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MAGNIFOAM
From groomecapital.com Special Situations The Federal Aviation Administration (FAA) recently issued an administrative directive ordering U.S.-registered airlines to replace the metallized Mylar insulation on their airplanes within four years. This directive could translate into a potential US$255 MM market opportunity for Magnifoam over the next four years. To get a full grasp of this opportunity for Magnifoam, we believe a technical overview would be helpful. Thermal insulation installed on McDonnell Douglas jets is wrapped in a type of plastic to protect the insulation against humidity. This protective covering comes in five different types: Mylar, Tedlar, Kapton, metallized Mylar (normal Mylar fitted with a thin layer of aluminum for additional thermal insulation) and thin layer of metallized Tedlar. All Thermal insulation installed on McDonnell Douglas jets is wrapped in a type of plastic to protect the insulation against a type of plastic to protect the insulation against humidity. All of these products are produced by DuPont. According to the FAA, metallized Mylar fails to meet a proposed new fire-resistance test. The test, ASTM648, consists of putting the material in the presence of a radiant heat panel (1,000øF) and then introducing a flame of a certain height. In order to successfully meet the new guideline, the material has to resist combusting for a certain period of time. The whole uncertainty right now is the proposed test's parameters (heat, height of flame, length of time) which are yet to be finalized. There will be a period of 45 days for interested parties to present their observations before a final test is adopted. Magnifoam utilizes only Mylar and metallized Tedlar on substantially all of Bombardier airplanes. Mylar is the most economical thermal barrier out of the five named above. Tedlar costs 20% more than Mylar, and Kapton costs four times more than Mylar. If the FAA directive ordering the replacement of the metallized Mylar becomes definitive, Magnifoam could be in an advantageous position to capture a lucrative portion of the business arising out of the decision. We believe this potential market would be divided among five main players in North America, including Magnifoam. The biggest player, the Mexmil Company, currently supplies the insulation systems for Boeing airplanes. Mexmil is a private company based in Mexico, and stands to benefit the most from this FAA ruling. The second player is Orcon Corporation's aerospace division. Orcon is a supplier of raw material to Magnifoam, but the two companies compete in the retrofit market. The third player is Magnifoam's PolyFab division, which supplies Bombardier. Two other smaller players are Backley (based in Witchita, Kansas, Backley serves the retrofit market and supplies the insulation system for the Learjet), and Skandia, a much smaller player. Although Magnifoam's share price has not reacted given the four-year time frame, we believe there is the potential for Magnifoam to substantially increase its sales over the next four years as a result of this development. In our opinion, Magnifoam's share price does not reflect this potential or the potential of the Company's proprietary silicone foam. On this news, therefore, we believe Magnifoam shares are undervalued. We reiterate our Buy recommendation, with a 12-month target of $4.00 -ARI BERBERYAN |
