to Boeing. This is facilitating Quickstep to put their composite material expertise to more uses and could create a platform for the use of Aerocure. 
• Some new revenue from UAVs programs likely.
• In terms of new sources of revenue seems very positive but Aerocure isn't mentioned.

General Notes:

• Revenue up 8%. Hoping for 8-10%.
• NPAT down but still around the break even mark.
• Numbers don't reflect the acquisition of Boeing Australia Component Repairs.
• Promise of profits and positive operating cash flow in 2H.
• Refinance of secured bank loan as part of Boeing acquisition.

Positive:

• Net operating cashflow of $4.3 mil.
• Boeing MRO acquisition and potential long term agreement for collaboration.
• AeroQure technical evaluation with Spirit and European OEM will take place over the coming months.
• New business opportunities in air mobility and composite battery casing announced over the half.

Negatives:

• Cash on hand seems low at $1.8mil, however, there is $7.1 mil in receivables due.
• Revenues from programs other than JSF are flat.
• Short term working capital facility needs renewing by 26/5. This is expected to be renewed, however, still a potential risk.

Has the thesis been broken?

• No, thesis is based on AeroQure technology which is getting close to commercialisation.
• Company remains profitable/break even with positive cashflow.