Small Cap. Research Report / Initiation of Coverage (update)

WWA Group, Inc.

BUY RATING

Opinion & Recommendation: 
Sterling Investment Services is updating its report initiating coverage on the shares of WWA Group, Inc. (WWAG:  OTC BB) with a Buy Rating to include an expanded description of its business operations.  We feel the company’s shares are undervalued at the current prices and are suitable for accumulation at price levels up to the $1.50/share range.  We believe there is a realistic probability that the company’s per share price level could move significantly closer to the $3.00/share level which would give it a valuation comparable to the industry comps we have identified within this report. 

Company Description: 
WWA Group is an auctioneer and dealer in heavy industrial construction equipment.  They primarily operate from their facilities in the Jebel Ali Free Zone, Dubai, United Arab Emirates. In addition to conducting auctions from its main location,  it also conducts auctions in other locations throughout the world.  Between March of 2001 and December 31, 2007 the company held 35 large un-reserved equipment auctions and 23 video and internet auctions from Dubai and Doha, Qatar.  Gross auction sales from the primary locations have reached over $600 million during this period, in addition to over $200 million in gross auction sales realized from other auction locations where WWA Group operates in joint ventures or franchise relationships. Equipment auctioned in Dubai and Doha included more than 35,000 items from 4,000 consignors that were sold to over 6,000 bidders.

WWA Group’s primary auctioned items include mobile and stationary earthmoving and construction equipment such as crawler tractors, excavators, wheel loaders, cranes, trucks and trailers, generators, compressors, agricultural tractors, and forklifts. Heavy construction equipment of this nature can be can be maintained almost indefinitely and has a near unlimited life expectancy.  Much of the equipment can be used in multiple industries and in diverse geographic locations. WWA Group also sell light vehicles and other related items such as boats and motorcycles. The company generates commission and service income from these auctions that comprise a large portion of its total gross operating revenue.

The company also owns and charters a shipping vessel, the M/V Iron Butterfly, through its subsidiary Crown Diamond Holdings.  The ship is 100 meters long and designed to carry heavy construction equipment.  It has been chartered to a freight forwarding company in the region and is chartered through the end of 2009.  The company also owns a 35% interest in a limestone quarry in the United  Arab Emirates. 

Financial Highlights:   *

*          Source:  2007 Form 10-K filed by WWAG with the SEC

The company has shown an impressive growth rate from 2006 to 2007.  With sales increasing over 50% and net operating income increasing over 90%.  In addition to this,  the assets and shareholders equity of the company has grown at a faster rate than its debt levels.  We find these results to be very positive, and an indication that the company is well managed. 

Recent Developments:
WWA Group recently reported its 1st quarter results.  While the company posted a slight decrease in revenue it was able to post a slight profit in the 1st quarter of 2008 compared to a moderate loss in the 1st quarter of 2007.  We view this as evidence of solid financial management of the company, and evidence of a strong management team. 

Additionally in May of this year,  WWA Group announced that the SEC declared effective a registration statement filed late last year.  This statement covered shares and warrants that were issued in a private placement completed in September of 2007.  There were just under 600,000 warrants covered in the registration statement.  These warrants exercise at just over $1.00 per share. 

Industry: 
The company’s primary target markets within that marketplace are the used construction, transportation and agricultural equipment sectors.  The sales of equipment within this market segment is largely a fragmented market.  Industry analysts estimate that there are approximately $1 trillion of used industrial equipment and construction equipment of the type sold by the company circulation worldwide, and that around $100 billion of that equipment changes ownership each year.  Of this total, only a fraction is currently traded through auctions, with the majority being sold directly by the owner or through truck and equipment dealers and brokers.

The U.S. Association of Equipment Manufacturers reports that 2007 exports of heavy equipment reached $17.2 billion, an increase of over 26% above the 2006 figure. Exports to Africa rose 67%, while exports to Asia grew 57%, shipments to Europe grew 50%, and Latin American purchases grew 20%. The Freedonia Group (www.freedoniagroup.com), a Cleveland-based industrial market research firm, projects that worldwide demand for heavy construction equipment will rise by an average of 5.4% annually through 2009.  This clearly indicates that the demand for this equipment outside of the United States continues to remain strong despite the potential slow down in the US economy. 

Comparables: *

*          All figures are based upon trailing 12 months.
**        GoIndustry, plc. Trades on the London Stock Exchange.  Figures in the table have been converted to $ from British Pounds

WWA Group has the lowest valuation of the four publicly traded auction companies we were able to locate.  Based upon the traditional valuation methods of Price to Earnings,  Price to Sales,  and Price to Book;  WWA Group has the lowest valuation of all four (4) companies.  We continue to believe that the Price to Earnings ratio (P/E ratio) is the best and most reliable valuation multiple for companies within an industry that is showing solid and consistent profits.  The average P/E ratio for the comparable companies is 35 times earnings.  If the share of WWA Group were to trade with the average P/E ratio of the above comparables,  the price of WWA Group shares would be approximately $3.00 per share.

Our Analysis:
The demand for construction equipment is largely influenced by construction spending.  Very simply put the greater the number of construction projects,  the greater the need for equipment.  Many of the very large construction companies will acquire equipment for a project and then dispose of the equipment once the project has been completed.   This allows these companies to preserve their cash and maintain flexibility in preparing to acquire the next set of construction profits.  This process is duly beneficial to WWA Group as companies will need the services of an equipment auction company when they want to acquire equipment and when they want to dispose of equipment.  In short companies such as WWA Group benefit from both the up and the down cycles in the construction industry. 

WWA Group is currently operating in a economically strong geographic region.  The U.S. Energy Information Agency, using OPEC data, reports that oil export receipts for the U.A.E., Qatar, Kuwait, and Saudi Arabia reached $300 billion in 2006 and grew to $323 billion in 2007. Natural gas represented an additional revenue source, with leading producer Qatar generating over $12 billion in gas export revenues in 2007.  The continuing environment of high oil prices has driven rapid economic growth.

The beneficiaries of the oil price boom are investing the proceeds in new infrastructure, catching up from a decade of neglect during the oil glut of the 1990s. MEED Projects, the project-tracking venture of the authoritative Middle East Economic Digest, announced on March 31, 2008 that projects now being tracked in the GCC region are valued at over $2 trillion, a 40% increase in one year. Since the threshold for inclusion in the MEED Projects database is $50 million, thousands of smaller but still significant projects are not included in this figure:  This expanding business environment appears set to continue for years. The IMF report cited above comments that “Envisaged spending plans imply continued prudent management of oil revenue in the region as a whole”, and adds that “The increased spending can be financed easily, even if oil prices were to decline significantly.”  All indications are that construction activities in the oil producing nations will continue to be strong for many years to come. This heavy activity should translate into a heavy volume of equipment auctions and trading,  which should benefit WWA Group for quite some time to come. 

We would like to point out that while the company primarily operates in the Persian Gulf region,  there is very little that prevents the company from obtaining wide spread geographic expansion.  The company could very easily set up facilities elsewhere throughout the world or within the United States.  In fact many auction companies within this industry conduct the majority of their auctions outside of their primary location. 

We think that the shares of WWA Group will benefit from increased construction spending and they are an attractive way to benefit from the current construction boom and could still see upside appreciation in the event of a contraction in construction spending. 

For additional information on WWA Group please click (here)

Disclaimer: The Sterling Investments series of newsletters is produced by Sterling Investment Services, Inc. All information used in the production has been obtained from sources believed to be reliable and accurate.  Sterling Investment Services does not warrant or assume any liability for inaccuracy of the information used to produce our publications.  To receive further information on these services please visit our web page at: www.sterlinginvestments.com If you would like to contact us our fax # is (404)-816-8830 Email address is: enelson@sterlinginvestments.com   Sterling Investment Services may hold positions in the securities recommended or may be providing consulting services to the companies mentioned within this report.  Sterling Investment Services, Inc. has not been paid any fee for  the production of this report.  However in the future,  Sterling Investment Services may charge fees for the production of follow up reports or services. Additionally affiliates of Sterling Investment Services may provided services to the company mention in this report in return for either cash or stock compensation.