Delta, BC’s Avcorp (TSX:AVP) has seen its share of troubles of late. But, if only for a brief period of time, investors are choosing to focus on the positive.
Shares of the much maligned company, which manufactures airframe structures and components on the outskirts of Vancouver, have been trading hands at a the speed of sound lately. At one point just before Christmas the rally sent the company’s shares to fifteen cents, approximately triple where it spent most of 2010. The stock has since settled into the ten cent range. So what’s behind the activity? The Company, for one, isn’t saying. In one of those boilerplate responses to an exchange request, Avcorp in December said it simply isn’t aware of any reason for the increased activity.
Perhaps investors are focusing on the growing evidence that the worst may be over for Avcorp. Most casual observers know the company took a revenue hit recently; top line sales were nearly sliced in half from 2008 to 2009, from $128.87 to $69.2 million. But with its share price seemingly locked in at a nickel for months, not many were aware that Avcorp had been showing top line improvement in several consecutive quarters, while trimming its loss to a mere $269,000 in its recent Q3.
For Avcorp management, scrambling to replace lost revenue has become a necessary talent. The Company’s infrastructure costs mean it must continue to win new business; in Q1 2010, for instance, idle plant capacity meant the company had to expense $1,333,000 of overhead. A couple of issues have made keeping the Delta plant running an increasingly difficult proposition. For starters, Avcorp’s relationship with Bombardier showed several cracks in 2007, with Avcorp now suing that company for $18 million regarding a contract Bombardier terminated. Then in December Avcorp confirmed that, after a brief transition period, it would cease building Cessnas. Avcorp began building components for the Cessna Citation CJ3 business jet in 2005, and even up to the most recently reported quarter, that contract accounted for nearly 40% of Avcorp’s revenue.
With 40% of its revenue headed out the door, and a law suit filed against the provider of another 23.6% of it, Avcorp may be deemed to be perilously dependent on its one dependable area of growth; Boeing. Boeing’s CH47 Helicopter went into a full rate of production in 2010, after being in the start up phase the year prior. Production rate increases from Boeing have been a lifeline for Avcorp. But management has not been sitting still. To help ease the concentration of its revenue stream Avcorp managed, this past summer, to sign a deal with BAE Systems Operations to be the single-source supplier for the F35 outboard wings.
The bigger issue for investors may be that Avcorp is a materially different company than it was just a couple years ago. The company has had to issue stock at increasingly low levels to stay alive and service its debt. Avcorp has forecast that it will be non-compliant with its credit covenants and has gone as far as to ask its lenders not to exercise their right to demand immediate payment. And as a result of the low share price, the necessary financings have become increasingly dilutive. This past March, for instance, the company issued 17,773,211 common shares at 5.5 cents per share for gross proceeds of approximately $978,000. Avcorp now has more than 195 million shares outstanding, it had just over 32 million at the end of 2008.
While the decade ago heyday of $6 a share may be long gone, the recent modest rally in shares of Avcorp shows that many believe it will live to fight another day. A quick look at the balance sheet shows a company with debt problems, but also one with a market capitalization of under $20 million compared to trailing four quarters revenue of just under $75 million. The company also appears to be approaching profitability. When Avcorp bulls add this up, many believe the company might not be grounded for much longer.