STOCKWATCH - Erste Lowers Recommendation on Romania's Turbomecanica to "Reduce" from "Accumulate"

"We have downgraded our Turbomecanica recommendation from Accumulate to Reduce and cut our target price from [Romanian lei] RON 0.4 to RON 0.076, due to the sharp deterioration of the company's financial outlook," Erste CEE Equity Research said in a statement.

"A number of surprising developments have come up in just six months, dampening the company's prospects," it added.

Turbomecanica last traded 1.25% down at 0.079 lei on the Bucharest Stock Exchange by 1046 GMT.

"The all-time-high loss of 20 million lei recorded in [the first three quarters of 2008] reflected the postponement of the maintenance contract with the Ministry of Defense. The outlook for this contract, which represents more than 80% of the revamping and overhauling business line, is the main risk factor for the company after 2012, when it is possible that Romania will renew its fighter aircraft fleet," Erste said.

It added that the delays in assimilating into production new parts and subassemblies, as well as in restructuring the production cycle (via switching to lean manufacturing), suggest management weakness in organising the production cycle.

According to Erste's Research department, Turbomecanica has missed the best period to relocate its activity - "i.e. before the real estate market became completely stuck" - while the higher costs of financing its long cash cycle will also affect profitability in the coming years.

"Our main forecast scenario assumes that the company will manage to maintain its business with the Ministry of Defense, but with a substantial contraction starting in 2012." For the manufacturing business line, Erste also sees a slight decrease induced by the international financial crisis, which will result in a decrease in demand for aircraft parts.

Turbomecanica's market capitalisation has dropped below 10 million euro, which is significantly below the value of the company's properties, even in the context of the real estate market downturn, the bank added.

(1 euro = 3.9317 Romanian lei)