LIMC IPO Analysis: Plenty Of Room For Growth

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 |  Includes: LIMC, TATT
by: Bill Simpson

On July 8, Bill Simpson wrote an analysis of Limco-Piedmont (LIMC). Limco-Piedmont's offering priced late Wednesday, July 18, at $11. In midday trading, the shares gained $2.45, or 22.3 percent, to $13.45. The company expected the offering to price between $9.50 and $11.50 per share, and boosted the size of the IPO, bringing the total offering to 4.4 million shares, from 4 million shares. On Friday the shares closed at $13.88.

The text of Mr. Simpson's original writeup follows:

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Limco-Piedmont plans on offering 4 million shares at a range of $9.50 - $11.50. Majority owner TAT Technologies (NASDAQ:TATTF) will be selling 1/2 a million shares in the offering. Oppenheimer and Stifel are co-leading the deal. Post-ipo LIMC will have 12.5 million shares outstanding for a market cap of $131 million on a $10.50 pricing. IPO proceeds will be used for general corporate purposes.

Pre-ipo, LIMC is a wholly owned subsidiary of TAT Technologies. With this ipo TATTF is spinning off LIMC and will retain a 65% stake in LIMC post-ipo. It does not appear the TATTF is in a hurry to spin off the remainder of its ownership stake. TATTF has actually agreed to a one year lock-up arrangement instead of the usual 180 day lock-up period. If TATTF plans on divesting the remainder of its LIMC interests, it doesn't appear as if we'll get an announcement to that effect for at least a year. By agreeing to the extended lock-up period, it appears to me that TATTF plans on holding its majority stake in LIMC indefinitely.

From the prospectus:

We provide maintenance, repair and overhaul, or MRO, services and parts supply services to the aerospace industry.

aircraft
LIMC operates four FAA certified repair stations. Two are located in Tulsa, Oklahoma, and the other two are located in Kernersville and Winston-Salem, North Carolina. The four service centers provide aircraft component maintenance, repair and overhaul services [MRO] for airlines, air cargo carriers, maintenance service centers and the military. In addition LIMC also is an equipment manufacturer of heat transfer equipment for airplane manufacturers and operates a parts services division that provides inventory management and parts services for commercial, regional and charter airlines and business aircraft owners.

As the name would suggest, Limco-Piedmont is the result of two merged operations, Limco and Piedmont. Limco bought Piedmont in 7/05.

MRO Services - 61% of revenues in first quarter of 2007. Government regulations and manufacturing specs require aircraft to undergo MRO servicing at regular intervals, usually each three to five years of service. Warranty covers the first one to five years of aircraft components, LIMC's MRO services usually 'kick in' after the warranty expires. LIMC specializes in the repair and overhaul of heat transfer components for the aerospace industry, special air conditioning units for military operations, APUs, propellers, landing gear and pneumatic ducting, which is used to channel air through the air conditioning and other pneumatic systems on the aircraft. LIMC works on aircraft and components from all the major manufacturers including Boeing (NYSE:BA), Airbus, Lockheed Martin (NYSE:LMT), General Dynamics (NYSE:GD) and GE (NYSE:GE).

Parts Servicing - 39% of revenues in first quarter of 2007. LIMC supplies parts to approximately 500 commercial, regional and charter airlines and business aircraft owners.

Sector - MRO/parts servicing growth for aircraft is being fueled by the aging and growing worldwide aircraft fleet. 74% of the world aircraft fleet is 5+ years old. Global air travel is also expected to grow by 4%-5% annually over the next five years. While not a swift growing niche, the MRO component services sector generates over $8 billion in worldwide revenues and is expected to grow 4% annually over the next 5 years.

LIMC's five largest MRO customers account for 20% of revenues. Customers include Bell Helicopter, Fokker, Hamilton Sundstrand, KLM Royal Dutch Airlines NV, Lufthansa Technik AG, PACE Airlines, Piedmont Airlines and the U.S. Government. LINC derives nearly 10% of its revenues from the U.S. Government, primarily Department of Defense related.

Competition
- LIMC is a rather small player and competes directly with larger manufacturers whom also service their manufactured components. These include various segments of Honeywell (NYSE:HON), as well as Standard Aero Group, Aerotech, AAR (NYSE:AIR), and a number of others.

LIMC's future growth strategies include expanding to additional MRO services as well as continuing to grow Western Europe based revenues. I would expect LIMC to utilize the ipo cash to make future acquisitions that assist it in its growth efforts. Fully expect one or more acquisitions here paid in LIMC's first year public.

70% of 2006 revenues derived from companies located in the U.S., 30% internationally.

Financials

$2 per share in cash, no debt. LINC does not plan on paying dividends.

3 X's book value on a $10 1/2 pricing.

LIMC has swiftly grown revenues since the mid 2005 acquisitions of Piedmont. In conjunction with the acquisition, LIMC instituted a number of cost cutting initiatives to reduce redundancies between the two companies.

Revenues in 2006 were $59 million. LIMC, which has been profitable since 2002, earned a fully taxed $0.38.

2007 - LIMC had a strong first quarter. Revenues should hit $90 million in 2007, an impressive 52% revenue increase from 2006. LIMC attributes recent quarterly revenue growth from both existing customers as well as winning new MRO/parts services contracts. Both increased due to LIMC receiving FAA approval to expand MRO services to include a greater number of aircraft components. Gross margins are not strong in this sector. I would expect 2007 gross margins to hit the 23%-25% area. GSA expenses should hit 10% levels of revenues. Operating margins then should be in the 14% ballpark. Net margins for full year should be in the 8%- 9% ballpark. This is slightly higher then LIMC has booked in recent quarters and is attributable to debt paid off on ipo as well as pre-ipo stock compensation charges. Earnings per share should be $0.60-$0.65. On a pricing of 10 1/2, LIMC would be trading 17 X's 2007 earnings.

Conclusion
- Market cap on ipo here gives LIMC plenty of room for growth. LIMC is hitting on all cylinders the 2 quarters leading into the ipo, booking the two strongest quarters in corporate history. The gross margins in this sector are rather thin and this is not traditionally a high growth sector. Those two factors mean you do not pay fat multiples for this type of company. However coming at a $131 market cap (on a $10 1/2 pricing) and 17 X's 2007 earnings with a strong year to year growth rate, this is an easy recommend in range. I like this ipo in the $9 1/2 - $11 1/2 range quite a bit actually. Strong recommend here, there is plenty of market cap room here for substantial appreciation going forward.

Note - While I would doubt 2008 revenues will grow at close to the pace of 2007 revenues, I fully expect LIMC to utilize the ipo cash to acquire one or more smaller component service companies.