Cliff Note #70 - TAT Technologies | $TATT

10-year contract with Honeywell finally provides visibility

Themes

BigCapMicro; Restructuring; Large Contracts
Caveats: Past issues with financial consistency; Domiciled in Israel (war risk)

Select Data

• Founded: 1969

• Headquarters: Israel

• Exchange: NASDAQ

• Revenue: $100M

• Debt: $14.6M

• Cash: $7.3M

• P/E 2024 est: N/A

• P/E trailing 12 months: 19.5x

• EV/S on 2024 revenue est: N/A

• EV/S trailing 12 months: 0.9X

• Price Target: $12.50 (very conservative)

What They Do

The Company’s primary target is the aerospace industry. TAT’s focus is on thermal management solutions and services, Auxiliary Power Units (APU) (think mini generators) maintenance services and landing gear maintenance.

“Thermal systems are responsible for making sure that cabin and cockpit temperatures are constantly regulated, resulting in cost-saving advantages over time. They also ensure that electronics operate at the correct temperatures in other locations throughout the aircraft. Heat transfer solutions facilitate the exchange of heat created through the operation of these systems by transmitting the heat from a hot medium (air, oil or other fluids) to a cold medium for disposal.”

As of 2022, the company also started to offer maintenance services for An Auxiliary Power Units (APU).

“APUs allow an aircraft to operate autonomously without reliance on ground support equipment such as a ground power unit, an external air-conditioning unit or a high pressure air start cart.”

“APU is an electrical power source of aircraft that provides energy for the functioning of aircraft systems, except for propulsion. APUs offer significant cost savings as these can manage power supply and air conditioning functions while the engine is inactive. This not only helps operators to reduce expenses in fuel costs, but also leads to a decrease in maintenance costs for the engine.”

Past Issues

• Delayed contract

• No product innovation

• Inefficient Cost structure

• The company has been hovering around the $80M revenue mark since 2006, with a few minor growth spurts that did not last. Earnings per share has also been fairly sporadic.

More on Reasons to add to the Index, Content Supporting the Overarching Themes, Valuation, and Research Tasks…

Reasons To Add To Index

1. Went through a minor restructuring that included eliminating and consolidating manufacturing locations. This has led to annual cost savings of $1.5M or 16 cents per share, better R&D activities and better customer service.

2. Is building a new R&D centre to develop more products.

3. The backlog is trending up. The 2022 ending backlog was $403M vs. $295M at the end of 2021. It currently stands at $411M. To put this into perspective, the backlog between 2016 and 2021 ranged from $170M to $257M.

4. Sales are starting to tick up, and EPS grew year over year for the last nine quarters, with the last four being profitable and up sequentially.

5. Won 4 large 10-year EXCLUSIVE Honeywell contracts (with respect to Boeing and Airbus planes) two years ago that are finally translating into revenue.

6. Apparently, the aerospace industry is shifting to replace mechanical (manual) systems with electronics systems (automation and less manual needs). This increases the need for thermal management systems. “New thermal management systems are among the most important avionics systems that will be seen on new aircraft.”

7. Embarking on creating new product lines, like its APU maintenance services in 2022. In fact, this is the business unit that resulted in the 4 contract wins from Honeywell that has lifted the backlog. The APU industry adds a target market worth over $1B and recurring revenue opportunities.

8. It has only just started generating revenues from APU business.

9. Landing gear maintenance cycles offer long-term revenue opportunities. “ATR landing gear overhauls are scheduled every 8 or 9 years or 18,000 or 20,000 cycles (whichever comes first), depending on the landing gear part number.”

10. InfoArb: The company’s December 1 investor presentation mentions that 2 major APU deals are “in the funnel.” No mention of this was made in the company’s press releases.

11. The company has a nice roster of large and well-known customers, including 300 customers and 50 major airlines.

12. Targeting larger accounts, while reducing exposure to smaller ones.

Valuation

We think a 25x P/E on trailing EPS of 50 cents is reasonable, yielding a short-term price target of $12.50. However, the fact that the company has been experiencing large sequential rises in EPS, that the new APU revenue has just started kicking in and that they have two large deals in the pipeline could make this target extremely conservative. Using the third quarter run-rate EPS of 22 cents (~80 cents) gets to a potential price target of $22. Now, even the 22 cents run-rate assumption could be conservative.

Caveats

1. Inconsistent growth

2. Being domiciled in Israel could limit valuation expansion.

3. A good portion of the company’s backlog is not firm, in that task orders have to be released.

Research Tasks

1. Still don’t clearly understand the difference between mechanical and electrical aerospace systems in terms of their use of power. So, we need to get some clarity.

2. Will the company be able to secure APU contracts from companies other than Honeywell?

3. The legacy thermal business has been lumpy. Does the company expect this business to become more stable?

4. 77% Of the company’s revenue is generated from commercial contracts. Is there an opportunity to generate more revenue from defence contracts? Are there any new products in the pipeline (looks like two more)?

5. 64% of revenue comes from the USA. Any plans to increase global revenue?

6. Does exposure to the commercial airline industry pose a risk?

7. Annual report mentions products and services for non-aerospace markets. Like the Navy and hospitals. Need to understand this opportunity.

Additional Info + Research

Press Release

Mr. Igal Zamir, TAT's CEO and President commented on the results:

"we are very pleased with the results of the third quarter and nine months of 2023. We are facing swift growth in demand for our products and services, which has resulted in increasing revenue and profitability quarter after quarter. We remain positive that the trend will continue for the following quarters to come.”

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Our disclaimer: We may hold a position in the stock. This article does not constitute investment advice. We are not registered investment advisers. Investing in biotech/microcaps carries specific risks best discussed with an investment advisor. Always do your own due diligence.