Siddharth Rajeev, B.Tech, MBA Analyst
Investment Analysis for Intelligent Investors December 24, 2008 Mecachrome International Inc. (TSX: MCH) –Fundamentally sound aerospace and auto components company fends off a possible liquidity crisis; Issuing Opinion
Sector/Industry: Aerospace and Defense www.mecachrome.com
Market Data (as of December 22, 2008) Investment Highlights Current Price C$0.08 Fair Value C$2.50 Mecachrome, founded in 1937, engages in the design, engineering, manufacture, Rating* BUY and assembly of complex precision-engineered components for aircraft, Risk* 4 (Speculative) automotive and industrial applications. 52 Week Range C$0.02-C$12.30 The company’s diverse clientele ranges from aircraft manufacturers like Boeing, Shares O/S 23.93 mm Airbus and Bombardier, to high-end European consumer auto/engine manufacturers like Rolls-Royce, Renault, Peugeot, BMW and Ferrari, to Market Cap C$1.91mm industrial conglomerates like General Electric. Current Yield N/A Mecachrome is the sole-source provider of more than 70% of its revenues. P/E (forward) N/A Revenues increased from €55 million in FY1996, to €295 million in FY2007; P/B 0.03x reflecting a CAGR of 16.4%. YoY Return -99.3% A highly leveraged balance sheet and recent slowdown in its aerospace and YoY TSX -37.6% automotive revenues led the company into a liquidity crisis. The company has *see back of report for rating and risk definitions defaulted on its interest payment, and the TSX Exchange has decided to delist Mecachrome’s shares at the close of market on January 9, 2009. 1,200,000 z $16.00 On December 22, 2008, the company announced that it has received financing commitments totaling €30 million. We believe these financings will significantly improve the company’s cash position, and help fend off a liquidity 900,000 $12.00 crisis. The TSX Exchange might revoke their decision to delist Mecachrome’s shares, now that the company has received financing commitments. 600,000 $8.00 The company is actively evaluating options to reduce their debt levels. Arguiro, the trust owned by the company`s founding family, which owns about 32% of the equity shares, we believe, could be the most likely source of additional 300,000 $4.00 capital for the company.
Risks 0 $0.00 Liquidity risks persist because of its highly leveraged balance sheet. 24-Dec-07 22-Apr-08 20-Aug-08 18-Dec-08 A low share price and downgraded credit rating on their debt will negatively impact the company if it pursues equity or debt financing.
Financial Summary (YE Dec 31) (in €) 2004 2005 2006 2007 2008E 2 009E R evenue 220.1 231 .3 261.8 295.0 2 98.0 282.3 Gross Margin 31% 32% 32% 2 8% 23% 24% Net Incom e (5.7) 1 .5 (32.3) (15.4) (42.9) (20.0) Cash + ST Inv. 13.3 8 .5 31.1 32.3 0.1 5.9 Asse ts 291.9 348 .7 382.2 407.4 3 68.9 370.2 Debt to Capital 87% 86% 95% 6 6% 75% 83% ROE -21% 5% - 130% -2 6% -50% -36% ROIC -3% 1% -12% -5% -15% -7% Mecachrome engages in the design, engineering, manufacture, and assembly of complex precision-engineered components for aircraft, automotive and industrial applications. Founded in 1937, the company has over 70 years of operating history. Mecachrome is the sole-source provider of more than 70% of its revenues. 2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 2
Company Mecachrome International, Inc., headquartered in Montreal, Canada, engages in the design, Overview engineering, manufacture, and assembly of complex precision-engineered components for aircraft, automotive and industrial applications. The company primarily offers aircraft engine and structural components, automobile engine components, and motor racing engines. Mecachrome, with over 70 years of operating history and long-standing relationships with several major players in their target markets, has established significant market presence and a global reputation. Their diverse clientele ranges from aircraft manufacturers like Boeing (NYSE: BA), Airbus (a subsidiary of EADS - Paris: EAD) and Bombardier (TSX: BBD.A), to high-end consumer auto/engine manufacturers like Rolls- Royce (LSE: RR), Renault (Paris: RNO), Peugeot (LSE: PEU), BMW (XETRA: BMW) and Ferrari (Milan: F), to industrial conglomerates like General Electric (NYSE: GE).
The following image shows the company’s three main segments, their major clients, and revenues in FY2007.
Source: Company
As shown above, revenues are well diversified - aerospace accounted for 46%, automotive accounted for 45%, and industrial equipment accounted for 9% of total revenues in FY2007. Over the years, the company has evolved from pure component manufacturing to the design, engineering, manufacturing, assembly and testing of systems. This has allowed them to transition from a sub-contractor to a tier 1 integrator in several programs, and participate in the design and engineering phases of development with original equipment manufacturers (OEMs).
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 3
The critical nature of the products, the company provides to its customers, we believe, offers it a significant competitive advantage. The following are the company’s key competitive advantages:
Strong Positioning –The company operates in a very niche market due to its focus on complex high-precision components.Mecachrome is the sole-source provider of more than 70% of its revenues, which indicates its strong positioning in the market. Barriers to entry are very high in the company’s target markets due to thehigh degree of design, engineering and production expertise required, significant amount of time required to establish customer relationships, and due to high switching costs for OEMs. Strong and Long-term Customer Relationships –The company has maintained long- term relationships with several of its 65 customers. Mecachrome’s relationship with its largest customer, Airbus, extends over 50 years. The company has had over 30 years of relationship with Boeing, Snecma, Renault, and Bombardier. The company’s top five customers generated approximately 38.5% of revenues in FY2007. No single program represented more than 6.5% of revenues, and no single customer represented more than 13.5% of revenues in FY2007; indicating that revenues are diversified. Long-term nature of contracts - Aerospace contracts tend to be long in nature, and could be as long as the life of the aircraft (35 to 40 years). Contract durations for automotive components generally range from three to seven years for cars, and four to ten years for commercial trucks. Solid revenue growth and above industry average margins –The company has experienced solid growth in revenues in the past 13 years. Revenues increased from €55 million in FY1996, to €295 million in FY2007; reflecting a CAGR of 16.4%. The growth was, however, slower during FY2003 –07, as revenues increased at a CAGR of 7.8%. Revenues from the aerospace division, which was the major revenue driver during the period, had a CAGR of 31% during FY2004-07. The company’s focus on high-end complex components has allowed them to maintain significantly higher margins than the industry averages. Large and diversified five year order backlog –At the end of September 30, 2008, the company had a five-year order backlog of €0.94 billion. About 90% of Mecachrome’s order backlogs have been converted to revenues historically, indicating that their current backlog figures are reasonable indicators of the company’s revenue growth potential. The diversification of the current order backlogs, which consists of 50% from aerospace, 48% in automotive, and 2% from industrial, we believe, also lowers the company’s risks. Operating facilities and technical capabilities - The company currently operates 11 state-of-the-art facilities, principally in France and Canada. Mecachrome has over 800 machines, including over 350 digitally-controlled high-precision machines. The company currently has over 2,000 employees, of which 1,203 are degreed engineering and technical employees, many of whom have worked with OEMs such as Airbus, Boeing, McDonnell Douglas (merged with Boeing), Bombardier, Bell Helicopter (NYSE: TXT), and Embraer (NYSE: ERJ). Positive long-term outlook on the aerospace and the European auto market –The company has little exposure to the US auto industry. Although we expect the global economic slowdown, slowdown in several aerospace programs, and a freeze in engine 2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 4
development in Formula 1, to negatively impact Mecachrome’s revenues in the near- term, we maintain a positive long-term outlook on the company’skey target markets, namely the global aerospace industry (based on long-term projections for aircraft deliveries and global passenger traffic volumes) and the European auto market (based on long-term production volumes).
Although the company has grown significantly in the past decade, the growth was primarily funded by debt.
Highly leveraged balance sheet - The company has generated negative free cash flows (FCF) during FY2004 –2008 (9 mo) due to significant investment in facilities and equipment. In order to get a perspective, the company spent a total of €238 million on capital expenditures (net of cash received from sale of assets) during FY2003 –FY2008 (9 mo), while cash from operations during the period were only €62 million. This has resulted in a highly leveraged balance sheet. The company is significantly leveraged at this time with a debt to capital of 74% (the industry average is 33%), and an EBIT interest coverage ratio of 0.5 during the first nine months of FY2008. We believe the company could have probably maintained a lower debt to capital if (1) it had gone public earlier, and raised more capital from equity than from debt; or (2) had spend less on capital expenditures (though this would have compromised growth to some degree). On a positive note, about 99% of its total debt, of €202 million, is long-term debt (most of which is due in May 2014); this means that the company does not have to make any significant principal repayments in the near-term.
Liquidity crisis –The global financial and economic crisis, along with delays in several major aerospace programs, led the company into a liquidity crisis, and the following events:
Defaults on interest payment - On November 14, 2008, the company announced it will not make the scheduled interest payment (about €9million), due November 15, 2008, on its 9% senior subordinated notes (unsecured). The company has obtained court protection against creditors in Canada and France.
Delisting from the TSX Exchange - The Toronto Stock Exchange has decided to delist Mecachrome's shares at the close of market on January 9, 2009, for failure to meet the continued listing requirements of the exchange.
Credit rating downgraded –Both Moody's and S&P downgraded their credit rating on Mecachrome. S&P downgrade Mecachrome’s corporate credit rating to 'CC' from 'B'. Moody's Investors Service downgraded Mecachrome’s corporate family rating to 'Caa1' from 'B2'.
Receives financing commitments totalling €30 million–fends off a liquidity crisis - On December 22, 2008, the company announced that it has received financing commitments, totaling €30 million, from FSTQ (they have already invested about $50 million in the company), Aerofund (funds managed by ACE Management), French banks, the CIRI
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 5
(Comité Interministériel de Restructuration Industrielle), and from one of its main customers. Our models indicate that the company only needs €24million to fund their operating and investing activities for the next 12 months. Therefore, these financings, we believe, will help the company fend off a possible liquidity crisis, or even bankruptcy.
Actively trying to refinance/restructure - The company has so far announced measures to cut annual costs by about €10 –€15 million, by reducing its Canadian workforce by about 120 people, and moving some less complex operations to lower cost Tangier, Morocco.
Although the company has yet to announce the details of the proposed €30 million financing, we believe they could be a combination of debt and convertible debt. As mentioned earlier, these financings will help the company to come out of an immediate liquidity crisis, but the company still has to implement measures to reduce its debt. We believe the company has the following options to raise additional capital and lower debt.
1. Funding from the trust owned by the founding family - Although all members of the founding family have resigned from their management positions and board of directors, Arguiro Luxembourg S.à.r.l., the trust owned by the company’sfounding family, which owns about 32% of the equity shares, we believe, could be the most likely source of additional capital for the company. Arguiro had received C$38 million from the $206 million initial public offering (IPO) in late 2007. 2. Refinancing (convertible debt or equity) –a low share price, and downgraded credit ratings (by S&P and Moody's) are not favorable for the company to pursue this option. 3. Sell facilities to raise cash –the company can lower debt through sale-and-leaseback transactions. This is probably the best option for the company’sshareholders at this time, as it will lower debt with no share dilution. 4. Bailout from the French/Quebec governments is possible, considering the critical nature of the products the company provides to leading aerospace/auto players like Airbus (French company), Renault (French company), Peugeot (French company) and Bombardier (Canadian company). Suppliers, like Mecachrome, play a significant role in the operations of major OEMs. For example, a delay in supplies from Mecachrome will result in delays in Airbus's schedule. Therefore, it is very important for the governments to support the suppliers as well. Also, Mecachrome would take away 2,000 jobs (according to management, about 4,000 jobs will be affected indirectly) if it goes down. In summary, we believe, Mecachrome is a fundamentally sound company with solid growth potential. Although its highly leveraged balance sheet, and near-term slowdown in activities in the aerospace and automotive divisions resulted in a liquidity crisis, we do not believe the company will go bankrupt as it is has already received sufficient financing commitments that will pull the company out of an immediate liquidity crisis. In addition, the company is also actively evaluating options to reduce debt. That said, we believe that liquidity risks still persist, as we cannot predict the outcome of the company’sefforts to lower debt. Our valuation models clearly indicate that the company’s shares are undervalued at current price levels. Therefore, based on our valuation models and review of the associated risks at this time, we issuing a rating on Mecachrome of BUY rating, and a fair value of $2.50 per share (Risk 4: Speculative). 2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 6
Mecachrome – The company was originally founded in 1937, as a sub-contractor in the aerospace over 70 years of industry, in Colombes, France, by Eugène Casella. Since then, with over 70 years of operating operating experience, the company has evolved into a leader in the design, engineering, history manufacture and assembly of complex precision-engineered components for aircraft and automotive applications. The following chart shows a few of the major events in the company’s long operating history.
Source: Company
In 1971 - Gérard Casella, son of the founder, Eugène Casella, became the company’s Chief Executive Officer. 1975 –Expanded into manufacturing motor sports parts for Renault Sport leveraging its expertise in manufacturing aerospace components 1991 –Expanded into manufacturing high-end niche products for the commercial automotive sector, upon the completion of its facility in Sablé, France 2003 –06 –Made a series of investments in North America, including the acquisition of aerospace components manufacturer Aéro Machining, the construction of a state-of-the- art 175,400 square foot facility in Mirabel, Canada, and the establishment of engineering offices in Montréal and Toronto. 2004 –Moved their head office from Paris, France to Montréal, Canada. The main motives behind such a move at that time were the following:
Gain access to the North American market, and grow relationships with major North American aerospace players, Build products in C$ to serve the high-cost European market Access to funds –The Solidarity Fund QFL (FSTQ), a Québec-based labor-
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 7
sponsored investment fund (with approximately C$7.3 billion in assets under management as of May 2008), has invested about C$50 million in Mecachrome.
Also, in 2004, the company acquired two European companies to strengthen its precision machining capabilities. In 2005, Mecachrome acquired Heini Mader Racing Components S.A., Switzerland, a provider of design, engineering and manufacturing services for motor racing engines.
Initial Public Offering in late 2007 –The second largest IPO in Canada in 2007 - Mecachrome went public in October 2007. The IPO consisted of 14.69 million subordinate shares at C$14 per share, which included 11.79 million subordinate shares + 2.90 million subordinate shares held by Arguiro Luxembourg S.à.r.l. Arguiro is an investment holding company indirectly owned by the Casella Trust (founding family). The subordinate shares are listed on the TSX Exchange (Canada).
The IPO raised gross proceeds of C$206 million; of which C$155.9 million went to the company, C$38.4 million went to Arguiro, and $11.3 million was paid as underwriters’ commission. Subsequent to the IPO, the company had 16.26 million subordinate shares (9.7% of the shares were held by FSTQ, and the remaining held by the public), and 7.51 million multiple voting shares held by Arguiro, for a total of 23.77 million equity shares.
As each multiple voting share carries ten votes per share (versus one vote for each subordinate share), Arguiro, which holds approximately 32% of the outstanding equity shares, holds approximately 82% of the voting power. Therefore, the trust owned the founding family has indirect control over Mecachrome.
2008 –In November 2008, the company announced that it will not make the scheduled interest payment on its 9% senior subordinated notes due 2014. The TSX Exchange has decided to delist Mecachrome's subordinate voting shares at the close of market on January 9, 2009. All the founding family members resigned from their management positions and board of directors. Mecachrome has obtained court protection, both in Canada and France, from the actions of creditors; which allows them to continue operations and devise a restructuring/refinancing plan. On December 22, 2008, the company announced it has received financing commitments totaling €30 million, which is sufficient enough to pull the company out of an immediate liquidity crisis. The company is now reviewing and evaluating its alternatives to lower debt.
Mecachrome’s Mecachrome’sexpertise is in the design, engineering, manufacture and assembly of Expertise and complex precision-engineered components and systems. The company currently operates Strategy 11 state-of-the-art facilities, principally in France and Canada, addressing three principal industries: (1) Aerospace (including aircraft engine components and aerostructural components), (2) Automotive (including high-end consumer automobile, commercial trucking engine components, and motor racing engines), and (3) Industrial equipment 2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 8
The continued and increasing trend of outsourcing the design, engineering and manufacturing of components by OEMs, in order to focus operations on final assembly and support services for their customers, is the main growth driver of aerospace and automotive component suppliers like Mecachrome.
Mecachrome has over 800 machines, including over 350 digitally-controlled high- precision machines. The company currently has over 2,000 employees (about 300 in North America), of which, 1,203 are degreed engineering and technical employees, many of whom have worked with OEMs such as Airbus, Boeing, McDonnell Douglas, Bombardier, Bell Helicopter, and Embraer.
Over the years, the company has evolved from pure component manufacturing to the design, engineering, manufacturing, assembly and testing of systems. This expanded capability has allowed the company to provide design and manufacturing solutions, while manufacturing components for its clients. The following are two good examples on how the company has increased their business with their customers through their expanded service offerings:
Mecachrome has expanded their relationship with Airbus, which started as a basic parts supplier in 1950, to become a co-developer of components through joint-development programs since 2001. Similarly, the company’s relationship with Renault Sport has grown since 1975, from a sport-engine components supplier, into a co-developer and complete assembler of Renault Sport’s Formula 1engines beginning in the 1990s.
Through their expanded products/service offerings, and through strong relationships with their customers, Mecachrome has been able achieve the following:
Tier 1 integrator status –Integration into OEM’s production process has enabled the company to transition from a sub-contractor to a tier 1 integrator in several programs. Achieving “Tier 1” status is important for a supplier as it gives them more business, and, at the same time, opportunities to build strong ties with their customers.
Participate in the design and engineering phases of development, as well as in joint- development programs, with OEMs - OEMs are increasingly looking to share investment and risks associated with building new aircraft by partnering with suppliers like Mecachrome in the development phase. Although suppliers have to share the initial investment, the significance of such programs is that once commercial production begins, the suppliers automatically get to manufacture and supply components, typically on an exclusive basis, for the life of an aircraft (which is 35 to 40 years). Therefore, such programs have the potential to offer a very good return on investment for suppliers. Mecachrome currently participates in joint development programs with regard to the Airbus A380 and A400M; although, in recent times, Mecachrome has reduced their involvement due to current market conditions, and the liquidity crisis, the company is currently facing.
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 9
Strong and diverse clientele –The company’s strong client base reflects the company’s track record. Over the 70+ years of operating experience, the company has built strong long-standing relationships with several major players in their target markets. They have a very diverse clientele, ranging from aircraft manufacturers like Boeing, Airbus and Bombardier, to high-end consumer auto/engine manufacturers like Rolls-Royce, Renault, Peugeot, BMW and Ferrari, to industrial conglomerates like General Electric.
Mecachrome currently has about 65 customers. Airbus is the oldest (50+ years) and largest customer, accounting for about 13.5% of total revenues. The company has had over 30 years of relationship with Boeing, Snecma, Renault, and Bombardier.
Source: Company
Mecachrome’s revenues are also well diversified, as no single program accounts for more than 6.5% of total revenues. Its top five customers generate approximately 38.5% of total revenues.
Sole-source provider of more than 70% of its revenues –Although the aerospace and automotive parts industries are highly competitive industries, the company operates in a very niche market due to its focus on high-precision components, which requires a high degree of design and production expertise. As a result, Mecachrome is the sole-source provider of more than 70% of their revenues; this is very significant as it shows that the company has little direct competition for a major portion of its revenues.
The space that Mecachrome currently targets has very high barriers to entry, which is another reason why it has less direct competition. The following are the main barriers to entry for suppliers:
Requires a high degree of design and production expertise Significant time is required to establish customer relationships, and build a strong reputation in the industry OEMs have hhigh switching costs –OEMs typically tend to retain their current suppliers during the life of an aircraft program, as a significant amount of capital and time is spent by the OEMs with suppliers on the design, manufacture, testing and certification. Also, changing a supplier might require additional testing and certification, which could lead to production delays and additional costs for the OEMs Joint-development programs have even higher barriers to entry as suppliers get integrated in the design and development process, and become an operational partner of the OEM for the entire project life cycles 2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 10
Note that high barriers to entry are good for Mecachrome, but it also means that it is tougher for Mecachrome to bid competitively against existing suppliers. Mecachrome’s major competitors in the aerospace industry include Groupe Latecoere, Hampson Industries plc, Vought Aircraft Industries and Magellan Aerospace (TSX: MAL). In the automotive sector, their main competitors are Albert Weber, Rege Motorenteile GmbH & Co, Goertz & Schiele, and Behr.
In the next section, we present the company’s three segments.
Aerospace – The aerospace industry consists of the markets for commercial, regional, business, military key growth aircraft and spacecraft. The company’s main focus is providing aerostructures (which are driver structural components such as fuselages, propulsion systems and wing systems) and engine components for the commercial and regional jet markets.
Source: Company
The company has long-standing relationships with some of the world’s leading aerospace manufacturers, including Airbus, Boeing, Bombardier, Embraer, Safran, Volvo, and Saab Aerospace. In order to get a perspective, we have presented a few major programs that Mecachrome is currently involved with.
Airbus - A significant proportion of the company’s Airbus revenues comes from providing components to the A320 family, which is Airbus’ best-selling jet airliner family. The company is also a supplier of components for the established A300 and A330-A340 series. Mecachrome also participates in the joint-development programs for the A380 passenger jet and the Airbus 400M military transport planes (although the company has reduced their involvement in these programs in recent times due to the current market conditions and their liquidity crisis). Boeing –Mecachrome, an official Boeing partner, was recently awarded supply contracts on Boeing’s next generation B787, which, according to Boeing, has been the most successful commercial aviation program launch in history in terms of firm orders.
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 11
The company’s involvement withAirbus and Boeing’s next generation aircraft, the A380 and B787, respectively, we believe, is another testimonial of Mecachrome’s technical expertise and strong ties with these players. Regional market –Mecachrome supplies components to Embraer and Bombardier, two major players in the regional market, for their successful regional jet programs, including Embraer’s ERJ-170 and ERJ-190 jets, and Bombardier’s CRJ900, CRJ700 and Global Express jets. Rolls-Royce –The company supplies engine components for Rolls- Royce’s Trent 900, Trent 1000, V2500, BR710, BR725, and others. Major contracts signed in 2008: The company was awarded a 5-year contract with Sonaca NMF Canada (to manufacture wing planks), signed a US$45 million contract with Rolls-Royce (to provide, on an exclusive basis, components for the BR725 engine, powering the new Gulfstream G650), and signed a contract with Pratt & Whitney to provide the design and manufacturing of a stub wing and a vertical pylon to demonstrate the potential of the new Geared Turbofan(TM) technology developed by Pratt & Whitney.
Revenues: The aerospace sector has been the revenue driver for the company in the past few years. Revenues grew from €61 million, to €136 million, during FY2004 –07, reflecting a CAGR of 31%. In FY2007, revenues were up 19% YOY. As a percentage of total revenues, revenues from this segment grew from 28% in 2004, to 46% in 2007. As of September 2008, the company had a five-year order backlog of €0.47 billion(accounting for 50% of the total backlogs).
Although the company experienced solid growth in this segment in the past few years, delays in several major aerospace programs, including the Airbus A380, A400M and Boeing 787 programs, and the global economic slowdown, started impacting revenues from this segment in Q3-2008. Revenues in the first half of FY2008, grew by 22%YOY, but dropped by 2% YOY in Q3-2008. Although we expect revenues to soften in Q4-2008 and FY2009, we believe, revenues from this segment will be the main growth driver in the long-run. This is based on our positive outlook on the industry, strong five-year order backlogs, and the company’s firm positioning in the industry today.
Industry Outlook - The global airline industry had posted net profits of US$12.9 billion in 2007, after six consecutive years of net losses following the 9/11 attacks. The industry was poised to post profits through the rest of the decade, however, the global financial crisis and the economic slowdown, offset by a steep drop in oil prices, have dramatically changed the near-term outlook on the industry. The airline industry is now expected to record net losses of US$5 and US$2.5 billion in 2008 and 2009, respectively (as shown in the following charts).
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 12
Industry Profits (US$ billion) 15
10
5
0 2000 2001 2002 2003 2004 2005 2006 2007 2008F 2009F
-5
-10
-15
Source: IATA & ICAO One of the primary factors that is currently affecting the profitability of airlines is the significant drop in global air traffic volumes (as shown in the following chart). High oil prices used to be another major concern for the industry until recently. The current oil price of below US$40/bbl, we believe, should be able to offset some of the potential loss that is expected to arise from the decreasing passenger traffic volumes.
The International Monetary Fund (IMF) recently lowered its global GDP growth forecasts from 3%, to 2.2% in 2009. The IMF revised its GDP growth forecasts for the U.S. and Europe to -0.7% and -0.5%, respectively, in 2009. China and India are not immune to the global economic slowdown, as their GDPs are expected to grow at a slower pace of 8.5% and 6.3%, respectively, in 2009. Although we expect the global economic slowdown to impact the global airline industry, we have a positive long-term outlook on the industry primarily because of the strong long-term traffic growth forecasts, and aircraft deliveries 2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 13
forecasts, as shown in the following section.
According to Rolls Royce, global traffic is expected to grow at about 5% per year during 2007 –26. China and India are expected to experience growth rates of over 8% per year during the same period. Rolls-Royce traffic forecast 2007-2026
In terms of aircraft deliveries, the following chart shows that mainline aircraft deliveries are expected to increase from 15,179 during 1985-2005, to 23,315 during 2007-26. Similarly, business jets deliveries are expected to increase from 8,081 to 30,388, and regional aircraft deliveries are expected to increase from 2,778 to 6,558.
Aircraft Deliveries
40,000
30,000
20,000
10,000
- Business Jets Regional Aircraft Mainline Aircraft
1985-2005 2007-26 Source: Rolls Royce
Rolls Royce estimates that a total of 60,261 aircraft will be delivered during 2007-26 (which includes 42% from North America, 22% from Europe, and 20% from Asia), up 2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 14
from 26,038 during 1985-2005, reflecting an increase of 131%. This is a significant jump, and these forecasts, along with the significant drop in oil prices, clearly suggest that the industry showed improve in the long-run despite a slowdown in the near-term.
Automotive – Automotive is the company’s highest volume business, producing up to 2,000 engine Motor Sports, components daily, including crankshafts, cylinder heads and cylinder blocks for clients, High-end including Mercedes-AMG, Porsche, Peugeot and Renault. Consumer and Commercial trucking
Source: Company
The company expanded into this segment in the 1970s by entering the motor sports market. Mecachrome entered the high-end consumer automobile and commercial trucking markets in the 1990s. In the next section, we look at the company’s performance in each of these segments.
Motor sports –The motor sports market is comprised of several professional racing series, including Formula 1, GP2 Series, NASCAR and Indy Racing League, as well as several non-professional leagues, such as Le Mans 24 Hour. Formula One is the most expensive sports in the world. F1 Racing estimates the spending of all 11 F1 teams to be about US$2.9 billion. Top teams like Toyota, Ferrari and McLaren are estimated to spend over US$400 million a year each.
Since entering this market in 1975, Mecachrome has progressed from being a pure component supplier to an integrated partner of Renault, co-developing and supplying its complete F1 engines. The company is now the leading independent third-party engine supplier in F1, with an agreement to supply engines to Renault Sport and Red Bull Racing teams through the 2009 season. Mecachrome also manufactures engine components for other F1 constructors, including BMW, Ferrari and Toyota.
Slowdown in F1 - The Fédération Internationale de l’Automobile (FIA) recently 2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
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implemented a five year freeze on engine development starting 2008, in order to cut spending, and citing the current engine specification as 'fully developed'. This was a major setback for the suppliers, as automakers pulled their business from suppliers like Mecachrome, and started doing the work in-house. As a result, Mecachrome’s revenues from this segment have softened in recent times. In addition, Mecachrome’s largest customer in this segment, Renault, announced it will cut production at five sites, as the global economic and financial crisis resulted in a 14% YOY drop in October sales.
On a positive note, the Renault F1 team, which apparently literally froze engine development since the FIA made the announcement, while the other manufacturers continued development, was recently allowed to make changes to their engine in 2009, in order to bring its performance on par with the other teams. As a result, in November 2008, Renault Sport renewed its contract with Mecachrome for three years for the manufacture and assembly of F1 engines, on an exclusive basis.
Participation in GP2 Series and other races - In addition to F1, the company is the sole engine supplier to all the 13 teams in the GP2 Series, as well as the GP2 Asia Series. (GP2 has made it mandatory for all of the teams to use the same chassis, engine and tire supplier so that true driver ability is reflected.) The company is also participating in the Le Mans Series, through a contract with Peugeot Sport to design, engineer, manufacture and test a new high-performance turbo-diesel piston engine to replace the current V12 Peugeot LMP1 engine, which is currently built by Mecachrome.
Proprietary Products - In 2005, the company invested in a high-performance engine engineering office, Heini Mader Racing, to develop proprietary products for the high- performance engine markets. The LMP1 diesel engine for Peugeot cars for the Le Mans 24 Hour, the GP2 Asia Series, and the company’s contract with CNIM to design, test and manufacture an outboard diesel engine for CNIM’s contract with the French Army and NATO (North Atlantic Treaty Organization), are examples of such markets.
High-end Consumer Automobiles and Commercial Trucks - In 1991, upon the completion of their facility in Sablé, France, the company expanded their automotive business, leveraging their motor sports engine expertise, into the commercial automotive sector. Their focus is on high-end consumer automobiles and commercial trucks. The company has little exposure to the U.S. auto sector. In the high-end consumer automobile market, the company manufactures engine components for high-end niche products, including the Porsche Cayenne and Mercedes- AMG. The company has further diversified its revenues from this segment in recent times by supplying compressor casings, cylinder heads, and cylinder blocks for commercial trucks, like Renault Trucks, Knorr-Bremse AG, Deutz AG and Volvo Powertrain. Mecachrome focuses on the medium and heavy-duty trucks series.
Automotive Revenues: Revenues from this segment were on an increasing trend during FY2005-07, as they increased from €113 million, to €134 million, reflecting a CAGR of 9%. However, FY2007 revenues were still below FY2004 levels, when revenues were €142 million. In FY2007, revenues were up 9% YOY. As a percentage of total revenues, 2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
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automotive revenues dropped from 64% in 2004, to 45%in 2007, primarily due to the increasing share from aerospace revenues. As of September 2008, the company had a strong five year order backlog of €0.45 billion(accounting for 48% of the total backlogs).
As a result of the global economic slowdown and its impact on the automotive sector, and the freeze in Formula 1 engine development, offset by growth in the proprietary products business relating to the GP2 series and LMP1, automotive revenue growth dropped by 8% YOY in the first nine months of FY2008, from €100 million to €92million. It is important to note that the company has minimal exposure to the U.S. auto sector. Most of its major clients are European automakers, which are in a much better position compared to their U.S. counterparts. Just like the aerospace segment, although we expect revenues from this segment to soften in the FY2009, our long-term outlook in this segment is positive considering the positive long-term outlook on the European auto sector, and the company’s market positioning at this stage.
Industry Outlook –After five years of good growth, Europe's truck-makers are now facing the crisis affecting the entire industry. For example, Volvo recently announced that their truck deliveries dropped by 21% YOY in November 2008 (from 24,378 to 19,326). The most concerning aspect is that the Group reported a negative net order intake in its single largest market of Europe for the last two months, as the number of cancellations outstripped orders; which implies that sales will continue to soften in 2009.
Over the long-term, KGP (a consultancy for the Automotive Industry) estimates global heavy commercial vehicle production will increase at a rate of 4% per annum during 2003 –12.
In terms of passenger car sales, CSM Worldwide projects that 2008 passenger car sales in Western Europe will fall by 7.4% YOY, from 14.7 million to 13.6 million. The sales decline is estimated to accelerate to 12.4% in 2009. In the U.S., new light-vehicle sales are estimate to drop to 13.6 million units in 2008, reflecting a 16% YOY decline from 16.1 million units in 2007 (according to J.D. Power and Associates). The projected 2008 growth
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
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rate for the automotive market in China is less than half of the 24.1% growth achieved in 2007.
Over the longer-term, sales of passenger cars are expected to pick up with an improvement in the global economy. According to forecasts from Global Insight, sales in Europe are expected to pick up in 2010, after a huge slump in 2009 (as shown in the chart below).
In summary, all these forecasts clearly indicate a positive long-term outlook for Mecachrome’s target markets.
Industrial This segment has contributed about 8-9% of total revenues during 2004-07. Mecachrome Equipment supplies industrial equipment components used in various platforms, such as components for industrial turbines and clamps for automotive. Their customers include industrial manufacturers such as affiliates of General Electric and Peugeot. Although industrial components tend to act as line-filler for its manufacturing facilities, and the company does not spend significant marketing or development resources towards this business, revenues from this segment experienced a CAGR of 14% during FY2004-07. Revenues increased from €17 million, to €25 million during the period. In FY2007, revenues were up 5%YOY. The growth increased to 20%YOY in the first nine months of FY2008, as revenues increased from €19 millionto €23 million. As of September 2008, the company had €0.02 billion in five year order backlogs, representing 2% of the total order backlogs.
Management Gérard Casella - Ex - Chairman, President and CEO Mr. Gérard Casella recently resigned from his management position and the board of directors. He joined the family-owned business at a young age in 1960 and has played a major role in the evolution of Mecachrome. Mr. Casella assumed leadership of Mecachrome in 1971. In 1979, he created Société SILMECA I in Amboise, France and in 1989 he created Mecachrome Holding. In 1991, Mr. Casella inaugurated the Société A.C.M.S. in Sablé/Sarthe, France and in 1996 structured the specialization of Mecachrome’s various plants. Mr. Casella was responsible for the creation of the Société 2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
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Mecachrome’s various plants. Mr. Casella was responsible for the creation of the Société SILMECA III in Amboise, France in 1998. Mr. Casella also spearheaded the acquisition of Aéro Machining in Montréal in 2003, and of JPX and R’Tec in France in 2003. Mr. Casella holds a Bachelor of Science degree from Lycée Pasteur, Neuilly-sur-Seine, France. Mr. Casella is highly regarded in the global precision-engineering industry and is responsible for Mecachrome’s overall strategic direction.
Mr. Christian Jacqmin - President and CEO Mr. Jacqmin was appointed as the new CEO in November 2008. He has 13 years of experience in the aerospace industry. From 1995 to 2008, as CEO of the Sonaca Group based in Belgium, he restructured, developed and transformed the company into an international group developing cutting-edge technology in the aerospace industry in Belgium, Brazil, Canada and the U.S.
Stephan Yazedjian - Executive Vice President and CFO Mr. Yazedjian joined Mecachrome as Chief Financial Officer in October 2003. Prior to that, he held senior investment banking positions at Scotia Capital Inc. and BMO Nesbitt Burns Inc. in Montréal. Prior to his investment banking career, Mr. Yazedjian was a Vice- President in Ernst & Young’s Corporate Finance practice in their Montréal office. Mr. Yazedjian has been a lecturer at McGill University and Concordia University business schools in finance, accounting and mergers and acquisitions. Mr. Yazedjian is a director of Alyotech Canada, an IT consulting company with more than 1,000 employees in Canada and Europe and is the President of the Fundraising Committee for Procure, a non-profit organization dedicated to the fight against prostate cancer. He is also Vice President of the Fund Raising Committee of the Fondation Autisme de Montréal, a non-profit organization dedicated to helping children with autism. Mr. Yazedjian holds a Bachelor of Commerce degree from McGill University and is a CA, CPA, MBA (McGill University) and is a Chartered Business Valuator.
Julio De Sousa - Managing Director, Vice President Operations, Mecachrome France - Julio De Sousa has been the Managing Director Vice President Operations for Mecachrome France since 1994 and joined Mecachrome as Workshop Supervisor, Société Silmeca (Amboise) in 1980. Mr. De Sousa has held various positions of increasing responsibility including Production Supervisor, Production Manager and Plant Manager, Société Silmeca (Amboise). Mr. De Sousa holds a Masters Degree (DEST — CNAM), and has industrial management training.
Jean-Pierre Le Pallec - Co-directeur général, Mecachrome France Mr. Le Pallec joined Mecachrome in 1984 as a Product Engineer. Since then, he has held positions as Plant Director, Industrial Director, Commercial Director and General Director of Mecachrome. He currently supports Gérard Casella in coordinating the industrial sites and plays a key role in maintaining client relationships in the aerospace and automobile industry for the negotiation and development of new large scale contracts. He is also responsible for the relationship with bankers of Mecachrome France. Prior to joining Mecachrome, Mr. Le Pallec worked for 10 years at Fruehauf France as an Engineer and Director of Production. He also managed the implementation of an industrial site for
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
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Fruehauf in Algeria spanning over 3 years. Mr. Le Pallec is an Engineer CNAM level (Conservatoire National des Arts et Métiers).
Emmanuel Maes - Vice President, Sales and Key Accounts Mr. Maes joined Mecachrome Technologies in March 2003 as the Vice President and Director of Engineering and Design. Mr. Maes has 20 years experience in both the aerospace and automotive industries with a focus in digital engineering design, product data management and process engineering. In 1986, Mr. Maes began his career with FM Engineering, USA as a Mechanical Engineer working in the industrial group of the company. Two years later, Mr. Maes assumed a senior position within the engineering group with assignments in Europe. In 1989 he joined L&H Consultants as a key executive to participate in a very successful start-up of a Canadian based engineering company specializing in both the aerospace and automotive industries. In 1992, Mr.Maes was appointed general manager to participate in the negotiations and the sale of the company to CENITAG Systemhaus. With CENIT AG, Mr. Maes was responsible for the Technical Services group and international customers. In 1998, Mr. Maes was appointed head of an engineering design and support team at Ferrari F1 and Ferrari Production. Mr. Maes holds an engineering degree from Concordia University and a master’s in Material Science. Mr. Maes is also a member of the Board of Directors of Turbo Trac Systems ULC.
Financial Solid track record - The company has experienced solid growth in revenues in the past 13 Analysis and years. Revenues increased from €55 million in FY1996, to €295 million in FY2007; Projections reflecting a CAGR of 16.4%. During FY2003 –07, revenues increased at a CAGR of 7.8%. The following chart shows segmented revenues. Revenues from the aerospace division, which was the major revenue driver during the period, had a CAGR of 31% during FY2004-07.
Revenues (in € millions)
350.0
300.0
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- 2004 2005 2006 2007 2008E 2009E
Aerospace Automotive Inudstrial
Revenue growth, however, slowed down in the first nine months of FY2008, as a result of the slowdown in the company’s key segments –aerospace and automotive. Revenues in 2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
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the first nine months of FY2008, were up by 4.3% YOY, as revenues grew from €221 million to €230 million. The revenue growth came from a 14% YOY growth in aerospace revenues, and a 20% YOY growth in industrial revenues, offset by a 8% YOY drop in automotive revenues. In Q3-2008, aerospace revenues dropped by 2% YOY, while automotive revenues dropped by 11% YOY.
At the end of September 30, 2008, the company had a five-year order backlog of €0.94 billion (50% from aerospace, 48% in automotive, and 2% from industrial). Order backlog is a commonly tracked indicator in the aerospace industry due to the long lead times required to produce aircraft (often several years between order and delivery). Although customers may unilaterally terminate their orders, without penalty, the fact that, historically, about 90% of Mecachrome’sorder backlogs have been converted to revenues, indicate that their current order backlog figures are reasonable indicators of the revenue growth potential of the company.
Our revenue forecasts for FY2008 and FY2009 are €298 million and €282 million, respectively.
Above average Mecachrome enjoys significantly higher margins than the industry averages as a result of industry its focus on high-end specialized markets. We believe this is due to a combination of margins pricing and creative sourcing. In addition, a shift of production from Europe to the dollar zone, we believe, has contributed to the high margins. The following chart shows the company’s margins since FY2003.
Margins
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0.0% 2003 2004 2005 2006 2007 2008(9 mo)
-10.0%
-20.0%
Gross EBITDA EBIT EBT Net
During FY2003 –06, gross margins ranged between 31 –34% (the industry average gross margins are 21.4%), but dropped to 28% in FY2007, and 23.5% in the first nine months of FY2009, due to :
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
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Ongoing transformation from sub-contractor to Tier 1 integrator –As a Tier 1 integrator, the company generates additional revenues that have lower margins. This is because a greater proportion of their costs is represented by material and purchased components. Increasing prices for raw materials also contributed to the decrease in gross margins - Although the company is able to pass-through raw material price increases (typically up to ±5%) to their clients, these price increases, when added to revenues as well as cost of goods sold, results in lower gross margins in percentage terms.
Although decreasing gross margins is a concern, it should not be a major concern for the company as gross profits (in euro terms) have been improving at, basically, no costs.
EBITDA grew by a CAGR of 6%, as revenues grew by 10%, during FY2004-07 - EBITDA margins ranged between 19 –25% during FY2003-07, which is also much higher than the industry average ratio of 12.5%. The drop in gross margins in FY2007, and FY2008 (9 mo), did affect the company’s EBITDA margins, which dropped to 18% and 14% respectively, versus 19% and 18% in comparable periods in previous years.
EBITDA, in euro terms, grew from €44 million to €53 million during FY2004-2007, reflecting a CAGR of 6%. From FY2003 - FY2008 (9 mo), the company had their best results in FY2003, when gross and EBITDA margins were 34% and 25%, respectively. The company had also recorded their highest EBITDA of €54 million in FY2003.
Non-recurring Although EBITDA was positive, the company had negative EBT (excluding unusual non- costs resulted recurring items) during FY2004, FY2006, FY2007 and FY2008 (9mo). This was because in huge net the sum of amortization and interest expenses more than offset EBITDA (as a result of losses in the high capital expenditures and debt) in those periods. As a result, the company posted net past few years losses during all those periods.
During FY2006 and FY2008 (9 mo), the company posted some major asset and inventory write downs, deferred financing fees (as a result of refinancing long-term debt), corporate financing activities (associated with the IPO), and costs associated with the cancellation of grants under the stock option and restricted share unit plans. Specifically, an inventory write-down (€8.0 million) was associated with the company’s strategic repositioning away from their joint-development programs. As a result of all these non-recurring charges, the company posted a net loss of €32 million, €15 million, and €31 million in FY2006, FY2007 and FY2008 (9 mo), respectively.
Our EPS forecasts for FY2008, and FY2009, are net losses of €43 million (EPS: - €1.79) and €20 million (EPS: -€0.84), respectively.
Negative FCF Free cash flows were negative during FY2004 –2008 (9 mo) because the company’s since FY2004 capital expenditures were higher than cash flow from operations. The huge CAPEX were a due to huge result of the company’s significant investment in facilities and equipment in the past few CAPEX years, including the construction of a state-of-the-art 175,400 square foot facility in Mirabel, Canada (now leased pursuant to a sale-and-leaseback transaction), and the establishment of North American engineering offices in Montréal and Toronto.
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
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During FY2003 –FY2008 (9 mo), the company spent a total of €238 million on property, plant and equipment, acquisitions, intangibles, and development costs, offset by cash received from the sale of assets. While cash from operations during the period was only €62 million. The balance was funded by €52 million in net debt, and €140 million in equity (which also includes the €113 million raised in the IPO in 2007).
The company believes that their facilities have sufficient capacity to service their current programs, and as a result, expects CAPEX to drop going forward. Mecachrome’s target revenues for FY2013 are between €550 –600 million. It is estimated that the company will have to spend an additional €50 million in the next three to four years to achieve the requisite capacity to generate such revenues.
Highly At the end of Q3-2008, the company had €8.1 million in cash, €81 million in working leveraged capital, and about €200 million in long-term debt. The company has credit facilities in the balance sheet amount of €75 million; no amount has been drawn from this facility at the end of September 2008.
Liquidity Analysis 2004 2005 2006 2007 2008 (9 mo) Cash + ST Inv. (in € millions) 13.3 8.5 31.1 32.3 8.1 Working Capital (in € millions) 5 23 93 111 81 Current Ratio 1.04 1.18 1.89 2.19 1.82 Debt / Capital 87.1% 86.2% 95.1% 65.7% 73.6% LT Debt/Capital 63.1% 66.3% 91.2% 64.8% 73.1% Interest Coverage Ratio 0.92 1.24 0.91 0.81 0.46
Profitability Analysis 2004 2005 2006 2007 2008 (9 mo) Return on Avg Assets -2% 0% -9% -4% -8% Return on Avg Equity -21% 5% -130% -26% -35% Return on Average Invested Capital -3% 1% -12% -5% -11%
Activity Analysis 2004 2005 2006 2007 2008 (9 mo) Days Inventory Outstanding 79 119 165 179 Days Accouts Receivable 118 111 87 56 Days Accouts Payable 161 167 172 155 Cash Conversion Cycle 37 62 80 79
The company is significantly leveraged at this time with a high debt to capital of 74% (the industry average is 33%), and an EBIT interest coverage ratio of 0.5x during the first nine months of FY2008. We believe the company could have probably kept its debt to capital lower if (1) it had went public earlier, and raised more capital from equity than from debt; or (2) spent less on CAPEX (at the compromise of growth).
Although the company has a highly leveraged balance sheet, it is important to note that most of its debt is long-term debt. About 99% of its total debt of €202 million is long-term debt (most of which is due in May 2014); which means that the company does not have to make any significant principal payment in the near-term.
Our models indicate that the company will need about €24 million additional capital 2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
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either, through equity or debt, for its operating and investing activities in the next 12 months.
Liquidity Crisis The highly leveraged position and the slowdown in the company’s aerospace and automotive divisions in the second half of FY2008, have put the company in a very tight cash position.
Defaults on interest payment - The interest payment default has led to cross-defaults in the company’s€75million revolving credit facility, therefore, the company is unable to withdraw any amount from its credit facility.
All members from the founding family resigned from their positions –In July 2008, Mr. Guillaume Casella (grandson of the founder) resigned as President and Chief Executive Officer, and in November/December 2008, Mr. Gérard Casella (son of the founder) and his other two sons, Mr. Arnaud Casella (President of Mecachrome France) and Mr. Romain Casella (Director) resigned from their management positions and the board of directors. The company appointed Mr. Christian Jacqmin as President and CEO of Mecachrome. He was the CEO of the Sonaca Group during 1995 –2008.
Receives On December 22, 2008, the company announced that it has received financing financing commitments totaling €30 million, which includes: commitments totalling €30 - €20 milliondebtor-in-possession (DIP) financing facility from FSTQ (they have already million –fends invested about $50 million in the company), and from Aerofund, funds managed by off liquidity ACE Management, crisis - €7 millioncredit facility from French banks, - €1 millionloan from the CIRI (Comité Interministériel de Restructuration Industrielle), and - €2 millionfrom one of its main customers
The financings are subject to certain customary conditions for DIP facilities, including Court approvals in Canada and France. Our models indicate that the company only needs €24million to fund their operating and investing activities in the next 12 months. Therefore, these financings, we believe, will help the company fend off a possible liquidity crisis, or even bankruptcy.
Actively trying The company has so far announced measures to cut annual costs by about €10 –€15 to refinance / million, by reducing its Canadian workforce by about 120 people, and moving some less restructure complex operations to lower cost Tangier, Morocco. Going forward, the company expects to further reduce their SG&A by identifying further synergies between their North American and European operations.
Although the company has yet to announce the details of the proposed €30 million financing, we believe they could be a combination of debt and convertible debt. As mentioned earlier, these financings will help the company to come out of an immediate liquidity crisis, but the company still has to seek measures to reduce its significantly high debt. We have already discussed what we believe to be the company’s options are with 2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
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debt. We have already discussed what we believe to be the company’s options are with respect to this above.
We would like to explore the possibility of a bail out from the French/Quebec governments further as:
Aerospace is Canada’s fourth largest industry in terms of research and development investment (Source: Investissement Québec). Quebec, which accounts for almost 62% of Canada’s total aerospace production, has 240 aerospace companies employing 39,000 people, half of Canada’s total aerospace workforce. (Source: Ministry of Economic Development, Innovation and Export Trade, 2006). The aerospace industry, one of the leading export industries in Quebec, exports about 80% of its aerospace output.
The following is a list of the top aerospace companies in Quebec according to the Ministry of Economic Development, Innovation and Export Trade, which also includes Mecachrome.
Company Employees in Quebec (2007) 1 Bombardier Aerospace 12,440 2 Pratt & Whitney Canada 5880 3 CAE 3700 4 ACTS 2685 5 Bell Helicopter Textron 2200 6 Rolls-Royce Canada 1500 7 L3 Communications (L-3 MAS) 975 8 Esterline/CMC Electronics 860 9 Héroux-Devtek 840 10 GE Canada Aviation 740 11 MDA Space 300 12 Messier-Dowty 260 13 Mecachrome 140 Source: Ministry of Economic Development, Innovation and Exports
The Canadian government has not yet announced any plans to bail out the aerospace industry. However, it seems that the government is proposing a bailout package for the auto sector, which could amount to approximately 20% of the recently proposed US$17.4 billion U.S. proposal.
In Canada, a coalition party, formed by three opposition parties, including the Liberals, New Democratic Party (NDP), and the Quebec Separatist Bloc Quebecois, is trying to bring down the current government, run by the Conservative Party of Canada, through a vote of non-confidence. This move from the opposition parties was instigated by Finance Minister Jim Flaherty's economic update, which lacked an economic stimulus package. We believe Mecachrome’s chances of receiving a financial aid improves if the coalition party comes into power because:
- The coalition party is more likely to implement a larger stimulus package 2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
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- The coalition party is more likely to help troubled companies in Quebec, as the party includes the Quebec Separatist Bloc Quebecois and Liberals (the current government of Quebec)
The Governor General, upon the request of the Prime Minister, Stephen Harper, has suspended parliament until January 26; which has delayed a possible change in the government.
The French government has clearly shown signs that it is willing to bail out major companies in crisis. The French President, Nicolas Sarkozy, has repeatedly insisted that France will not allow its car industry to fall victim to the economic crisis. In early December, the president announced a €26 billion economic stimulus plan that provided for billions in aid for the struggling car and construction industries. We believe, the most recent bail out plan announced by the U.S. will encourage European governments to do the same to their industries.
Valuation Our Discounted Cash Flow (DCF) valuation on the company is $2.49 per share. A summary of our model is shown below.
DCF Valuation Model 2008-Q4E 2009E 2010 2011 2012 2013 FFO € 25.5 € 28.1 € 27.5 € 29.1 € 31.2 € 33.7 Investment in WC (€ 2.7) (€ 6.5) € 1.7 (€ 5.5) (€ 7.0) (€ 7.6) CFO € 22.8 € 21.7 € 29.2 € 23.6 € 24.2 € 26.0 CAPEX (€ 6.0) (€ 25.0) (€ 15.0) (€ 12.5) (€ 10.0) (€ 10.0) FCF € 16.8 (€ 3.3) € 14.2 € 11.1 € 14.2 € 16.0 PV € 16.8 (€ 3.0) € 11.4 € 8.0 € 9.2 € 9.3
2014 2015 2016 2017 2018 2019 FFO € 36.4 € 39.5 € 43.0 € 45.3 € 48.5 € 51.2 Investment in WC (€ 8.3) (€ 9.0) (€ 9.8) (€ 6.7) (€ 7.0) (€ 7.3) CFO € 28.1 € 30.5 € 33.2 € 38.7 € 41.5 € 43.9 CAPEX (€ 10.0) (€ 10.0) (€ 10.0) (€ 10.0) (€ 10.0) (€ 10.0) FCF € 18.1 € 20.5 € 23.2 € 28.7 € 31.5 € 33.9 PV € 9.4 € 9.6 € 9.7 € 10.8 € 10.6 € 134.5
Discount Rate 11.5% Terminal Growth Rate 3% Total PV € 236.4 Cash - Debt (€ 193.8) Equity Value € 42.5 Equity Value (C$) $59.53 Shares O/S (dil) € 23.9 Value per share $2.49
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
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Our model used a weighted average cost of capital of 11.5%; which was calculated as shown in the following table:
Weighted Average Cost of Capital Cost of Equity 13.9% Cost of Debt 10% Debt/Capital LT Forecast 33% WACC 11.5%
We also use a comparables valuation model to value MCH which clearly indicates that the company’s shares are undervalued at current price levels.
Company Symbol Revenues TEV/ TEV / P/B (C$ mm) LTM Revenues LTM EBITDA 1 Avcorp Industries Inc. TSX:AVP $121.3 0.33 10.12 1.19 2 First Aviation Services Inc. OTCPK:FAVS $144.9 0.25 21.76 0.64 3 Northstar Aerospace Inc. TSX:NAS $211.6 0.39 3.59 0.56 4 LMI Aerospace Inc. NasdaqGS:LMI $294.6 0.56 3.55 2.00 5 Hampson Industries plc LSE:HAMP $346.5 1.55 8.30 1.52 6 Mecachrome(LSE:HAMP) International TSX: MCH $516.9 0.56 4.69 0.07 7 Magellan Aerospace Corp. TSX:MAL $661.8 0.41 4.33 0.23 8 Societe(TSX:MAL) Industrie d'Aviation ENXTPA:LAT $905.5 0.82 12.15 0.25 Average (excl. outliers) 0.61 6.68 0.81 Industry (Aerospae and Defense) 0.70 5.50 1.70
Source: Capital IQ and FRC
As shown in the table above, Mecachrome’s shares are trading at an EV/LTM Revenues and EV/LTM EBITDA of 0.56 of 4.69, respectively, while its peers trade at 0.61 and 6.68, and the industry (aerospace and defence) trades at 0.70 and 5.50, respectively.
Rating We believe the announcement on December 22, 2008, with regard to the receipt of financing commitments have pulled the company out of a possible liquidity crisis, and have lowered its overall risks. We believe the company has sound fundamentals, and is well positioned in the market for long-term growth, despite a slowdown in the near- term. Therefore, based on our valuation models and review of the company’s fundamentals, we initiate coverage on Mecachrome with a BUY rating, and a fair value estimate of $2.50 per share.
Risks The following risks, though not exhaustive, may cause our estimates to differ from actual results: Liquidity risks persist because of its highly leveraged balance sheet. A low share price and downgraded credit rating will negatively impact equity or debt financing. A reduction in outsourcing by OEMs or tier 1 integrators could have an adverse effect on the company’s long-term prospects. High barriers to entry make it tougher for Mecachrome to bid competitively against existing suppliers. Cancellations or delays in launching new programs could have an adverse effect.
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 27
Foreign currency risks –Currently, about 96% of its revenues come from Europe, and the remaining 4% comes from North America. The company’s long-term debt (most of the company’s long-term debt of €200 million are denominated in euros) acts as an automatic hedge against its revenues in euros. Cyclical revenues – The company’s aerospace business is cyclical and is sensitive to general economic conditions and other factors.
We have rated the shares Risk 4 (Speculative).
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 28
Appendix
STATEMENTS OF OPERATIONS (in EUR) 2004 2005 2006 2007 2008E 2009E
Revenues 220.1 231.3 261.8 295.0 298.0 282.3 Cost Of Goods Sold 152.4 157.4 179.2 212.9 228.4 215.9 Gross Profit 67.7 73.9 82.6 82.1 69.6 66.3
Selling General & Admin Exp. 23.7 28.0 31.8 29.3 30.0 27.1
EBITDA 44.0 45.9 50.8 52.7 39.6 39.2
Dep., Amort. of Goodwill and Intangibles 36.4 28.5 29.6 32.1 33.7 31.3 Operating Income 7.5 17.4 21.1 20.6 5.8 8.0
Interest Expense (8.1) (14.0) (23.3) (25.4) (26.2) (25.9) Interest and Invest. Income 0.3 0.4 0.5 0.7 0.7 0.0
EBT before unusual items (0.3) 3.8 (1.7) (4.1) (19.7) (18.0)
Currency Exchange Gains (Loss) (0.2) 5.3 (5.5) 4.7 0.4 - Other Non-Operating Inc. (Exp.) (0.2) (0.7) (1.3) (2.7) (0.6) (0.6) Restructuring Charges - (1.9) - (3.2) (4.7) Impairment of Goodwill - - - - (2.4) Asset Writedown - - (9.1) - (10.2) Other Unusual Items (2.4) (0.4) (13.6) (9.7) (4.7) EBT (3.1) 6.1 (31.2) (14.9) (41.9) (18.6)
Income Tax Expense 2.6 4.7 1.1 0.5 1.0 1.4 Minority Int. in Earnings (0.0) 0.1 0.0 (0.0) 0.0 0.0 Net Income (5.7) 1.5 (32.3) (15.4) (42.9) (20.0)
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 29
BALANCE SHEETS (in EUR) 2004 2005 2006 2007 2008E 2009E
ASSETS Cash And Equivalents 13.3 8.5 31.1 15.0 0.1 5.9 Short Term Investments - - - 17.3 Total Cash & ST Investments 13.3 8.5 31.1 32.3 0.1 5.9
Total Receivables 71.4 69.2 64.5 49.5 53.6 50.8
Inventory 33.0 69.5 93.0 115.4 118.8 123.1 Deferred Tax Assets, Curr. 1.9 3.7 3.1 2.6 2.6 2.6 Other Current Assets 3.9 3.1 4.6 3.8 4.6 4.4 Total Current Assets 123.4 154.0 196.4 203.7 179.7 186.7
Net Property, Plant & Equipment 127.4 146.5 141.2 147.4 137.1 133.3
Goodwill 2.4 2.9 2.6 2.8 0.4 0.4 Other Intangibles 1.7 31.9 27.5 28.5 26.6 24.6 Loans Receivable Long-Term 10.4 - - - - - Deferred Tax Assets, LT 2.2 2.0 2.7 0.1 0.1 0.1 Deferred Charges, LT 15.3 4.2 11.8 25.0 25.0 25.0 Other Long-Term Assets 9.1 7.2 - - - - Total Assets 291.9 348.7 382.2 407.4 368.9 370.2
LIABILITIES Accounts Payable 67.1 77.3 91.8 89.0 91.4 86.4 Short-term Borrowings 22.5 37.5 Curr. Port. of LT Debt 27.8 14.2 10.7 1.8 1.1 0.9 Curr. Port. of Cap. Leases 0 0 0.9 0.6 0.6 Unearned Revenue, Current - 1.5 0.9 0.9 0.9 0.9 Def. Tax Liability, Curr. 1.5 - 0.5 0.3 0.3 0.3 Total Current Liabilities 118.8 130.6 103.8 93.0 94.4 89.2
Long-Term Debt 132.2 172.1 253.0 199.5 200.3 227.4 Capital Leases 0 0 0 1.4 0.8 0.1 Minority Interest 0.2 0.2 0.2 0.0 0.0 0.0 Unearned Revenue, Non-Current 3.6 - - - - - Pension & Other Post-Retire. Benefits 3.6 3.9 3.8 3.2 3.2 3.2 Def. Tax Liability, Non-Curr. 6.6 6.0 6.1 3.6 3.6 3.6 Other Non-Current Liabilities - - 1.6 0.5 0.5 0.5 Total Liabilities 265.0 312.8 368.6 301.1 302.8 324.0
Pref. Stock, Redeemable 26.2 - - Pref. Stock, Convertible - 37.1 48.6 Pref. Stock, Other - 0.7 - Total Pref. Equity 26.2 37.8 48.6 - - -
Common Stock 0.1 0.1 2.7 161.3 161.3 161.3 Additional Paid In Capital - - - 0.3 5.0 5.0 Retained Earnings 0.5 (1.6) (39.9) (54.2) (97.1) (117.1) Treasury Stock ------Comprehensive Inc. and Other 0.2 (0.4) 2.2 (1.2) (3.1) (3.1) Total Common Equity 0.7 (1.9) (35.0) 106.3 66.1 46.1
Total Equity 26.9 35.9 13.7 106.3 66.1 46.1
Total Liabilities And Equity 291.9 348.7 382.2 407.4 368.9 370.2
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 30
STATEMENTS OF CASH FLOWS (in EUR) 2004 2005 2006 2007 2008E 2009E
Net Income (5.7) 1.5 (32.3) (15.4) (42.9) (20.0)
Dep., Amort. of Goodwill and Intangibles 36.3 27.8 29.6 32.1 33.7 31.3 Other Amortization 0.3 3.2 15.1 4.3 (Gain) Loss From Sale Of Assets 0.1 0.0 (0.0) (0.3) Asset Writedown & Restructuring Costs - - 9.1 - 12.5 Stock-Based Compensation - - - 0.6 4.7 Minority Int. in Earnings 0.0 (0.1) (0.0) 0.0 (0.0) (0.0) Other Operating Activities 1.0 (6.6) 8.3 (1.0) (0.4) 32.0 25.8 29.8 20.3 7.7 11.3
Change in Acc. Receivable (7.5) (2.4) 5.3 15.4 (4.2) 2.8 Change In Inventories (3.5) (27.0) (27.6) (22.1) (3.3) (4.3) Change in Acc. Payable 6.2 (4.5) 6.0 (6.0) 2.3 (5.0) Change in Unearned Rev. (6.3) - (0.6) 0.04 - - Change in Other Net Operating Assets (0.1) 1.1 (0.7) (1.1) Cash from Ops. 20.8 (6.9) 12.3 6.6 2.5 4.8
Capital Expenditure (25.6) (67.9) (31.3) (36.4) (32.3) (25.0) Sale of Property, Plant, and Equipment 2.7 0.0 12.2 3.7 1.2 Cash Acquisitions (3.2) (1.0) - - Divestitures - - - - Sale (Purchase) of Intangible assets (0.2) (1.5) (0.4) (3.5) (0.5) (0.5) Invest. in Marketable & Equity Securt. - - - (16.9) 17.3 Net (Inc.) Dec. in Loans Originated/Sold - - - - Other Investing Activities (18.0) (10.6) (5.1) (12.7) (0.8) 0.2 Cash from Investing (44.4) (81.0) (24.6) (65.8) (15.1) (25.3)
Short Term Debt Issued - - - - 2.0 28.0 Long-Term Debt Issued 142.6 96.9 269.7 16.2 Total Debt Issued 142.6 96.9 269.7 16.2 2.00 28.00 Short Term Debt Repaid (0.6) - - - Long-Term Debt Repaid (106.7) (22.9) (241.3) (83.9) (2.7) (1.7) Total Debt Repaid (107.3) (22.9) (241.3) (83.9) (2.7) (1.7)
Issuance of Common Stock 0.1 10.2 - 113.0 Issuance of Pref. Stock - - 16.3 -
Common and/or Pref. Dividends Paid - (3.3) (5.0) - Total Dividends Paid - (3.3) (5.0) - - -
Other Financing Activities (11.1) (2.4) - (0.9) (1.6) Cash from Financing 24.3 78.4 39.7 44.4 (2.3) 26.3
Foreign Exchange Rate Adj. 0.01 4.8 (4.7) (1.4) Net Change in Cash 0.8 (4.8) 22.6 (16.1) (14.9) 5.8
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT Mecachrome International Inc. (TSX: MCH) –Initiating Coverage Page 31
Buy –Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold –Annual expected rate of return is between 5% and 12% Sell –Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events.
Fundamental Research Corp. Risk Rating Scale: 1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt.
2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt.
3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient.
4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative.
5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative.
Disclaimers and Disclosure The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject company. Fees of less than $30,000 have been paid to FRC by an investor in the company. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are protected contractually. Coverage cannot be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The performance of FRC’s research is ranked by Investars. Full rankings and are available at www.investars.com.
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This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. Fundamental Research Corp is registered with the British Columbia Securities Commission as a Securities Adviser which is not in any way an endorsement from the BCSC. The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any person or entity in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction.
2008 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT