AerSale Corp.

ASLE Details

AerSale Corp. (NASDAQ: ASLE) is a worldwide provider of aftermarket commercial jet aircraft and its parts to passenger and cargo airlines, Original Equipment Manufacturers (OEMs), and Maintenance, Repair, and Overhaul (MRO) service providers. The company operates in two segments, namely, 1) Asset Management Solutions (AMS), which provides short-term and long-term leasing solutions to passenger and cargo operators. 2) Tech Ops, comprised of MRO activities, sale of engineered solutions, and other serviceable products. As of May 13, 2021, the company's market capitalization stood at USD 480.17 million.

Boeing 757 passenger to freighter (P2F) conversion: On January 05, 2021, the company announced that it had introduced the conversion of Boeing 757-200 aircraft from passenger-to-freighter (P2F) at its Goodyear, Arizona facility. The company has earlier acquired 24 such aircraft and intends to monetize the fleet through this conversion at a time when a global shortfall in freight capacity is augmented by a sharp decrease in passenger flights whose cargo holds typically carried the majority of global air freight.

Q1FY21 Results: The company reported a 2.27% increase in net revenue to USD 58.43 million in Q1FY21 (ending March 31, 2021) compared to USD 57.13 million in Q1FY20 (ending March 31, 2020). The increase in total revenue was propelled by a 10.94% increase in revenue from the TechOps segment. The company recorded a steep uptick in income from operations by 595.14% to USD 12.88 million in Q1FY21 compared to USD 1.85 million in Q1FY20, driven by the proceeds from the extension in the payroll support program provided by the U.S. Department of the Treasury on March 4, 2021.

Key Risks: The company is a provider of products and services to the commercial aviation industry. Passenger airline traffic declined significantly due to the outbreak of the Covid-19 pandemic since March 2020, and it has had a material negative impact on the company’s financial state of affairs. If the Covid-19 pandemic continues to result in decreased worldwide commercial activity, it could affect the demand for airline cargo services, which might lead to a decrease in the operational and financial activity of the company.

Outlook: For FY21, the company expects its revenues to be in the range of USD 340 million to USD 360 million and adjusted EBITDA to be in the range of USD 60 million to USD 70 million. The growth in AMS is expected to be led by the monetization of the cargo conversion aircraft. For the TechOps segment, the company is projecting increase contribution from its MRO business activities.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

ASLE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: ASLE has declined 10.12% in the past month and is currently leaning towards the lower band of the 52-week range of USD 8.68 to USD 18.35. The stock is currently trading below 200 DMA levels. We have valued the stock using the EV/Sale-based relative valuation methodology and arrived at a target price of USD 12.31. On the technical chart, the next support level is USD 10.10. Considering the correction in the stock price in the past one-month, quick cash conversion cycle, no long-term debt despite being in a capital-intensive industry, and associated risks with the commercial aviation industry, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 11.18, down by 5.33% as of May 13, 2021.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

 

Strattec Security Corp.

STRT Details

Strattec Security Corp. (NASDAQ: STRT) is engaged in manufacturing and commercializing automotive access control products, including mechanical as well as electronically enhanced locks and keys, passive entry passive start systems, steering column, instrument panel ignition lock housings, and other allied products to its automotive customers situated in North America. The company also has a unique strategic relationship with WITTE Automotive and ADAC Automotive. It markets the products of each company to global customers under the “VAST” brand name. As of May 13, 2021, the company’s market capitalization stood at USD 172.33 million.

STRT Sales Distribution (Source: Company Presentation, March 25, 2021)

Q3FY21 Results: The company reported a 4.02% surge in net sales to USD 121.64 million in Q3FY21 (ending March 28, 2021) compared to USD 116.93 million in Q3FY20 (ending March 29, 2020). The increase in total revenue attributed to increasing orders from all major customers. STRT’s net income increased by 20.29% in Q3FY21 to USD 5.91 million compared to USD 4.91 million in Q3FY20. The company has significantly decreased its outstanding borrowing to USD 16 million on March 28, 2021, from USD 40 million on June 28, 2021. The company utilized USD 136.40 million to buy back 3,655,322 shares during the quarter.

Debt Reduction (Source: Company presentation, March 25, 2021)

Ceasing Disruptions in Automotive Industry Supply-Chain: The outbreak of the COVID-19 pandemic and restrictions imposed by various countries on travel and business operations continue to adversely impact global economic activity, including customer purchasing actions and supply chain disruption. Most automotive and Original Equipment Manufacturer (OEM) plants faced functional disruptions since the onset of the pandemic, which hampered the supply chain. However, with the ongoing rollout of the vaccine, the automotive demand is expected to rebound this year.

Key Risks: The major raw materials that the company required are high-grade zinc, brass, nickel silver, aluminum, steel, and plastic resins. The company has chosen only one vendor for each raw material, which puts it at vendor concentration risk. As a result, potential fluctuations in procurement and the prices of raw materials could harm the company's operational and financial health. Delays in penetration of vaccination and a revival of Covid-19 infections are also significant risks for the company.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group) 

* % Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

STRT Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Stock Recommendation: STRT has declined 27.19% in the past three months and is currently trading in the middle band of the 52-week range of USD 12.51 to USD 67.28. The stock is currently trading above the 200 DMA levels. We have valued the stock using the EV/EBITDA based relative valuation methodology and arrived at a target price of USD 49.43. On the technical chart, the next support level is USD 39.40. Considering the significant correction in the stock price in the past three months, continuous decline in outstanding debt, and strong fundamentals, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 44.34, up by 0.68% as of May 13, 2021.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.