The Speculator

PORTFOLIO POINT: Composites maker Quickstep Holdings is attracting global attention; one broker has set a target about double its current price.

Followers of the Speculator have turned a tidy profit in the past from trading Quickstep Holdings (QHL). We bought into Quickstep at 21.5¢ a share in July 2006; by November of that year the shares had risen to 77¢ as the company attracted world attention to its patents to make composites – such as carbon-fibre mouldings – cheaper, stronger and faster than older batch production techniques.

In hindsight, that price surge was premature, for with all new technologies it requires time to gain recognition and for standards to be accredited to win the confidence of potential customers.

In the years since, the company has installed demonstration units for its technology at Britain’s Manchester University, Melbourne’s Deakin University and the National Composites Center in Dayton, Ohio, the heartland of the US composites industry. (The latter installation was supported with a grant from that city of $US800,000.)

In March this year, the company completed its own $10 million fully integrated aerospace composites manufacturing facility at its headquarters site at North Coogee, south of Fremantle, Western Australia. We added Quickstep to our current portfolio at 16.5¢ on March 16 and this week they traded at 19–19.5¢.

In mid-June the company reached a crucial milestone when it gained official accreditation to international AS9100/ISO9001:2000 aerospace quality standards. This enables it to tender with the big boys. Most of the major aircraft engine manufacturers, such as Airbus, General Electric’s Aircraft Engine Division (GEAE), Boeing, Rolls-Royce Allison and Pratt & Whitney require their suppliers to have AS9100 accreditation.

Only 25 Australian companies have achieved such accreditation, and of those only two are significant composites makers – Hawker De Havilland and Australian Aerospace (EADS Australia). The autoclave capacity of both those companies is reportedly fully committed to existing orders. That, according to the Adelaide Advertiser of July 6, leaves only Quickstep in Western Australia to take up subcontacting work on offer from the prime contractor to the Joint Strike Fighter (JFS) project.

According to the newspaper’s defence correspondent, Ian McPhedran: “Prime contractor Lockheed wants local firms involved in aspects of construction. Those include composite skins, assembly of vertical tail finds, machining metal parts and electronics – creating hundreds of jobs. The potential through-life value for Australia in support contracts is up to $9 billion, with more than 2000 technical and engineering jobs.”

Australian taxpayers will spend $16 billion to buy up to 100 of the new-generation stealth fighters, and there are estimates that more than 3000 of the aircraft will be built to re-equip the air forces of the US and nine allied countries.

nThe Speculator portfolio, as at July 14, 2009
Company	ASX	No of shares	Bought	Purchase price	Current price	Current value
Laserbond	LBL	20,000	4/07/2008	$0.10*	$0.115	$2,300
Robust Resources	ROL	40,000	13/02/2009	$0.155 avge	$0.565	$22,600
Quickstep Holdings	QHL	20,000	16/03/2009	$0.165	$0.195	$3,900
Cortona Resources	CRC	20,000	14/04/2009	$0.150	$0.165	$3,300
A1 Minerals	AAM	20,000	12/05/2009	$0.145	$0.135	$2,700
Gage Roads Brewing	GRB	40,000	26/05/2009	$0.050	$0.062	$2,480
Image Resources	IMA	12,000	2/06/2009	$0.645	$0.600	$7,200
Blue Energy	BUL	40,000	9/06/2009	$0.215 avge	$0.220	$8,800
Trafford Resources	TRF	30,000	16/06/2009	$0.185	$0.225	$6,750
Citigold Corporation	CTO	26,250	19/06/2009	$0.152	$0.160	$4,200
Scotgold Resources	SGZ	20,000	22/06/2009	$0.100	$0.150	$3,000
Viralytics (ops)	VLAO	100,000	3/07/2009	$0.010	$0.011	$1,100
Total value of portfolio						$68,330
Plus cash at bank						$5,480
Total						$73,810
Portfolio change since January 2, 2009						84.53%
All ordinaries change since January 2, 2009 (then 3655.7)						5.56%
*These shares were carried over from the 2008 portfolio, hence the 2008 purchase dates. However this price is the "beginning of year" value not the original purchase price. Disclosure: The author's family holds shares in Laserbond Current value based on last sale July 14, 2009

Carbon-fibre composites are increasingly used in products ranging from golf club shafts to parts and panels in satellites and aircraft. During the past three decades, lighter, stronger and high-heat resistant composites have replaced traditional materials such as metallic components in many applications.

As an example, when the F-15A fighter aircraft was released in 1973, only 3% of its structure involved composite materials. The equivalent figure for the current F-22 Raptor if 25%. Now the next generation Airbus 380 and Boeing 787 passenger aircraft incorporate about 50% composites.

With the opening of its state-of-the-art plant and its first-grade accreditation, Quickstep has begun collecting several initial development contracts. On June 12, it formally teamed with BAE Systems Australia Ltd to design and manufacture unique, lightweight deployable satellite communications antennas for military and commercial applications. The parent company, London-based BEA Systems Plc, is also a principal subcontractor to Lockheed on the JSF project; the other being Northrop Grumman Corp.

Quickstep’s 162.4 million shares have traded in the past 12 months between a high of 55¢ and a low of 12.5¢. At 19.5¢, the company carries a market capitalisation of $31.5 million. Net cash remaining at March 31 was $5.4 million, with a “burn rate” for that quarter on operating expenses of $1.17 million. Since then, the company has won a $2.6 million grant from the federal government’s AusIndustry Climate Ready Program to help develop components for low-emission, low-cost, lightweight vehicles.

I notice that yesterday Perth broker State One Stockbroking, which has been an underwriter to Quickstep in the past, has released an updated research report on the company with a share price target of 40¢ – double its present price.

David Haselhurst writes a monthly column for Money magazine.