Velocity fails to take off – but shares have momentum
IN THE past fortnight, defence and aerospace specialist BAE Systems has announced plans to cull its workforce by almost 2,000; automotive and aerospace group GKN has issued a profits warning following two legal claims from clients; and Bombardier has been caught up in a bitter trade row with US aircraft giant Boeing, resulting in a controversial deal with Airbus.
So it is perhaps unsurprising that Velocity
Composites, a supplier to the aircraft industry, has had a disappointing market debut. The company listed on AIM in May at 85p. Today, the shares are 84p.
This performance should change. Velocity’s business is designed to help aircraft makers in the current environment, prospects are good and the share price ought to respond in the coming months.
Traditionally, planes have been made from aluminium, but in recent times, more and more metal has been replaced by sophisticated, carbonbased composite materials, which are extremely strong, durable and light.
The Boeing 787 Dreamliner and the double-decker Airbus 380 make extensive use of carbon composites, and these are expected to become increasingly prevalent in aircraft.
Lighter planes use less fuel, they are quieter, more environmentally friendly and can fly further. But composites are expensive and aircraft makers are under pressure to cut costs.
Enter Velocity Composites. Founded by three materials experts, including chief executive Jon Bridges, the business supplies ready-made composite kits to the aerospace industry. Endusers include Boeing and Airbus, but the company’s immediate customers are their suppliers, such as BAE and GKN.
These firms are constantly asked to produce more for less and Velocity can help them do that. Focusing exclusively on making complete composite kits, the group can supply customers with finished parts faster and cheaper than they can create them themselves. Bridges suggests cost savings range from 10 to 50 per cent and Velocity can finish the job about 20 per cent faster too.
Speed is important. Some players in the industry are suffering, but the outlook for air travel is strong, fleets are expected to grow by about 90 per cent over the next 20 years and demand for new planes is rising. As such, suppliers need to be cost-effective and productive, playing to Velocity’s strengths.
The group was set up in 2007 and has grown steadily with no external funding until the recent flotation. To date, Bridges has focused on the UK, but having raised £9 millionplus in May, the firm intends to expand across Europe, before looking to the US and Asia. Velocity’s financial year ends on October 31 and analysts expect maiden profits of about £500,000, with a possible dividend of 0.1p. But next year, profits are expected to soar to £3.8 million, and to £6 million in 2019. The firm hopes to invest most of its spare cash in future growth, but dividends of 1.3p and 2.7p are pencilled in for 2018 and 2019.
Midas verdict: Velocity is neatly placed to address the demands on aircraft makers. This should become increasingly clear over time, so investors who buy at today’s price should be well rewarded.