Turnaround potential good news for Orbital

ORBITAL Engine Corporation has achieved two major breakthroughs this month, removing dark clouds hanging over the company’s future.

The good news for Orbital shareholders is that the company, under new chief executive Peter Cook, has secured its medium-term future.

The bad news is that Orbital is coming off a very low base, with bottom-line profits remaining elusive.

Hartleys analyst Steven Piotrowski put Orbital’s recent history in stark context by stating that: “If Peter Cook hadn’t come in and made the changes that he did, there is a very real prospect the company would have gone under.

“It has now bottomed and is a potential turnaround story. That is the appeal.”

Paterson Ord Minnett analyst Robert Gee holds a similar view.

“Having removed the immediate financial risk to the company, Orbital appears now to be well placed to continue working on automotive deals,” Mr Gee said.

“Delays may continue but Orbital should still be around to see the technology commercialised if the automotive manufacturers eventually decide to adopt it.”

The past 12 months have been challenging for Orbital, with extensive cost cutting and restructuring.

A critical achievement was the restructuring and refinancing of its Synerject manufacturing joint venture, owned 50:50 with Siemens Automotive.

The refinancing included Orbital converting an outstanding $10.2 million loan to Synerject into equity.

It also involved Orbital vending its profitable marine and recreation systems business into Synerject, and Siemens vending in a non-automotive systems business.

This will dramatically change the shape of Orbital’s annual accounts, with sales revenue sharply lower.

However, Mr Cook said Orbital’s bottom-line impact would be unaffected since it would benefit from cost reductions and in-creased earnings from the larger Synerject business.

The second major achievement this month was the New York Stock Exchange’s (NYSE) decision to allow Orbital shares to continue trading on Wall Street.

This was despite Orbital’s market capitalisation falling below the cut-off point of $US50 million.

The continued listing is subject to Orbital successfully implementing the business plan submitted to the NYSE.

Looking ahead, Mr Piotrowski has forecast a loss of $3.3 million in the 2002-03 financial year and a break-even result in 2003-04.

Mr Gee is more positive, tipping profits of $5 million per annum within two years, based on royalty revenue, engineering income and its share of Synerject profits.

“This underpins the existing market value of $55 million providing effectively a free option on any success in the automotive sector,” Mr Gee said.

There are currently six manufacturers using Orbital’s direct fuel injection technology in outboard engines, jet skis and two-stroke scooters.

Mr Cook said that, based on advice from the manufacturers, he expects the number of products using Orbital technology to grow from 24 currently to 32-35 by the end of 2003.

In the European scooter market, Aprilia, Piaggio and Peugeot have released models with Orbital’s direct injection technology.

Orbital expects about 120,000 scooters using its technology will be sold this year, double the number of last year.

Progress has been slower in Asia, with Chinese manufacturer Sundiro discontinuing production of a proposed scooter. However, the company still sees opportunities in India and Taiwan.

In the automotive sector, the company suffered a setback late last year when Saab suspended a development program that featured Orbital’s direct injection fuel system.

However, Orbital is continuing its discussions with five automotive groups.

Mr Gee said General Motors (the owner of Saab) was working on a global engine platform and this held much greater potential than Saab’s stand-alone initiative.

Orbital’s engineering business, which traditionally has been a large cash drain on the company, has achieved considerable success in obtaining fee-for-service contracts.

This included a contract with the Federal Government agency Environment Australia to test the impact of ethanol mixtures on petrol. Mr Cook said this contract was worth “in excess of $1 million”.