A slow wait for Quickstep

Often it's said that finding investments in the small cap market is akin to walking along the beach turning over rocks in search of gems. It's an endless task and one that is more often met with disappointment than prosperity. Sometimes, though, it's worth starting over by returning to those rocks previously found bare.

One such stock that has met us with recent surprise is Quickstep Holdings (QHL).

QHL listed way back in 2005 raising $6m at 25c for the development of their unique composites (mainly carbon fibre) manufacturing process. Like every other small cap, the stock enjoyed a great run pre-GFC to subsequently fall back to earth in 2008.

However, things got a little exciting again in November 2009 when the company breathlessly announced, "Quickstep signs MOU to advance to $700m plus Joint Strike Fighter Manufacturing Contract".

Additionally, "The potential manufacturing contract under the long term agreement is planned to last between 20 and 30 years and could generate annual turnover of $50 million by 2015".

This sent the stock soaring back up to 50c but in the subsequent decade, it's been one-way traffic back down again. Whether because of optimistic promises, the digestion of countless equity raisings (shares on issue have exploded from 86m to 562m) or simply shareholder boredom (total revenues to 2013 had amounted to just $6.5m - for the 8 years they had been listed!), the share price bottomed out to below 7c last month. I'm certain we weren't the only firm to decline meetings with the company during this period.

However, things have changed of late. In 2017 current managing director Mark Burgess was appointed and 3 long-standing directors were replaced. Further contracts have been won, costs have been cut, operating income has improved and revenues have exceeded $50m in each financial year since 2016. Indeed, QHL posted its first maiden operating profit in 1H19.

QHL now boasts an expansive composites manufacturing facility in Bankstown employing more than 400 people with clients across the civil and defense aerospace, automotive, marine and medical sectors.

The company expects the recent positive trajectory to continue with revenue growth above 20% and improved margins driving greater profitability.

However, some things have not changed. The company has just conducted another capital raising, issuing 125m shares at 8.5c.  But we believe with a fully diluted market cap of less than $60m, no debt, strong contracted existing sales, proven products and improving profitability, the company has – finally - appeared to have turned the corner.

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Disclaimer: The Cyan C3G Fund owns shares in QHL and also subscribed to the recent placement on 7th March 2019.