BREEZE-EASTERN CORP BZC
January 20, 2012 - 5:03pm EST by
spence774
2012 2013
Price: 8.66 EPS $0.00 $0.00
Shares Out. (in M): 10 P/E 0.0x 0.0x
Market Cap (in $M): 82 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 82 TEV/EBIT 0.0x 0.0x

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  • Insider Ownership
  • Private Equity (PE)
  • Potential Sale
  • Aerospace
  • customer stickiness
  • NOLs
 

Description

BZC – long

  • BZC is an illiquid microcap that has a strong core business and attractive growth opportunities.
  • Investors are frustrated that the Company will not receive revenue from its large Airbus A400M contract until 2013 (years later than initially expected). Recent results also understate normalized earnings as engineering/development expenses are above normalized levels due to preparation for Airbus and other upcoming programs.
  • I value BZC's stock at ~50-100% more than its current price.  As the A400M program ramps up, and engineering expenses decline in 2013, BZC’s FCF will increase to higher levels.
  • Management/Board and shareholder interests are aligned given large insider ownership. The Company is 57% owned by two PE firms (Tinicum Capital and Wynnefield Capital) who have made an agreement not to purchase more stock or to seek control before 2013. I expect the PE owners to exit via a sale once the Company puts up solid results in 2013.

     Stock price: $8.66
     S/O: 9.5M
     Market Cap: $82.3M
     Cash & Equiv: $10.6M
     Debt: $10.7M
     EV: $82.4

BZC overview

  • BZC is the leading manufacturer of electric & hydraulic helicopter rescue hoists and cargo hook systems. BZC sells primarily to militaries and aerospace contractors; its products are used for rescue operations, extraction and transporting cargo.
  • BZC is the market leader with ~50-70% global share. BZC equipment is entrenched in most helicopter brands (including Agusta, Alenia, Sikorsky, Boeing etc.)
  • Business model is to sell equipment and benefit further from recurring after-market sales of spare parts & overhaul/repairs. The installed base offers visibility to the after-market sales. It is a low capital-intensive business.

BZC’s core business has high barriers to entry

  • High switching costs: Hoist/winch equipment is highly customized and integrated. A helicopter type is typically produced for ~20 years, providing a tail of revenue that competitors cannot steal away.  Moreover, displacing BZC would be difficult for a new entrant as customers would have to disrupt their business to customize and test a new product (qualification testing etc. is costly and timely).
  • Economies of scale: The economics of developing hoists and winches are not attractive given the small size of the addressable market. An entrant would also face poor ROI as it entered the business, given BZC and Goodrich’s high share.

Growth opportunities

  • Airbus: BZC has a large order for a cargo positioning system for the A400M. BZC will begin to generate revenue late 2012 or early 2013; the program is projected to continue until at least 2020 (backlog includes $71M for Airbus). Not only equipment orders but the associated after-market business will be significant.
  • Geographic expansion: The Company has a solid presence with helicopter companies in regions beyond North America and Europe (such as Hindustan Aeronautics in India). BZC will benefit from increasing demand in emerging markets.
  • Other growth opportunities: BZC is working with several OEM-partners on new platform opportunities (programs include the AW-159, V-22, C-27J and H-92). Slide 12 in the most recent company presentation (http://phx.corporate-ir.net/phoenix.zhtml?c=114678&p=irol-irhome) highlights the recent above-normal development costs and the expected benefits of $10-20M incremental revenue per annum over the next decade.

Other key points

  • Market/Competition: Goodrich Hoist and Winch is BZC’s only key competitor. Goodrich operates in some of the same sub-segments. Goodrich is a miniscule division of Goodrich Corp, recently acquired by UTX (see risks below)
  • Debt: BZC has continually paid down debt in recent years and now has a strong balance sheet. BZC inherited significant debt unrelated to its actions when its former parent Transtech Corp was wound down.
  • Tinicum Capital: Board Chairman Charles Grigg’s PE firm, Tinicum Capital Partners, owns ~35% of BZC and purchased more stock in 2011.
  • Environmental liabilities: BZC has environmental liabilities of ~$14M related to former facilities of Transtech, BZC’s former parent. The ~$14M is based on a 2010 review. BZC spent $638K on environmental costs in fiscal 2011.
  • Deferred-tax assets (DTAs): At Sep. 30. 2011, the balance sheet had current DTAs of $6.8M and non-current DTAs of $8.1M indicating BZC will pay minimal tax in the near-term.

Valuation and financials

Revenues 2012
Products (hoist/winch, cargo hooks) 54
Services (overhaul/repairs, eng services) 20
Total 74
   
Gross Profit 30.3
Margin 40.9%
   
EBIT (excluding non-recurring) 11.6
Margin 15.7%
   
FCF (fully-taxed) 8.5
Margin 11.5%
  • BZC is trading at ~10x EV/2012E FCF. I forecast ~$74M revenue and ~$8.5M FCF (after-tax) in 2012. These results are below normalized earnings; as Airbus and other new programs generate revenue and the engineering expense decline plays out in 2013, revenue and FCF will be higher. 
  • BZC offers an attractive risk/reward given the strength of the business and the balance sheet. I believe the stock is worth ~50-100% more than the current price, depending on the timing and magnitude of Airbus and other new programs – operating leverage offers meaningful margin expansion. Additionally, value should be given to the tax assets as BZC will pay minimal tax in the coming years.
  • I also expect the PE owners to sell following strong results in 2013. A strategic owner would benefit from reducing the SG&A.
 Risks
  • Significant cancellations or delays in orders and programs
  • Any major reduction in across-the-board defense spending. As the majority of equipment is used for training, the withdrawal from active military engagements would not have a major impact.
  • United Technologies (UTX) purchase of Goodrich (GR): UTX owns Sikorsky, a key customer of BZC. Goodrich Hoist & Winch is an immaterial (<1%) part of Goodrich but it is possible that new Sikorsky programs go to Goodrich. While this offers some concern, current Sikorsky programs will remain at BZC (as programs are locked in for a long time) and BZC could also benefit as Goodrich risks losing customers who do not want to a supplier to be owned by a competitor.

Catalyst

  • Improved results in 2012 and 2013 (partly driven by lower engineering expenses)
  • Airbus contract begins to generate revenue
  • Additional program announcements
  • Company sale
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    Description

    BZC – long

         Stock price: $8.66
         S/O: 9.5M
         Market Cap: $82.3M
         Cash & Equiv: $10.6M
         Debt: $10.7M
         EV: $82.4

    BZC overview

    BZC’s core business has high barriers to entry

    Growth opportunities

    Other key points

    Valuation and financials

    Revenues 2012
    Products (hoist/winch, cargo hooks) 54
    Services (overhaul/repairs, eng services) 20
    Total 74
       
    Gross Profit 30.3
    Margin 40.9%
       
    EBIT (excluding non-recurring) 11.6
    Margin 15.7%
       
    FCF (fully-taxed) 8.5
    Margin 11.5%
     Risks

    Catalyst

    Messages


    Subjecta few questions
    Entry06/26/2012 09:54 AM
    Memberrrackam836

    a) This business has averaged 20% ROC (defined as EBIT/(NWC+PPE) over the last 6 years. So it looks like an average business (I think 2010 should be included btw because of the contract driven nature of this business) - despite what the high switching costs and market share + barriers to entry seem to imply. If they had so much lock-in, then perhaps they could raise prices (and thereby increase ROC) but they have apparently not been able to do so. Also, the fact that their business is contract driven (Airbus being delayed by so long), and the fact that b2b fell to 0.8 (trend since 2009 has been 1.1, 1.0, 1.0, 0.8) seems to imply that customers have some power in this relationship and their product is not so critical.

    BTW B2b does not seem like a good indicator of future revenues at all. In 2009, it was 1.1, yet revenues fell by 8.5% due to lower sales to the US military.

    Also, the nature of their business has not changed much over the years. So even with the huge revenue uptick expected from Airbus, is there a reason to believe that this company can generate higher ROC ? I suspect most of their projects have this kind of profit profile built in ?

    So it is a reasonable business - why pay 1.5x book - we need a great price for this kind of business no ?

    b) Could you explain the "engineering expense" decline a bit more ? Is this wrt projected earnings for projects as compared to r&d or just a decline in engineering expense because of better project planning ?

    c) Is there a reason Mike Harlan left and the new CEO was brought in ? From their employment agreements, it certainly looks like - 

     

    http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=6762962-1144-7541&type=sect&TabIndex=2&companyid=592&ppu=%252fdefault.aspx%253fcik%253d99359

     

    http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=8638174-1178-11925&type=sect&dcn=0001193125-12-246252

     

    Specifically, the new CEO's pay seems to be very much tied to an increase in the stock price (and his options are all struck at $8.1). In other words, he gets 400k options of which 50k exercise upon grant. But the remaining options vest 50k at a time, based upon whether the closing price of the stock over a thirty day period exceeds $8.5, $9.5, $10.5 etc. In addition, they vest ratably until May 2015. 

    So now his remuneration is explicitly tied to the stock price. Ok fair enough. But what is the play here ? What levers can he pull that are in his control ?

    d) The two PE firms already own 57%+ of the equity giving them effective control. If they take it private, what is the play here ? There seems to be no way they can accelerate the Airbus (and) other contracts. So are there some cost efficiencies in engineering that they can realize?

    e) Taking your FCF estimate of 8.5 million (they did 9.6 million OCF in 2012, 11.1 million in 2011 and 11.7 million in 2010), so lets take $10 million to be conservative. Discounting at 15% gives us an equity value of $66 million (or $76 million if we assume 2% inflation pacing growth). Since I used a lower line item, OCF, it considers debt (and taxes) but we need to negate the environmental liability from this. So it takes it down to 76-17.8 = $58.2 million. Equity value is $57 million so it seems to be fairly priced.

    f) So at this price, it really seems to be that we are paying for (substantial) revenue growth from the Airbus contract ??

     g) I liked the way the CEO handled the questions on the call BTW - calmly stating that he does not want to give the impression that they are capitalizing R&D and that they are not immune to DoD cutbacks.


    SubjectTremendous Recent Volume, VN Capital
    Entry11/17/2013 10:19 AM
    Membermaggie1002
    Spence774, assuming you're still involved, wonder if you have any updated perspective and what you know of VN Capital? 
     
    There was enormous volume last week (on Nov 12th it traded 18.5x 3-month avg) primarily in a block trade for this illiquid stock and we've seen VN Capital gradually accumulate more stock (now 12.2% outstanding) but there has not been a recent filing by them or anyone else reflecting purchases made on Nov 12th. 
     
    It's notable that the Company increased the pill trigger from 12.5% to 15% last week, thereby inviting VN to own more.  With Tinicum and Wynnefield owning 56%, one might infer that the Board is inviting VN to accumulate more to drive the stock higher which might set a higher base from which to claim a premium by a strategic for control.  The CEO and Board are appropriately aligned to the stock price increasing.  Although recent results were not great (consistent with well-documented challenges for most serving the defense industry), there seems to have been a delay from a large international order that should materialize in the next three quarters.  The Compay's competitive position has not been diluted and the Airbus flows could materialize soon for the operating leverage that exists pursuant to a majority of engineering expenses occuring in advance of the Airbus orders.
     
    Thanks in advance for your perspective.
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