Mecachrome International Inc. (TSX: MCH

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Mecachrome International Inc. (TSX: MCH
Siddharth Rajeev, B.Tech, MBA
Analyst
Investment Analysis for Intelligent Investors
December 24, 2008
Mecachrome International Inc. (TSX: MCH) –Fundamentally sound aerospace and auto components
company fends off a possible liquidity crisis; Issuing Opinion
Sector/Industry: Aerospace and Defense
Market Data (as of December 22, 2008)
Current Price
C$0.08
Fair Value
C$2.50
Rating*
BUY
Risk*
4 (Speculative)
52 Week Range
C$0.02-C$12.30
Shares O/S
23.93 mm
Market Cap
C$1.91mm
Current Yield
N/A
P/E (forward)
N/A
P/B
0.03x
YoY Return
-99.3%
YoY TSX
-37.6%
Investment Highlights
*see back of report for rating and risk definitions
1,200,000
$16.00
z
900,000
$12.00
600,000
$8.00
300,000
$4.00
0
$0.00
24-Dec-07
22-Apr-08
20-Aug-08
Fin anc ia l Su m mary (Y E D ec 31)
( in €)
2004
R eve nue
220.1
Gr oss M ar gin
31%
Ne t I ncom e
( 5.7)
C ash + ST Inv.
13.3
Asse ts
291.9
De bt to Ca pita l
87%
R OE
-21%
R OIC
-3%
18-Dec-08
2005
231 .3
32%
1 .5
8 .5
348 .7
86%
5%
1%
www.mecachrome.com

Mecachrome, founded in 1937, engages in the design, engineering, manufacture,
and assembly of complex precision-engineered components for aircraft,
automotive and industrial applications.

Thec
ompa
ny
’
sdi
v
e
r
s
ec
l
i
e
nt
e
l
er
a
ng
e
sfrom aircraft manufacturers like Boeing,
Airbus and Bombardier, to high-end European consumer auto/engine
manufacturers like Rolls-Royce, Renault, Peugeot, BMW and Ferrari, to
industrial conglomerates like General Electric.

Mecachrome is the sole-source provider of more than 70% of its revenues.
Revenues increased from €55mi
l
l
i
oni
nFY1996,t
o€295mi
l
l
i
oni
nFY2007;
reflecting a CAGR of 16.4%.

A highly leveraged balance sheet and recent slowdown in its aerospace and
automotive revenues led the company into a liquidity crisis. The company has
defaulted on its interest payment, and the TSX Exchange has decided to delist
Me
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a
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hr
ome
’
ss
ha
r
e
sat the close of market on January 9, 2009.

On December 22, 2008, the company announced that it has received financing
commitments totaling €30 mi
l
l
i
on. We believe these financings will
significantly improve t
hec
ompa
ny
’
sc
a
s
hpos
i
t
i
on, and help fend off a liquidity
crisis. TheTSX Ex
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ha
ng
emi
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htr
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v
ok
et
he
i
rde
c
i
s
i
ont
ode
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i
s
tMe
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hr
ome
’
s
shares, now that the company has received financing commitments.

The company is actively evaluating options to reduce their debt levels. Arguiro,
the trust owned by the company`s founding family, which owns about 32% of
the equity shares, we believe, could be the most likely source of additional
capital for the company.
Risks

Liquidity risks persist because of its highly leveraged balance sheet.

A low share price and downgraded credit rating on their debt will negatively
impact the company if it pursues equity or debt financing.
2006
261.8
32%
(32.3)
31.1
382.2
95%
- 130%
-12%
2007
295.0
2 8%
( 15.4)
32.3
407.4
6 6%
-2 6%
- 5%
2008E
2 98.0
23%
( 42.9)
0.1
3 68.9
75%
-50%
-15%
2 009E
282.3
24%
(20.0)
5.9
370.2
83%
-36%
-7%
Mecachrome engages in the design, engineering, manufacture, and assembly of complex precision-engineered
components for aircraft, automotive and industrial applications. Founded in 1937, the company has over 70 years of
operating history. Mecachrome is the sole-source provider of more than 70% of its revenues.

2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Company
Overview
Page 2
Mecachrome International, Inc., headquartered in Montreal, Canada, engages in the design,
engineering, manufacture, and assembly of complex precision-engineered components for
aircraft, automotive and industrial applications. The company primarily offers aircraft
engine and structural components, automobile engine components, and motor racing
engines. Mecachrome, with over 70 years of operating history and long-standing
relationships with several major players in their target markets, has established significant
market presence and a global reputation. Their diverse clientele ranges from aircraft
manufacturers like Boeing (NYSE: BA), Airbus (a subsidiary of EADS - Paris: EAD) and
Bombardier (TSX: BBD.A), to high-end consumer auto/engine manufacturers like RollsRoyce (LSE: RR), Renault (Paris: RNO), Peugeot (LSE: PEU), BMW (XETRA: BMW)
and Ferrari (Milan: F), to industrial conglomerates like General Electric (NYSE: GE).
The following image shows the compa
ny
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ema
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,t
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s
, and
revenues in FY2007.
Source: Company
As shown above, revenues are well diversified - aerospace accounted for 46%, automotive
accounted for 45%, and industrial equipment accounted for 9% of total revenues in
FY2007. Over the years, the company has evolved from pure component manufacturing to
the design, engineering, manufacturing, assembly and testing of systems. This has allowed
them to transition from a sub-contractor to a tier 1 integrator in several programs, and
participate in the design and engineering phases of development with original equipment
manufacturers (OEMs).
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 3
The critical nature of the products, the company provides to its customers, we believe,
offers it a significant competitive advantage. Thef
ol
l
owi
ng a
r
et
hec
omp
a
ny
’
skey
competitive advantages:

Strong Positioning –The company operates in a very niche market due to its focus on
complex high-precision components. Mecachrome is the sole-source provider of more
than 70% of its revenues, which indicates its strong positioning in the market. Barriers
to entry are very high in t
hec
ompa
ny
’
st
a
r
g
e
tma
r
ke
t
sduet
ot
hehigh degree of design,
engineering and production expertise required, significant amount of time required to
establish customer relationships, and due to high switching costs for OEMs.

Strong and Long-term Customer Relationships –The company has maintained longterm relationships with several of its 65 customers. Me
c
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ome
’
sr
e
l
a
t
i
ons
hi
pwi
t
hits
largest customer, Airbus, extends over 50 years. The company has had over 30 years of
relationship with Boeing, Snecma, Renault, and Bombardier. The c
ompa
ny
’
stop five
customers generated approximately 38.5% of revenues in FY2007. No single program
represented more than 6.5% of revenues, and no single customer represented more than
13.5% of revenues in FY2007; indicating that revenues are diversified.

Long-term nature of contracts - Aerospace contracts tend to be long in nature, and
could be as long as the life of the aircraft (35 to 40 years). Contract durations for
automotive components generally range from three to seven years for cars, and four to
ten years for commercial trucks.

Solid revenue growth and above industry average margins –The company has
experienced solid growth in revenues in the past 13 years. Revenues increased from €55
million in FY1996, to €295mi
l
l
i
oni
nFY2007;r
e
f
l
e
c
t
i
ngaCAGR of16.
4%.The
growth was, however, slower during FY2003 –07, as revenues increased at a CAGR of
7.8%. Revenues from the aerospace division, which was the major revenue driver during
the period, had a CAGR of 31% during FY2004-07.Thec
ompa
ny
’
sf
oc
usonhigh-end
complex components has allowed them to maintain significantly higher margins than the
industry averages.

Large and diversified five year order backlog –At the end of September 30, 2008,
the company had a five-year order backlog of €0.94 billion. About 90% of
Me
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ome
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rba
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onve
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dt
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shi
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t
or
i
c
a
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l
y
,i
ndi
cating
that their current ba
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e
sa
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er
e
a
s
ona
bl
ei
ndi
c
a
t
or
soft
hec
ompa
ny
’
srevenue
growth potential. The diversification of the current order backlogs, which consists of
50% from aerospace, 48% in automotive, and 2% from industrial, we believe, also
l
owe
r
st
hec
ompa
ny
’
sr
i
s
ks
.

Operating facilities and technical capabilities - The company currently operates 11
state-of-the-art facilities, principally in France and Canada. Mecachrome has over 800
machines, including over 350 digitally-controlled high-precision machines. The
company currently has over 2,000 employees, of which 1,203 are degreed engineering
and technical employees, many of whom have worked with OEMs such as Airbus,
Boeing, McDonnell Douglas (merged with Boeing), Bombardier, Bell Helicopter
(NYSE: TXT), and Embraer (NYSE: ERJ).

Positive long-term outlook on the aerospace and the European auto market –The
company has little exposure to the US auto industry. Although we expect the global
economic slowdown, slowdown in several aerospace programs, and a freeze in engine
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 4
development in Formula 1, to negatively impact Me
c
a
c
hr
ome
’
srevenues in the nearterm, we maintain a positive long-term outlook on the c
ompa
ny
’
skey target markets,
namely the global aerospace industry (based on long-term projections for aircraft
deliveries and global passenger traffic volumes) and the European auto market (based on
long-term production volumes).
Although the company has grown significantly in the past decade, the growth was
primarily funded by debt.
Highly leveraged balance sheet - The company has generated negative free cash flows
(FCF) during FY2004 –2008 (9 mo) due to significant investment in facilities and
equipment. In order to get a perspective, the company spent a total of €238mi
l
l
i
onon
capital expenditures (net of cash received from sale of assets) during FY2003 –FY2008 (9
mo), while cash from operations during the period were only €62 million. This has resulted
in a highly leveraged balance sheet. The company is significantly leveraged at this time
with a debt to capital of 74% (the industry average is 33%), and an EBIT interest coverage
ratio of 0.5 during the first nine months of FY2008. We believe the company could have
probably maintained a lower debt to capital if (1) it had gone public earlier, and raised
more capital from equity than from debt; or (2) had spend less on capital expenditures
(though this would have compromised growth to some degree). On a positive note, about
99% of its total debt, of €
202 million, is long-term debt (most of which is due in May
2014); this means that the company does not have to make any significant principal
repayments in the near-term.
Liquidity crisis –The global financial and economic crisis, along with delays in several
major aerospace programs, led the company into a liquidity crisis, and the following
events:

Defaults on interest payment - On November 14, 2008, the company announced it will
not make the scheduled interest payment (about €9million), due November 15, 2008, on
its 9% senior subordinated notes (unsecured). The company has obtained court
protection against creditors in Canada and France.

Delisting from the TSX Exchange - The Toronto Stock Exchange has decided to delist
Mecachrome's shares at the close of market on January 9, 2009, for failure to meet the
continued listing requirements of the exchange.

Credit rating downgraded –Both Moody's and S&P downgraded their credit rating on
Me
c
a
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hr
ome
.S&Pdowng
r
a
deMe
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a
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hr
ome
’
sc
or
porate credit rating to 'CC' from 'B'.
Moody's Investors Service downgraded Mecachrome
’
sc
or
por
a
t
ef
a
mi
l
yr
a
t
i
n
gto 'Caa1'
from 'B2'.
Receives financing commitments totalling €30mi
l
l
i
on–fends off a liquidity crisis - On
December 22, 2008, the company announced that it has received financing commitments,
totaling €30mi
l
l
i
on, from FSTQ (they have already invested about $50 million in the
company), Aerofund (funds managed by ACE Management), French banks, the CIRI
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 5
(Comité Interministériel de Restructuration Industrielle), and from one of its main
customers. Our models indicate that the company only needs €24million to fund their
operating and investing activities for the next 12 months. Therefore, these financings, we
believe, will help the company fend off a possible liquidity crisis, or even bankruptcy.
Actively trying to refinance/restructure - The company has so far announced measures
to cut annual costs by about €10–€15million, by reducing its Canadian workforce by
about 120 people, and moving some less complex operations to lower cost Tangier,
Morocco.
Although the company has yet to announce the details of the proposed €30 million
financing, we believe they could be a combination of debt and convertible debt. As
mentioned earlier, these financings will help the company to come out of an immediate
liquidity crisis, but the company still has to implement measures to reduce its debt. We
believe the company has the following options to raise additional capital and lower debt.
1. Funding from the trust owned by the founding family - Although all members of the
founding family have resigned from their management positions and board of directors,
Arguiro Luxembourg S.à.r.l., the trust owned by the c
ompa
ny
’
sfounding family, which
owns about 32% of the equity shares, we believe, could be the most likely source of
additional capital for the company. Arguiro had received C$38 million from the $206
million initial public offering (IPO) in late 2007.
2. Refinancing (convertible debt or equity) –a low share price, and downgraded credit
ratings (by S&P and Moody's) are not favorable for the company to pursue this option.
3. Sell facilities to raise cash –the company can lower debt through sale-and-leaseback
transactions. This is probably the best option for the c
ompa
ny
’
sshareholders at this
time, as it will lower debt with no share dilution.
4. Bailout from the French/Quebec governments is possible, considering the critical
nature of the products the company provides to leading aerospace/auto players like
Airbus (French company), Renault (French company), Peugeot (French company) and
Bombardier (Canadian company). Suppliers, like Mecachrome, play a significant role in
the operations of major OEMs. For example, a delay in supplies from Mecachrome will
result in delays in Airbus's schedule. Therefore, it is very important for the governments
to support the suppliers as well. Also, Mecachrome would take away 2,000 jobs
(according to management, about 4,000 jobs will be affected indirectly) if it goes down.
In summary, we believe, Mecachrome is a fundamentally sound company with solid
growth potential. Although its highly leveraged balance sheet, and near-term slowdown in
activities in the aerospace and automotive divisions resulted in a liquidity crisis, we do not
believe the company will go bankrupt as it is has already received sufficient financing
commitments that will pull the company out of an immediate liquidity crisis. In addition,
the company is also actively evaluating options to reduce debt. That said, we believe that
liquidity risks still persist, as we cannot predict the outcome of the c
ompa
ny
’
sefforts to
lower debt. Our valuation models clearly indicate that the company’
ss
hares are
undervalued at current price levels. Therefore, based on our valuation models and
review of the associated risks at this time, we issuing a rating on Mecachrome of BUY
rating, and a fair value of $2.50 per share (Risk 4: Speculative).
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Mecachrome –
over 70 years of
operating
history
Page 6
The company was originally founded in 1937, as a sub-contractor in the aerospace
industry, in Colombes, France, by Eugène Casella. Since then, with over 70 years of
operating experience, the company has evolved into a leader in the design, engineering,
manufacture and assembly of complex precision-engineered components for aircraft and
automotive applications. The following chart shows a few of the major events in the
c
ompa
ny
’
slong operating history.
Source: Company

In 1971 - Gérard Casella, son of the founder, Eug
è
neCa
s
e
l
l
a
,be
c
a
met
hec
ompa
ny
’
s
Chief Executive Officer.

1975 –Expanded into manufacturing motor sports parts for Renault Sport leveraging its
expertise in manufacturing aerospace components

1991 –Expanded into manufacturing high-end niche products for the commercial
automotive sector, upon the completion of its facility in Sablé, France

2003 –06 –Made a series of investments in North America, including the acquisition of
aerospace components manufacturer Aéro Machining, the construction of a state-of-theart 175,400 square foot facility in Mirabel, Canada, and the establishment of engineering
offices in Montréal and Toronto.

2004 –Moved their head office from Paris, France to Montréal, Canada. The main
motives behind such a move at that time were the following:

Gain access to the North American market, and grow relationships with major
North American aerospace players,

Build products in C$ to serve the high-cost European market

Access to funds –The Solidarity Fund QFL (FSTQ), a Québec-based labor2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 7
sponsored investment fund (with approximately C$7.3 billion in assets under
management as of May 2008), has invested about C$50 million in Mecachrome.
Also, in 2004, the company acquired two European companies to strengthen its precision
machining capabilities. In 2005, Mecachrome acquired Heini Mader Racing Components
S.A., Switzerland, a provider of design, engineering and manufacturing services for motor
racing engines.

Initial Public Offering in late 2007 –The second largest IPO in Canada in 2007 Mecachrome went public in October 2007. The IPO consisted of 14.69 million
subordinate shares at C$14 per share, which included 11.79 million subordinate
shares + 2.90 million subordinate shares held by Arguiro Luxembourg S.à.r.l. Arguiro is
an investment holding company indirectly owned by the Casella Trust (founding
family). The subordinate shares are listed on the TSX Exchange (Canada).
The IPO raised gross proceeds of C$206 million; of which C$155.9 million went to the
company, C$38.4 million went to Arguiro, and $11.3 million was paid as un
d
e
r
wr
i
t
e
r
s
’
commission. Subsequent to the IPO, the company had 16.26 million subordinate shares
(9.7% of the shares were held by FSTQ, and the remaining held by the public), and 7.51
million multiple voting shares held by Arguiro, for a total of 23.77 million equity shares.
As each multiple voting share carries ten votes per share (versus one vote for each
subordinate share), Arguiro, which holds approximately 32% of the outstanding equity
shares, holds approximately 82% of the voting power. Therefore, the trust owned the
founding family has indirect control over Mecachrome.

2008 –In November 2008, the company announced that it will not make the scheduled
interest payment on its 9% senior subordinated notes due 2014. The TSX Exchange has
decided to delist Mecachrome's subordinate voting shares at the close of market on
January 9, 2009. All the founding family members resigned from their management
positions and board of directors. Mecachrome has obtained court protection, both in
Canada and France, from the actions of creditors; which allows them to continue
operations and devise a restructuring/refinancing plan. On December 22, 2008, the
company announced it has received financing commitments totaling €30 million, which
is sufficient enough to pull the company out of an immediate liquidity crisis. The
company is now reviewing and evaluating its alternatives to lower debt.
Me
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hr
ome
’
s Me
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ome
’
sexpertise is in the design, engineering, manufacture and assembly of
Expertise and
complex precision-engineered components and systems. The company currently operates
Strategy
11 state-of-the-art facilities, principally in France and Canada, addressing three principal
industries:
(1) Aerospace (including aircraft engine components and aerostructural components),
(2) Automotive (including high-end consumer automobile, commercial trucking engine
components, and motor racing engines), and
(3) Industrial equipment
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 8
The continued and increasing trend of outsourcing the design, engineering and
manufacturing of components by OEMs, in order to focus operations on final assembly
and support services for their customers, is the main growth driver of aerospace and
automotive component suppliers like Mecachrome.
Mecachrome has over 800 machines, including over 350 digitally-controlled highprecision machines. The company currently has over 2,000 employees (about 300 in North
America), of which, 1,203 are degreed engineering and technical employees, many of
whom have worked with OEMs such as Airbus, Boeing, McDonnell Douglas, Bombardier,
Bell Helicopter, and Embraer.
Over the years, the company has evolved from pure component manufacturing to the
design, engineering, manufacturing, assembly and testing of systems. This expanded
capability has allowed the company to provide design and manufacturing solutions, while
manufacturing components for its clients. The following are two good examples on how
the company has increased their business with their customers through their expanded
service offerings:

Mecachrome has expanded their relationship with Airbus, which started as a basic parts
supplier in 1950, to become a co-developer of components through joint-development
programs since 2001.

Similarly, t
hec
ompa
ny
’
srelationship with Renault Sport has grown since 1975, from a
sport-engine components supplier, into a co-developer and complete assembler of
Re
na
ul
tSpor
t
’
sFor
mul
a1engines beginning in the 1990s.
Through their expanded products/service offerings, and through strong relationships with
their customers, Mecachrome has been able achieve the following:

Tier 1 integrator status –Integration into OEM’
s production process has enabled the
company to transition from a sub-contractor to a tier 1 integrator in several programs.
Ac
hi
e
vi
ng“
Ti
e
r1”s
t
a
t
usi
si
mpor
t
a
ntf
oras
uppl
i
e
ra
si
tgives them more business, and,
at the same time, opportunities to build strong ties with their customers.

Participate in the design and engineering phases of development, as well as in jointdevelopment programs, with OEMs - OEMs are increasingly looking to share
investment and risks associated with building new aircraft by partnering with suppliers
like Mecachrome in the development phase. Although suppliers have to share the initial
investment, the significance of such programs is that once commercial production
begins, the suppliers automatically get to manufacture and supply components, typically
on an exclusive basis, for the life of an aircraft (which is 35 to 40 years). Therefore, such
programs have the potential to offer a very good return on investment for suppliers.
Mecachrome currently participates in joint development programs with regard to the
Airbus A380 and A400M; although, in recent times, Mecachrome has reduced their
involvement due to current market conditions, and the liquidity crisis, the company is
currently facing.
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 9
Strong and diverse clientele –Thec
ompa
ny
’
ss
t
r
ongc
l
i
e
ntba
s
ereflects t
hec
ompa
ny
’
s
track record. Over the 70+ years of operating experience, the company has built strong
long-standing relationships with several major players in their target markets. They have a
very diverse clientele, ranging from aircraft manufacturers like Boeing, Airbus and
Bombardier, to high-end consumer auto/engine manufacturers like Rolls-Royce, Renault,
Peugeot, BMW and Ferrari, to industrial conglomerates like General Electric.
Mecachrome currently has about 65 customers. Airbus is the oldest (50+ years) and largest
customer, accounting for about 13.5% of total revenues. The company has had over 30
years of relationship with Boeing, Snecma, Renault, and Bombardier.
Source: Company
Mecachrome’
sr
e
ve
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sa
r
ea
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s
owe
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ount
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ormor
e
than 6.5% of total revenues. Its top five customers generate approximately 38.5% of total
revenues.
Sole-source provider of more than 70% of its revenues –Although the aerospace and
automotive parts industries are highly competitive industries, the company operates in a
very niche market due to its focus on high-precision components, which requires a high
degree of design and production expertise. As a result, Mecachrome is the sole-source
provider of more than 70% of their revenues; this is very significant as it shows that the
company has little direct competition for a major portion of its revenues.
The space that Mecachrome currently targets has very high barriers to entry, which is
another reason why it has less direct competition. The following are the main barriers to
entry for suppliers:

Requires a high degree of design and production expertise

Significant time is required to establish customer relationships, and build a strong
reputation in the industry

OEMs have hhigh switching costs –OEMs typically tend to retain their current
suppliers during the life of an aircraft program, as a significant amount of capital and
time is spent by the OEMs with suppliers on the design, manufacture, testing and
certification. Also, changing a supplier might require additional testing and certification,
which could lead to production delays and additional costs for the OEMs

Joint-development programs have even higher barriers to entry as suppliers get
integrated in the design and development process, and become an operational partner of
the OEM for the entire project life cycles
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 10
Note that high barriers to entry are good for Mecachrome, but it also means that it is
tougher for Mecachrome to bid competitively against existing suppliers. Me
c
a
c
hr
ome
’
s
major competitors in the aerospace industry include Groupe Latecoere, Hampson
Industries plc, Vought Aircraft Industries and Magellan Aerospace (TSX: MAL). In the
automotive sector, their main competitors are Albert Weber, Rege Motorenteile GmbH &
Co, Goertz & Schiele, and Behr.
I
nt
hene
xts
e
c
t
i
on,wepr
e
s
e
ntt
hec
ompa
ny
’
st
hr
e
es
e
g
me
nt
s
.
Aerospace –
key growth
driver
The aerospace industry consists of the markets for commercial, regional, business, military
aircraft and spacecraft. Thec
ompa
ny
’
sma
i
nf
oc
usi
sproviding aerostructures (which are
structural components such as fuselages, propulsion systems and wing systems) and engine
components for the commercial and regional jet markets.
Source: Company
The company has long-standing relationships with s
omeoft
hewor
l
d’
sl
e
a
di
nga
e
r
os
pa
c
e
manufacturers, including Airbus, Boeing, Bombardier, Embraer, Safran, Volvo, and Saab
Aerospace. In order to get a perspective, we have presented a few major programs that
Mecachrome is currently involved with.

Airbus - A significant proportion of t
hec
ompa
ny
’
sAirbus revenues comes from
providing components to the A320 family, which i
sAi
r
bus
’be
s
t
-selling jet airliner
family. The company is also a supplier of components for the established A300 and
A330-A340 series. Mecachrome also participates in the joint-development programs for
the A380 passenger jet and the Airbus 400M military transport planes (although the
company has reduced their involvement in these programs in recent times due to the
current market conditions and their liquidity crisis).

Boeing – Mecachrome, an official Boeing partner, was recently awarded supply
contracts on Boe
i
ng
’
snext generation B787, which, according to Boeing, has been the
most successful commercial aviation program launch in history in terms of firm orders.
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 11
Thec
ompany’
si
nvol
ve
me
ntwi
t
hAirbusandBoe
i
ng’
sne
xtge
ne
r
at
i
ona
i
r
c
r
af
t
,the
A380 and B787, respectively, we believe, is another testimonial of Me
c
ac
hr
ome
’
s
technical expertise and strong ties with these players.

Regional market –Mecachrome supplies components to Embraer and Bombardier, two
major players in the regional market, for their successful regional jet programs,
i
nc
l
udi
ngEmbr
a
e
r
’
sERJ
-170 and ERJ-190 jets, and Bomba
r
di
e
r
’
sCRJ
900,CRJ
700
and Global Express jets.

Rolls-Royce –The company supplies engine components for Rolls- Roy
c
e
’
sTr
e
nt900,
Trent 1000, V2500, BR710, BR725, and others.

Major contracts signed in 2008: The company was awarded a 5-year contract with
Sonaca NMF Canada (to manufacture wing planks), signed a US$45 million contract
with Rolls-Royce (to provide, on an exclusive basis, components for the BR725 engine,
powering the new Gulfstream G650), and signed a contract with Pratt & Whitney to
provide the design and manufacturing of a stub wing and a vertical pylon to demonstrate
the potential of the new Geared Turbofan(TM) technology developed by Pratt &
Whitney.
Revenues: The aerospace sector has been the revenue driver for the company in the past
few years. Revenues grew from €61mi
l
l
i
on, to €136mi
l
l
i
on, during FY2004 –07,
reflecting a CAGR of 31%. In FY2007, revenues were up 19% YOY. As a percentage of
total revenues, revenues from this segment grew from 28% in 2004, to 46% in 2007. As of
September 2008, the company had a five-year order backlog of €0.
47bi
l
l
i
on(accounting
for 50% of the total backlogs).
Although the company experienced solid growth in this segment in the past few years,
delays in several major aerospace programs, including the Airbus A380, A400M and
Boeing 787 programs, and the global economic slowdown, started impacting revenues
from this segment in Q3-2008. Revenues in the first half of FY2008, grew by 22%YOY,
but dropped by 2% YOY in Q3-2008. Although we expect revenues to soften in Q4-2008
and FY2009, we believe, revenues from this segment will be the main growth driver in the
long-run. This is based on our positive outlook on the industry, strong five-year order
backlogs, and the c
ompa
ny
’
sf
i
r
m pos
i
t
i
oni
ngi
nt
hei
ndus
try today.
Industry Outlook - The global airline industry had posted net profits of US$12.9 billion in
2007, after six consecutive years of net losses following the 9/11 attacks. The industry was
poised to post profits through the rest of the decade, however, the global financial crisis
and the economic slowdown, offset by a steep drop in oil prices, have dramatically
changed the near-term outlook on the industry. The airline industry is now expected to
record net losses of US$5 and US$2.5 billion in 2008 and 2009, respectively (as shown in
the following charts).
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 12
Industry Profits (US$ billion)
15
10
5
0
2000
2001
2002
2003
2004
2005
2006
2007
2008F
2009F
-5
-10
-15
Source: IATA & ICAO
One of the primary factors that is currently affecting the profitability of airlines is the
significant drop in global air traffic volumes (as shown in the following chart). High oil
prices used to be another major concern for the industry until recently. The current oil price
of below US$40/bbl, we believe, should be able to offset some of the potential loss that is
expected to arise from the decreasing passenger traffic volumes.
The International Monetary Fund (IMF) recently lowered its global GDP growth forecasts
from 3%, to 2.2% in 2009. The IMF revised its GDP growth forecasts for the U.S. and
Europe to -0.7% and -0.5%, respectively, in 2009. China and India are not immune to the
global economic slowdown, as their GDPs are expected to grow at a slower pace of 8.5%
and 6.3%, respectively, in 2009. Although we expect the global economic slowdown to
impact the global airline industry, we have a positive long-term outlook on the industry
primarily because of the strong long-term traffic growth forecasts, and aircraft deliveries
2008 Fundamental Research Corp.
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Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 13
forecasts, as shown in the following section.
According to Rolls Royce, global traffic is expected to grow at about 5% per year during
2007 –26. China and India are expected to experience growth rates of over 8% per year
during the same period.
Rolls-Royce traffic forecast 2007-2026
In terms of aircraft deliveries, the following chart shows that mainline aircraft deliveries
are expected to increase from 15,179 during 1985-2005, to 23,315 during 2007-26.
Similarly, business jets deliveries are expected to increase from 8,081 to 30,388, and
regional aircraft deliveries are expected to increase from 2,778 to 6,558.
Aircraft Deliveries
40,000
30,000
20,000
10,000
Business Jets
Regional Aircraft
1985-2005
Mainline Aircraft
2007-26
Source: Rolls Royce
Rolls Royce estimates that a total of 60,261 aircraft will be delivered during 2007-26
(which includes 42% from North America, 22% from Europe, and 20% from Asia), up
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PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 14
from 26,038 during 1985-2005, reflecting an increase of 131%. This is a significant jump,
and these forecasts, along with the significant drop in oil prices, clearly suggest that the
industry showed improve in the long-run despite a slowdown in the near-term.
Automotive –
Motor Sports,
High-end
Consumer and
Commercial
trucking
Automotive is t
hec
ompa
ny
’
shighest volume business, producing up to 2,000 engine
components daily, including crankshafts, cylinder heads and cylinder blocks for clients,
including Mercedes-AMG, Porsche, Peugeot and Renault.
Source: Company
The company expanded into this segment in the 1970s by entering the motor sports market.
Mecachrome entered the high-end consumer automobile and commercial trucking markets
in the 1990s. In the next section, we look at t
hec
ompa
ny
’
spe
r
f
or
ma
nc
ei
neach of these
segments.
Motor sports –The motor sports market is comprised of several professional racing
series, including Formula 1, GP2 Series, NASCAR and Indy Racing League, as well as
several non-professional leagues, such as Le Mans 24 Hour. Formula One is the most
expensive sports in the world. F1 Racing estimates the spending of all 11 F1 teams to be
about US$2.9 billion. Top teams like Toyota, Ferrari and McLaren are estimated to spend
over US$400 million a year each.
Since entering this market in 1975, Mecachrome has progressed from being a pure
component supplier to an integrated partner of Renault, co-developing and supplying its
complete F1 engines. The company is now the leading independent third-party engine
supplier in F1, with an agreement to supply engines to Renault Sport and Red Bull Racing
teams through the 2009 season. Mecachrome also manufactures engine components for
other F1 constructors, including BMW, Ferrari and Toyota.
Slowdown in F1 - The Fédération I
nt
e
r
na
t
i
ona
l
e de l
’
Aut
omobi
l
e(
FI
A) recently
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 15
implemented a five year freeze on engine development starting 2008, in order to cut
spending, and citing the current engine specification as 'fully developed'. This was a major
setback for the suppliers, as automakers pulled their business from suppliers like
Mecachrome, and started doing the work in-house. As a result, Mecachrome’
sr
e
ve
nue
s
from this segment have softened in recent times. I
na
ddi
t
i
on,Me
c
a
c
hr
ome
’
sl
a
r
g
e
s
t
customer in this segment, Renault, announced it will cut production at five sites, as the
global economic and financial crisis resulted in a 14% YOY drop in October sales.
On a positive note, the Renault F1 team, which apparently literally froze engine
development since the FIA made the announcement, while the other manufacturers
continued development, was recently allowed to make changes to their engine in 2009, in
order to bring its performance on par with the other teams. As a result, in November 2008,
Renault Sport renewed its contract with Mecachrome for three years for the manufacture
and assembly of F1 engines, on an exclusive basis.
Participation in GP2 Series and other races - In addition to F1, the company is the sole
engine supplier to all the 13 teams in the GP2 Series, as well as the GP2 Asia Series. (GP2
has made it mandatory for all of the teams to use the same chassis, engine and tire supplier
so that true driver ability is reflected.) The company is also participating in the Le Mans
Series, through a contract with Peugeot Sport to design, engineer, manufacture and test a
new high-performance turbo-diesel piston engine to replace the current V12 Peugeot
LMP1 engine, which is currently built by Mecachrome.
Proprietary Products - In 2005, the company invested in a high-performance engine
engineering office, Heini Mader Racing, to develop proprietary products for the highperformance engine markets. The LMP1 diesel engine for Peugeot cars for the Le Mans 24
Hour
,t
heGP2As
i
aSe
r
i
e
s
,a
ndt
hec
ompa
ny
’
sc
ont
r
a
c
twi
t
hCNIM to design, test and
manufacture an outboard diesel engine for CNI
M’
sc
ont
r
a
c
twi
t
ht
heFr
e
nc
hAr
mya
nd
NATO (North Atlantic Treaty Organization), are examples of such markets.
High-end Consumer Automobiles and Commercial Trucks - In 1991, upon the
completion of their facility in Sablé, France, the company expanded their automotive
business, leveraging their motor sports engine expertise, into the commercial automotive
sector. Their focus is on high-end consumer automobiles and commercial trucks. The
company has little exposure to the U.S. auto sector.
In the high-end consumer automobile market, the company manufactures engine
components for high-end niche products, including the Porsche Cayenne and MercedesAMG. The company has further diversified its revenues from this segment in recent times
by supplying compressor casings, cylinder heads, and cylinder blocks for commercial
trucks, like Renault Trucks, Knorr-Bremse AG, Deutz AG and Volvo Powertrain.
Mecachrome focuses on the medium and heavy-duty trucks series.
Automotive Revenues: Revenues from this segment were on an increasing trend during
FY2005-07, as they increased from €113 million, to €134 million, reflecting a CAGR of
9%. However, FY2007 revenues were still below FY2004 levels, when revenues were
€142 million. In FY2007, revenues were up 9% YOY. As a percentage of total revenues,
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PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 16
automotive revenues dropped from 64% in 2004, to 45%in 2007, primarily due to the
increasing share from aerospace revenues. As of September 2008, the company had a
strong five year order backlog of €0.
45bi
l
l
i
on(accounting for 48% of the total backlogs).
As a result of the global economic slowdown and its impact on the automotive sector, and
the freeze in Formula 1 engine development, offset by growth in the proprietary products
business relating to the GP2 series and LMP1, automotive revenue growth dropped by 8%
YOY in the first nine months of FY2008, from €100 million to €92million. It is important
to note that the company has minimal exposure to the U.S. auto sector. Most of its major
clients are European automakers, which are in a much better position compared to their
U.S. counterparts. Just like the aerospace segment, although we expect revenues from this
segment to soften in the FY2009, our long-term outlook in this segment is positive
considering the positive long-term outlook on the European auto sector, a
ndt
hec
ompa
ny
’
s
market positioning at this stage.
Industry Outlook –After five years of good growth, Europe's truck-makers are now
facing the crisis affecting the entire industry. For example, Volvo recently announced that
their truck deliveries dropped by 21% YOY in November 2008 (from 24,378 to 19,326).
The most concerning aspect is that the Group reported a negative net order intake in its
single largest market of Europe for the last two months, as the number of cancellations
outstripped orders; which implies that sales will continue to soften in 2009.
Over the long-term, KGP (a consultancy for the Automotive Industry) estimates global
heavy commercial vehicle production will increase at a rate of 4% per annum during 2003
–12.
In terms of passenger car sales, CSM Worldwide projects that 2008 passenger car sales in
Western Europe will fall by 7.4% YOY, from 14.7 million to 13.6 million. The sales
decline is estimated to accelerate to 12.4% in 2009. In the U.S., new light-vehicle sales are
estimate to drop to 13.6 million units in 2008, reflecting a 16% YOY decline from 16.1
million units in 2007 (according to J.D. Power and Associates). The projected 2008 growth
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Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 17
rate for the automotive market in China is less than half of the 24.1% growth achieved in
2007.
Over the longer-term, sales of passenger cars are expected to pick up with an improvement
in the global economy. According to forecasts from Global Insight, sales in Europe are
expected to pick up in 2010, after a huge slump in 2009 (as shown in the chart below).
In summary, all these forecasts clearly indicate a positive long-term outlook for
Me
c
a
c
hr
ome
’
st
a
r
g
e
tma
r
ke
t
s
.
Industrial
Equipment
This segment has contributed about 8-9% of total revenues during 2004-07. Mecachrome
supplies industrial equipment components used in various platforms, such as components
for industrial turbines and clamps for automotive. Their customers include industrial
manufacturers such as affiliates of General Electric and Peugeot. Although industrial
components tend to act as line-filler for its manufacturing facilities, and the company does
not spend significant marketing or development resources towards this business, revenues
from this segment experienced a CAGR of 14% during FY2004-07. Revenues increased
from €17mi
l
l
i
on,to €25mi
l
l
i
ondur
i
ngt
hepe
r
i
od.In FY2007, revenues were up 5%YOY.
The growth increased to 20%YOY in the first nine months of FY2008, as revenues
increased from €19mi
l
l
i
onto €23mi
l
l
i
on. As of September 2008, the company had €0.
02
billion in five year order backlogs, representing 2% of the total order backlogs.
Management
Gérard Casella - Ex - Chairman, President and CEO
Mr. Gérard Casella recently resigned from his management position and the board of
directors. He joined the family-owned business at a young age in 1960 and has played a
major role in the evolution of Mecachrome. Mr. Casella assumed leadership of
Mecachrome in 1971. In 1979, he created Société SILMECA I in Amboise, France and in
1989 he created Mecachrome Holding. In 1991, Mr. Casella inaugurated the Société
A.C.M.S. in Sablé/Sarthe, France and in 1996 structured the specialization of
Me
c
a
c
hr
ome
’
sva
r
i
ouspl
a
nt
s
.Mr
.Ca
s
e
l
l
awa
sr
e
s
pons
i
bl
ef
ort
hec
r
e
a
t
i
onoft
heSoc
i
é
t
é
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 18
Me
c
a
c
hr
ome
’
sva
r
i
ouspl
a
nt
s
.Mr
.Ca
s
e
l
l
awa
sr
e
s
pons
i
bl
ef
ort
hec
r
e
a
t
i
onoft
heSoc
i
é
t
é
SILMECA III in Amboise, France in 1998. Mr. Casella also spearheaded the acquisition of
Aéro Machining in Montréal in 2003, and ofJ
PX a
ndR’
Te
ci
nFr
a
nc
ei
n2003.Mr
.
Casella holds a Bachelor of Science degree from Lycée Pasteur, Neuilly-sur-Seine, France.
Mr. Casella is highly regarded in the global precision-engineering industry and is
r
e
s
pons
i
bl
ef
orMe
c
a
c
hr
ome
’
sove
r
a
l
ls
t
r
a
t
egic direction.
Mr. Christian Jacqmin - President and CEO
Mr. Jacqmin was appointed as the new CEO in November 2008. He has 13 years of
experience in the aerospace industry. From 1995 to 2008, as CEO of the Sonaca Group
based in Belgium, he restructured, developed and transformed the company into an
international group developing cutting-edge technology in the aerospace industry in
Belgium, Brazil, Canada and the U.S.
Stephan Yazedjian - Executive Vice President and CFO
Mr. Yazedjian joined Mecachrome as Chief Financial Officer in October 2003. Prior to
that, he held senior investment banking positions at Scotia Capital Inc. and BMO Nesbitt
Burns Inc. in Montréal. Prior to his investment banking career, Mr. Yazedjian was a VicePresident in Ernst & Youn
g
’
sCor
por
a
t
eFi
na
nc
epr
a
c
t
i
c
ei
nt
he
i
rMont
r
é
a
lo
f
f
i
c
e
.Mr
.
Yazedjian has been a lecturer at McGill University and Concordia University business
schools in finance, accounting and mergers and acquisitions. Mr. Yazedjian is a director of
Alyotech Canada, an IT consulting company with more than 1,000 employees in Canada
and Europe and is the President of the Fundraising Committee for Procure, a non-profit
organization dedicated to the fight against prostate cancer. He is also Vice President of the
Fund Raising Committee of the Fondation Autisme de Montréal, a non-profit organization
dedicated to helping children with autism. Mr. Yazedjian holds a Bachelor of Commerce
degree from McGill University and is a CA, CPA, MBA (McGill University) and is a
Chartered Business Valuator.
Julio De Sousa - Managing Director, Vice President Operations, Mecachrome France
- Julio De Sousa has been the Managing Director Vice President Operations for
Mecachrome France since 1994 and joined Mecachrome as Workshop Supervisor, Société
Silmeca (Amboise) in 1980. Mr. De Sousa has held various positions of increasing
responsibility including Production Supervisor, Production Manager and Plant Manager,
Société Silmeca (Amboise). Mr. De Sousa holds a Masters Degree (DEST — CNAM), and
has industrial management training.
Jean-Pierre Le Pallec - Co-directeur général, Mecachrome France
Mr. Le Pallec joined Mecachrome in 1984 as a Product Engineer. Since then, he has held
positions as Plant Director, Industrial Director, Commercial Director and General Director
of Mecachrome. He currently supports Gérard Casella in coordinating the industrial sites
and plays a key role in maintaining client relationships in the aerospace and automobile
industry for the negotiation and development of new large scale contracts. He is also
responsible for the relationship with bankers of Mecachrome France. Prior to joining
Mecachrome, Mr. Le Pallec worked for 10 years at Fruehauf France as an Engineer and
Director of Production. He also managed the implementation of an industrial site for
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Page 19
Fruehauf in Algeria spanning over 3 years. Mr. Le Pallec is an Engineer CNAM level
(Conservatoire National des Arts et Métiers).
Emmanuel Maes - Vice President, Sales and Key Accounts
Mr. Maes joined Mecachrome Technologies in March 2003 as the Vice President and
Director of Engineering and Design. Mr. Maes has 20 years experience in both the
aerospace and automotive industries with a focus in digital engineering design, product
data management and process engineering. In 1986, Mr. Maes began his career with FM
Engineering, USA as a Mechanical Engineer working in the industrial group of the
company. Two years later, Mr. Maes assumed a senior position within the engineering
group with assignments in Europe. In 1989 he joined L&H Consultants as a key executive
to participate in a very successful start-up of a Canadian based engineering company
specializing in both the aerospace and automotive industries. In 1992, Mr.Maes was
appointed general manager to participate in the negotiations and the sale of the company to
CENITAG Systemhaus. With CENIT AG, Mr. Maes was responsible for the Technical
Services group and international customers. In 1998, Mr. Maes was appointed head of an
engineering design and support team at Ferrari F1 and Ferrari Production. Mr. Maes holds
a
ne
ng
i
ne
e
r
i
ngde
g
r
e
ef
r
om Conc
or
di
aUni
ve
r
s
i
t
ya
ndama
s
t
e
r
’
si
nMa
t
e
r
i
a
lSc
i
e
nc
e
.Mr
.
Maes is also a member of the Board of Directors of Turbo Trac Systems ULC.
Financial
Analysis and
Projections
Solid track record - The company has experienced solid growth in revenues in the past 13
years. Revenues increased from €55 million in FY1996, to €295 million in FY2007;
reflecting a CAGR of 16.4%. During FY2003 –07, revenues increased at a CAGR of
7.8%. The following chart shows segmented revenues. Revenues from the aerospace
division, which was the major revenue driver during the period, had a CAGR of 31%
during FY2004-07.
Revenues(
i
n€mi
l
l
i
ons)
350.0
300.0
250.0
200.0
150.0
100.0
50.0
2004
2005
2006
Aerospace
2007
Automotive
2008E
2009E
Inudstrial
Revenue growth, however, slowed down in the first nine months of FY2008, as a result of
the s
l
owdowni
nt
hec
omp
a
ny
’
ske
ys
e
g
me
nt
s–aerospace and automotive. Revenues in
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 20
the first nine months of FY2008, were up by 4.3% YOY, as revenues grew from €221
million to €230 million. The revenue growth came from a 14% YOY growth in aerospace
revenues, and a 20% YOY growth in industrial revenues, offset by a 8% YOY drop in
automotive revenues. In Q3-2008, aerospace revenues dropped by 2% YOY, while
automotive revenues dropped by 11% YOY.
At the end of September 30, 2008, the company had a five-year order backlog of €0.94
billion (50% from aerospace, 48% in automotive, and 2% from industrial). Order backlog
is a commonly tracked indicator in the aerospace industry due to the long lead times
required to produce aircraft (often several years between order and delivery). Although
customers may unilaterally terminate their orders, without penalty, the fact that,
hi
s
t
or
i
c
a
l
l
y
,a
bout90% ofMe
c
a
c
hr
ome
’
sorder backlogs have been converted to revenues,
indicate that their current order backlog figures are reasonable indicators of the revenue
growth potential of the company.
Our revenue forecasts for FY2008 and FY2009 are €298mi
l
l
i
onand€282mi
l
l
i
on,
respectively.
Above average
industry
margins
Mecachrome enjoys significantly higher margins than the industry averages as a result of
its focus on high-end specialized markets. We believe this is due to a combination of
pricing and creative sourcing. In addition, a shift of production from Europe to the dollar
zone, we believe, has contributed to the high margins. The following chart shows the
c
ompa
ny
’
sma
r
g
i
nss
i
nc
eFY2003.
Margins
40.0%
30.0%
20.0%
10.0%
0.0%
2003
2004
2005
2006
2007
2008(9 mo)
-10.0%
-20.0%
Gross
EBITDA
EBIT
EBT
Net
During FY2003 –06, gross margins ranged between 31 –34% (the industry average gross
margins are 21.4%), but dropped to 28% in FY2007, and 23.5% in the first nine months of
FY2009, due to :
2008 Fundamental Research Corp.
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Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
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Page 21

Ongoing transformation from sub-contractor to Tier 1 integrator –As a Tier 1 integrator,
the company generates additional revenues that have lower margins. This is because a
greater proportion of their costs is represented by material and purchased components.

Increasing prices for raw materials also contributed to the decrease in gross margins Although the company is able to pass-through raw material price increases (typically up
to ±5%) to their clients, these price increases, when added to revenues as well as cost of
goods sold, results in lower gross margins in percentage terms.
Although decreasing gross margins is a concern, it should not be a major concern for the
company as gross profits (in euro terms) have been improving at, basically, no costs.
EBITDA grew by a CAGR of 6%, as revenues grew by 10%, during FY2004-07 EBITDA margins ranged between 19 –25% during FY2003-07, which is also much higher
than the industry average ratio of 12.5%. The drop in gross margins in FY2007, and
FY2008 (9 mo), di
da
f
f
e
c
tt
hec
ompa
ny
’
sEBI
TDA ma
r
g
i
ns
,whi
c
hdr
oppe
dt
o18% and
14% respectively, versus 19% and 18% in comparable periods in previous years.
EBITDA, in euro terms, grew from €44 million to €53 million during FY2004-2007,
reflecting a CAGR of 6%. From FY2003 - FY2008 (9 mo), the company had their best
results in FY2003, when gross and EBITDA margins were 34% and 25%, respectively.
The company had also recorded their highest EBITDA of €54 million in FY2003.
Non-recurring
costs resulted
in huge net
losses in the
past few years
Although EBITDA was positive, the company had negative EBT (excluding unusual nonrecurring items) during FY2004, FY2006, FY2007 and FY2008 (9mo). This was because
the sum of amortization and interest expenses more than offset EBITDA (as a result of
high capital expenditures and debt) in those periods. As a result, the company posted net
losses during all those periods.
During FY2006 and FY2008 (9 mo), the company posted some major asset and inventory
write downs, deferred financing fees (as a result of refinancing long-term debt), corporate
financing activities (associated with the IPO), and costs associated with the cancellation of
grants under the stock option and restricted share unit plans. Specifically, an inventory
write-down (€8.
0mi
l
l
i
on)wa
sa
s
s
oc
i
a
t
e
dwi
t
ht
hec
ompa
ny
’
sstrategic repositioning away
from their joint-development programs. As a result of all these non-recurring charges,
the company posted a net loss of €32 million, €15 million, and €31 million in FY2006,
FY2007 and FY2008 (9 mo), respectively.
Our EPS forecasts for FY2008, and FY2009, are net losses of €43 million (EPS: €1.79) and €20 million (EPS: -€0.84), respectively.
Negative FCF
since FY2004
due to huge
CAPEX
Free cash flows were negative during FY2004 –2008 (9 mo) because t
hec
ompa
ny
’
s
capital expenditures were higher than cash flow from operations. The huge CAPEX were a
result of the c
ompa
ny
’
ssignificant investment in facilities and equipment in the past few
years, including the construction of a state-of-the-art 175,400 square foot facility in
Mirabel, Canada (now leased pursuant to a sale-and-leaseback transaction), and the
establishment of North American engineering offices in Montréal and Toronto.
2008 Fundamental Research Corp.
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Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 22
During FY2003 –FY2008 (9 mo), the company spent a total of €238 million on property,
plant and equipment, acquisitions, intangibles, and development costs, offset by cash
received from the sale of assets. While cash from operations during the period was only
€62 million. The balance was funded by €52 million in net debt, and €140 million in equity
(which also includes the €113 million raised in the IPO in 2007).
The company believes that their facilities have sufficient capacity to service their current
programs, and as a result, expects CAPEX to drop going forward. Mecachrome’
st
a
r
g
e
t
revenues for FY2013 are between €550–600 million. It is estimated that the company will
have to spend an additional €50mi
l
l
i
onin the next three to four years to achieve the
requisite capacity to generate such revenues.
Highly
leveraged
balance sheet
At the end of Q3-2008, the company had €8.1 million in cash, €81 million in working
capital, and about €200 million in long-term debt. The company has credit facilities in the
amount of €75 million; no amount has been drawn from this facility at the end of
September 2008.
Liquidity Analysis
Cash + ST Inv. (in €mi
l
l
i
on
s
)
Working Capital (in €mi
l
l
i
o
ns
)
Current Ratio
Debt / Capital
LT Debt/Capital
Interest Coverage Ratio
2004
13.3
5
1.04
87.1%
63.1%
0.92
2005
8.5
23
1.18
86.2%
66.3%
1.24
2006
31.1
93
1.89
95.1%
91.2%
0.91
2007 2008 (9 mo)
32.3
8.1
111
81
2.19
1.82
65.7%
73.6%
64.8%
73.1%
0.81
0.46
Profitability Analysis
Return on Avg Assets
Return on Avg Equity
Return on Average Invested Capital
2004
-2%
-21%
-3%
2005
0%
5%
1%
2006
-9%
-130%
-12%
2007 2008 (9 mo)
-4%
-8%
-26%
-35%
-5%
-11%
Activity Analysis
Days Inventory Outstanding
Days Accouts Receivable
Days Accouts Payable
Cash Conversion Cycle
2004
79
118
161
37
2005
119
111
167
62
2006
165
87
172
80
2007 2008 (9 mo)
179
56
155
79
The company is significantly leveraged at this time with a high debt to capital of 74% (the
industry average is 33%), and an EBIT interest coverage ratio of 0.5x during the first nine
months of FY2008. We believe the company could have probably kept its debt to capital
lower if (1) it had went public earlier, and raised more capital from equity than from debt;
or (2) spent less on CAPEX (at the compromise of growth).
Although the company has a highly leveraged balance sheet, it is important to note that
most of its debt is long-term debt. About 99% of its total debt of €202 million is long-term
debt (most of which is due in May 2014); which means that the company does not have to
make any significant principal payment in the near-term.
Our models indicate that the company will need about €24 million additional capital
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 23
either, through equity or debt, for its operating and investing activities in the next 12
months.
Liquidity Crisis
The highly leveraged position and t
he s
l
owdown i
nt
he c
ompa
ny
’
sa
e
r
o
s
pa
c
ea
nd
automotive divisions in the second half of FY2008, have put the company in a very tight
cash position.
Defaults on interest payment - The interest payment default has led to cross-defaults in
the company’
s€75million revolving credit facility, therefore, the company is unable to
withdraw any amount from its credit facility.
All members from the founding family resigned from their positions –In July 2008,
Mr. Guillaume Casella (grandson of the founder) resigned as President and Chief
Executive Officer, and in November/December 2008, Mr. Gérard Casella (son of the
founder) and his other two sons, Mr. Arnaud Casella (President of Mecachrome France)
and Mr. Romain Casella (Director) resigned from their management positions and the
board of directors. The company appointed Mr. Christian Jacqmin as President and CEO of
Mecachrome. He was the CEO of the Sonaca Group during 1995 –2008.
Receives
financing
commitments
totalling €30
million –fends
off liquidity
crisis
On December 22, 2008, the company announced that it has received financing
commitments totaling €30mi
l
l
i
on, which includes:
- €20mi
l
l
i
ondebtor-in-possession (DIP) financing facility from FSTQ (they have already
invested about $50 million in the company), and from Aerofund, funds managed by
ACE Management,
- €7mi
l
l
i
oncredit facility from French banks,
- €1mi
l
l
i
onloan from the CIRI (Comité Interministériel de Restructuration Industrielle),
and
- €2mi
l
l
i
onfrom one of its main customers
The financings are subject to certain customary conditions for DIP facilities, including
Court approvals in Canada and France. Our models indicate that the company only needs
€24million to fund their operating and investing activities in the next 12 months.
Therefore, these financings, we believe, will help the company fend off a possible liquidity
crisis, or even bankruptcy.
Actively trying
to refinance /
restructure
The company has so far announced measures to cut annual costs by about €10–€15
million, by reducing its Canadian workforce by about 120 people, and moving some less
complex operations to lower cost Tangier, Morocco. Going forward, the company expects
to further reduce their SG&A by identifying further synergies between their North
American and European operations.
Although the company has yet to announce the details of the proposed €30 million
financing, we believe they could be a combination of debt and convertible debt. As
mentioned earlier, these financings will help the company to come out of an immediate
liquidity crisis, but the company still has to seek measures to reduce its significantly high
debt. We have already discussed what we believe to be the company’
s options are with
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 24
debt. We have already discussed what we believe to be the company’
s options are with
respect to this above.
We would like to explore the possibility of a bail out from the French/Quebec governments
further as:

Ae
r
os
pa
c
ei
sCa
na
da
’
sf
ourth largest industry in terms of research and development
investment (Source: Investissement Québec). Quebec, which accounts for almost
62% of Canada’
st
ot
a
la
e
r
os
pa
c
e pr
oduc
t
i
on, has 240 aerospace companies
employing 39,000 people, half of Canada
’
st
ot
a
la
e
r
os
pa
c
ewor
kf
or
c
e
. (Source:
Ministry of Economic Development, Innovation and Export Trade, 2006). The
aerospace industry, one of the leading export industries in Quebec, exports about
80% of its aerospace output.
The following is a list of the top aerospace companies in Quebec according to the
Ministry of Economic Development, Innovation and Export Trade, which also
includes Mecachrome.
1
2
3
4
5
6
7
8
9
10
11
12
13
Company
Bombardier Aerospace
Pratt & Whitney Canada
CAE
ACTS
Bell Helicopter Textron
Rolls-Royce Canada
L3 Communications (L-3 MAS)
Esterline/CMC Electronics
Héroux-Devtek
GE Canada Aviation
MDA Space
Messier-Dowty
Mecachrome
Employees in Quebec (2007)
12,440
5880
3700
2685
2200
1500
975
860
840
740
300
260
140
Source: Ministry of Economic Development, Innovation and Exports
The Canadian government has not yet announced any plans to bail out the aerospace
industry. However, it seems that the government is proposing a bailout package for
the auto sector, which could amount to approximately 20% of the recently proposed
US$17.4 billion U.S. proposal.

 In Canada, a coalition party, formed by three opposition parties, including the
Liberals, New Democratic Party (NDP), and the Quebec Separatist Bloc Quebecois,
is trying to bring down the current government, run by the Conservative Party of
Canada, through a vote of non-confidence. This move from the opposition parties
was instigated by Finance Minister Jim Flaherty's economic update, which lacked an
economic stimulus package. We believe Me
c
a
c
hr
ome
’
sc
ha
nc
e
sofr
e
c
e
i
vi
ng a
financial aid improves if the coalition party comes into power because:
- The coalition party is more likely to implement a larger stimulus package
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 25
- The coalition party is more likely to help troubled companies in Quebec, as the
party includes the Quebec Separatist Bloc Quebecois and Liberals (the current
government of Quebec)
The Governor General, upon the request of the Prime Minister, Stephen Harper, has
suspended parliament until January 26; which has delayed a possible change in the
government.

 The French government has clearly shown signs that it is willing to bail out major
companies in crisis. The French President, Nicolas Sarkozy, has repeatedly insisted
that France will not allow its car industry to fall victim to the economic crisis. In
early December, the president announced a €26 billion economic stimulus plan that
provided for billions in aid for the struggling car and construction industries. We
believe, the most recent bail out plan announced by the U.S. will encourage
European governments to do the same to their industries.
Valuation
Our Discounted Cash Flow (DCF) valuation on the company is $2.49 per share. A
summary of our model is shown below.
DCF Valuation Model
FFO
Investment in WC
CFO
CAPEX
FCF
PV
2008-Q4E
€25
.
5
(€2.
7)
€22
.
8
(€6.
0)
€16
.
8
€16
.
8
2009E
€2
8.
1
(€6.
5)
€2
1.
7
(€2
5.
0)
(€3.
3)
(€3.
0)
2010
€2
7.
5
€1.
7
€2
9.
2
(€1
5.
0
)
€1
4.
2
€1
1.
4
2011
€29
.
1
(€5
.
5)
€23
.
6
(€12
.
5)
€11
.
1
€8
.
0
2012
€31
.
2
(€7.
0)
€24
.
2
(€10
.
0)
€14
.
2
€9.
2
2013
€3
3.
7
(€7.
6)
€2
6.
0
(€1
0.
0)
€1
6.
0
€9.
3
FFO
Investment in WC
CFO
CAPEX
FCF
PV
2014
€36
.
4
(€8.
3)
€28
.
1
(€10
.
0)
€18
.
1
€9.
4
2015
€3
9.
5
(€9.
0)
€3
0.
5
(€1
0.
0)
€2
0.
5
€9.
6
2016
€4
3.
0
(€9.
8
)
€3
3.
2
(€1
0.
0
)
€2
3.
2
€9.
7
2017
€45
.
3
(€6
.
7)
€38
.
7
(€10
.
0)
€28
.
7
€10
.
8
2018
€48
.
5
(€7.
0)
€41
.
5
(€10
.
0)
€31
.
5
€10
.
6
2019
€5
1.
2
(€7.
3)
€4
3.
9
(€1
0.
0)
€3
3.
9
€13
4.
5
Discount Rate
Terminal Growth Rate
Total PV
Cash - Debt
Equity Value
Equity Value (C$)
Shares O/S (dil)
Value per share
2008 Fundamental Research Corp.
11.5%
3%
€2
36
.
4
(€1
93
.
8)
€42
.
5
$59.53
€2
3.
9
$2.49
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 26
Our model used a weighted average cost of capital of 11.5%; which was calculated as
shown in the following table:
Weighted Average Cost of Capital
Cost of Equity
13.9%
Cost of Debt
10%
Debt/Capital LT Forecast
33%
WACC
11 .5%
We also use a comparables valuation model to value MCH which clearly indicates that the
c
ompa
ny
’
ss
ha
r
e
sa
r
eunde
r
v
a
l
ue
da
tc
ur
r
e
ntpr
i
c
el
e
ve
l
s
.
Company
Symbol
1 Avcorp Industries Inc.
TSX:AVP
2 First Aviation Services Inc.
OTCPK:FAVS
3 Northstar Aerospace Inc.
TSX:NAS
NasdaqGS:LMI
4 LMI Aerospace Inc.
LSE:HAMP
5 Hampson Industries plc
(LSE:HAMP) International
6 Mecachrome
TSX: MCH
TSX:MAL
7 Magellan Aerospace Corp.
Societe Industrie d'Aviation
ENXTPA:LAT
8 (TSX:MAL)
Average (excl. outliers)
Industry (Aerospae and Defense)
Revenues
TEV /
(C$ mm) LTM Revenues
$121.3
0.33
$144.9
0.25
$211.6
0.39
$294.6
0.56
$346.5
1.55
$516.9
0.56
$661.8
0.41
$905.5
0.82
0.61
0.70
TEV /
LTM EBITDA
10.12
21.76
3.59
3.55
8.30
4.69
4.33
12.15
6.68
5.50
P/B
1.19
0.64
0.56
2.00
1.52
0.07
0.23
0.25
0.81
1.70
Source: Capital IQ and FRC
As shown in the table above, Me
c
a
c
hr
ome
’
ss
ha
r
e
sa
r
et
r
a
di
nga
ta
n EV/LTM Revenues
and EV/LTM EBITDA of 0.56 of 4.69, respectively, while its peers trade at 0.61 and 6.68,
and the industry (aerospace and defence) trades at 0.70 and 5.50, respectively.
Rating
We believe the announcement on December 22, 2008, with regard to the receipt of
financing commitments have pulled the company out of a possible liquidity crisis, and
have lowered its overall risks. We believe the company has sound fundamentals, and
is well positioned in the market for long-term growth, despite a slowdown in the nearterm. The
r
e
f
or
e
,bas
e
d on our val
uat
i
on mode
l
sand r
e
vi
e
w oft
he c
ompany’
s
fundamentals, we initiate coverage on Mecachrome with a BUY rating, and a fair
value estimate of $2.50 per share.
Risks
The following risks, though not exhaustive, may cause our estimates to differ from actual
results:

Liquidity risks persist because of its highly leveraged balance sheet.

A low share price and downgraded credit rating will negatively impact equity or debt
financing.

A reduction in outsourcing by OEMs or tier 1 integrators could have an adverse effect
on t
hec
ompa
ny
’
sl
ong
-term prospects.

High barriers to entry make it tougher for Mecachrome to bid competitively against
existing suppliers.

Cancellations or delays in launching new programs could have an adverse effect.
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 27

Foreign currency risks –Currently, about 96% of its revenues come from Europe, and
t
her
e
ma
i
ni
ng4% c
ome
sf
r
om Nor
t
hAme
r
i
c
a
.Thec
ompa
ny
’
sl
ong
-term debt (most of
t
hec
ompa
ny
’
sl
ong
-term debt of €200mi
l
l
i
ona
r
ede
nomi
na
t
e
di
ne
ur
os
)a
c
t
sa
sa
n
automatic hedge against its revenues in euros.

Cyclical revenues –Thec
ompa
ny
’
saerospace business is cyclical and is sensitive to
general economic conditions and other factors.
We have rated the shares Risk 4 (Speculative).
2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 28
Appendix
STATEMENTS OF OPERATIONS
(in EUR)
2004
2005
2006
2007
2008E
2009E
Revenues
Cost Of Goods Sold
Gross Profit
220.1
152.4
67.7
231.3
157.4
73.9
261.8
179.2
82.6
295.0
212.9
82.1
298.0
228.4
69.6
282.3
215.9
66.3
Selling General & Admin Exp.
23.7
28.0
31.8
29.3
30.0
27.1
EBITDA
44.0
45.9
50.8
52.7
39.6
39.2
Dep., Amort. of Goodwill and Intangibles
Operating Income
36.4
7.5
28.5
17.4
29.6
21.1
32.1
20.6
33.7
5.8
31.3
8.0
Interest Expense
Interest and Invest. Income
(8.1)
0.3
(14.0)
0.4
(23.3)
0.5
(25.4)
0.7
EBT before unusual items
(0.3)
3.8
(1.7)
(4.1)
(19.7)
Currency Exchange Gains (Loss)
Other Non-Operating Inc. (Exp.)
Restructuring Charges
Impairment of Goodwill
Asset Writedown
Other Unusual Items
EBT
(0.2)
(0.2)
(2.4)
(3.1)
5.3
(0.7)
(1.9)
(0.4)
6.1
(5.5)
(1.3)
(9.1)
(13.6)
(31.2)
4.7
(2.7)
(3.2)
(9.7)
(14.9)
0.4
(0.6)
(4.7)
(2.4)
(10.2)
(4.7)
(41.9)
Income Tax Expense
Minority Int. in Earnings
Net Income
2.6
(0.0)
(5.7)
4.7
0.1
1.5
1.1
0.0
(32.3)
0.5
(0.0)
(15.4)
1.0
0.0
(42.9)
2008 Fundamental Research Corp.
www.researchfrc.com
(26.2)
0.7
(25.9)
0.0
(18.0)
(0.6)
(18.6)
1.4
0.0
(20.0)
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
BALANCE SHEETS
(in EUR)
Page 29
2004
2005
2006
2007
2008E
2009E
13.3
13.3
8.5
8.5
31.1
31.1
15.0
17.3
32.3
0.1
5.9
0.1
5.9
71.4
69.2
64.5
49.5
53.6
50.8
33.0
1.9
3.9
123.4
69.5
3.7
3.1
154.0
93.0
3.1
4.6
196.4
115.4
2.6
3.8
203.7
118.8
2.6
4.6
179.7
123.1
2.6
4.4
186.7
127.4
146.5
141.2
147.4
137.1
133.3
Go odwill
Other Intangibles
Loans Receivable Long-Term
Deferred T ax Assets, LT
Deferred Charges, LT
Other Long-Term Assets
Total Assets
2.4
1.7
10.4
2.2
15.3
9.1
291.9
2.9
31.9
2.0
4.2
7.2
348.7
2.6
27.5
2.7
11.8
382.2
2.8
28.5
-0.1
25.0
-407.4
0.4
26.6
0.4
24.6
368.9
370.2
LIABILITIES
Accounts Payable
Short-term Borrowings
Curr. Port. of LT Debt
Curr. Port. of Cap. Leases
Unearned Revenue, Current
Def. Tax Liability, Curr.
Total Current Liabilities
67.1
22.5
27.8
0
1.5
118.8
77.3
37.5
14.2
0
1.5
130.6
91.8
89.0
91.4
86.4
10.7
0.9
0.5
103.8
1.8
0.9
0.9
0.3
93.0
Long-T erm Debt
Capital Leases
Minority Interest
Unearned Revenue, N on-Current
Pension & Other Po st-Retire. Benefits
Def. Tax Liability, Non-Curr.
Other Non-Current Liabilities
Total Liabilities
132.2
0
0.2
3.6
3.6
6.6
265.0
172.1
0
0.2
3.9
6.0
312.8
253.0
0
0.2
3.8
6.1
1.6
368.6
199.5
1.4
0.0
-3.2
3.6
0.5
301.1
26.2
26.2
37.1
0.7
37.8
48.6
48.6
0.1
0.5
0.2
0.7
0.1
(1.6)
(0.4)
(1.9)
2.7
(39.9)
2.2
(35.0)
26.9
35.9
13.7
291.9
348.7
382.2
ASSETS
Cash And Equivalents
Short T erm Investments
Total Cash & ST Investments
Total Receivables
Inventory
Deferred T ax Assets, Curr.
Other Current A ssets
Total Current Assets
N et Property, Plant & Equipm ent
Pref. Stock, Redeemable
Pref. Stock, Convertible
Pref. Stock, Other
Total Pref. Equity
Common Stock
Additional Paid In Capital
Retained Earnings
T reasury Stock
Comprehensive Inc. and Other
Total Common Equity
Total Equity
Total Liabilities And Equity
2008 Fundamental Research Corp.
161.3
0.3
(54.2)
- (1.2)
106.3
0.1
25.0
0.1
25.0
-
1.1
0.6
0.9
0.3
94.4
0.9
0.6
0.9
0.3
89.2
200.3
0.8
0.0
227.4
0.1
0.0
-
3.2
3.6
0.5
302.8
3.2
3.6
0.5
324.0
-
-
161.3
5.0
(97.1)
161.3
5.0
(117.1)
-
(3.1)
66.1
(3.1)
46.1
106.3
66.1
46.1
407.4
368.9
370.2
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 30
STATEMENTS OF CASH FLOWS
(in EUR)
2004
2005
2006
2007
Net Income
(5.7)
1.5
(32.3)
(15.4)
(42.9)
Dep., Amort. of Goodwill and Intangibles
Other Amortization
(Gain) Loss From Sale Of Assets
Asset Writedown & Restructuring Costs
Stock-Based Compensation
Minority Int. in Earnings
Other Operating Activities
36.3
0.3
0.1
0.0
1.0
32.0
27.8
3.2
0.0
(0.1)
(6.6)
25.8
29.6
15.1
(0.0)
9.1
(0.0)
8.3
29.8
32.1
4.3
(0.3)
0.6
0.0
(1.0)
20.3
33.7
(7.5)
(3.5)
6.2
(6.3)
(0.1)
20.8
(2.4)
(27.0)
(4.5)
1.1
(6.9)
5.3
(27.6)
6.0
(0.6)
(0.7)
12.3
(25.6)
2.7
(3.2)
(0.2)
(18.0)
(44.4)
(67.9)
0.0
(1.0)
(1.5)
(10.6)
(81.0)
142.6
142.6
(0.6)
(106.7)
(107.3)
2008E
2009E
(20.0)
31.3
12.5
4.7
(0.0)
(0.4)
7.7
(0.0)
15.4
(22.1)
(6.0)
0.04
(1.1)
6.6
(4.2)
(3.3)
2.3
-
2.8
(4.3)
(5.0)
-
(31.3)
12.2
(0.4)
(5.1)
(24.6)
(36.4)
3.7
(3.5)
(16.9)
(12.7)
(65.8)
(32.3)
1.2
(25.0)
(0.5)
17.3
(0.5)
(0.8)
(15.1)
0.2
(25.3)
96.9
96.9
(22.9)
(22.9)
269.7
269.7
(241.3)
(241.3)
16.2
16.2
(83.9)
(83.9)
2.0
28.0
2.00
28.00
(2.7)
(2.7)
(1.7)
(1.7)
0.1
-
10.2
-
16.3
113.0
-
-
(3.3)
(3.3)
(5.0)
(5.0)
-
-
-
Other Financing Activities
(11.1)
(2.4)
-
(0.9)
Cash from Financing
24.3
78.4
39.7
44.4
(1.6)
(2.3)
26.3
0.01
0.8
4.8
(4.8)
(4.7)
22.6
(1.4)
(16.1)
(14.9)
5.8
Change in Acc. Receivable
Change In Inventories
Change in Acc. Payable
Change in Unearned Rev.
Change in Other Net Operating Assets
Cash from Ops.
Capital Expenditure
Sale of Property, Plant, and Equipment
Cash Acquisitions
Divestitures
Sale (Purchase) of Intangible assets
Invest. in Marketable & Equity Securt.
Net (Inc.) Dec. in Loans Originated/Sold
Other Investing Activities
Cash from Investing
Short Term Debt Issued
Long-Term Debt Issued
Total Debt Issued
Short Term Debt Repaid
Long-Term Debt Repaid
Total Debt Repaid
Issuance of Common Stock
Issuance of Pref. Stock
Common and/or Pref. Dividends Paid
Total Dividends Paid
Foreign Exchange Rate Adj.
Net Change in Cash
2008 Fundamental Research Corp.
www.researchfrc.com
11.3
2.5
4.8
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Mecachrome International Inc. (TSX: MCH) –Initiating Coverage
Page 31
Buy –Annual expected rate of return exceeds 12% or the expected return is commensurate with risk
Hold –Annual expected rate of return is between 5% and 12%
Sell –Annual expected rate of return is below 5% or the expected return is not commensurate with risk
Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events.
Fundamental Research Corp. Risk Rating Scale:
1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a
regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of
profitability. The capital structure is conservative with little or no debt.
2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are
relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated
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structure is conservative with little to modest use of debt.
3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and
cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use
is in line with industry averages, and coverage ratios are sufficient.
4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up
mode or in a turnaround situation. These companies should be considered speculative.
5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and
unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity
issues, and may rely on external funding. These stocks are considered highly speculative.
Disclaimers and Disclosure
The opinions expressed in this report are the true opinions o
ft
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and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or
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FRC”do
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own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business
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2008 Fundamental Research Corp.
www.researchfrc.com
Siddharth Rajeev, B.Tech, MBA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT