Investment Column: AIM to profit among high flyers

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The Independent Online
Now is not a bad time to be involved in the aerospace industry. The output of the big three aeroplane makers, Boeing, McDonnell Douglas and Airbus, is forecast to soar from 463 aircraft in 1996 to 800 or more next year, as the airline industry makes up for the dearth of recent investment and prepares for the expected upswing in air travel into the next century. Small companies with a focus on this business should be particularly highly geared into this boom, but such investments are few and far between, which explains why shares in AIM have surged from 120p three years ago to 555p, down 15p yesterday.

Despite its name, AIM is a fully listed aerospace group, which, along with two US competitors, dominates the manufacture of aircraft interiors. Given the market background, it is perhaps hardly surprising that the company should yesterday report pre-tax profits up by three-quarters to pounds 6.22m for the year to April, even after an pounds 850,000 hit for a property revaluation. But the figures also demonstrate just how volume-sensitive this business is.

It was only two or three years ago that AIM suffered a profits collapse after delays to a big contract with Saab, the Swedish aircraft maker, meant it had difficulty covering its high fixed costs. Now AIM has demonstrated the reverse of that process, turning in a 75 per cent rise in profits on a mere 10 per cent uptick in sales.

The reason for the higher volumes was the record $90m contract to refurbish the interiors of Northwest Airlines' fleet of DC-9s, which saw 90 units completed last year. Although that deal is now nearly complete, AIM has already gone a long way to replacing it with refurbishment work valued at around $12m for part of KLM's fleet of Boeing 747s and a contract with Air Canada and Aero Mexico for their DC-9 and MD-88 aircraft put at roughly $10m. Most of that should fall in the current financial period and AIM's chairman, Jeff Smith, is forecasting a similar level of group turnover for this year.

But the feast should be far from over even then. AIM is also involved in a pounds 20m contract as part of the Nimrod 2000 programme to upgrade the UK's main reconnaissance aircraft and in the EH101 helicopter programme. Enquiries are running at record levels and, although he is making no forecasts, Mr Smith says the company could handle pounds 100m of sales without too much trouble, which would feed through to profits of well over pounds 10m, given the jump in margins from 7.9 to 9.6 per cent last year.

He remains sanguine about the strength of the pound, pointing out that many of its parts are manufactured in the US, and about the merger talks currently under way between Boeing and McDonnell Douglas, which together account for roughly pounds 10m of sales. Profits could come in at around pounds 7.4m this year, putting the shares on a forward price/earnings ratio of 16. That is still reasonable value, while small acquisitions could add spice.