BULL POINTS:
■ Growing aviation division
■ Increase in handling contracts
■ Impressive cash conversion
■ Share price well below sum-of-the-parts value
BEAR POINTS:
■ Over capacity at UK airports
■ Distribution in long-term decline
At first glance, John Menzies looks like an odd mix of opposites, combining its traditional newspaper and magazines distribution business with airport cargo and ground handling. But it's exactly this combination of a steady, cash-generative operation and a growing aviation business that we deem attractive, especially as the shares look lowly rated.
| IC TIP RATING | |
|---|---|
| Tip style | Value |
| Risk rating | Medium |
| Timescale | Long term |
| What do these mean? Find out in our | |
In the first half of 2010, aviation operating profits more than doubled from £4m to £9.1m, as cargo volumes bounced back from last year's nadir. This sky-high performance came despite the effects of the Icelandic volcano, which cost Menzies £2.5m. The business won a net 40 contracts in the first six months - 56 won and 16 lost - but those lost were predominantly due to the termination of routes. Crucially, the group signed its first deal with a domestic carrier in India, Kingfisher Airlines, handling 360 flights a month out of Hyderabad. Further, management secured a £70m five-year contract with Lufthansa/BMI at Heathrow, which amounts to approximately 100 flights per day, giving Menzies a strong position.
Unfortunately, structural issues with cargo handling persist within the industry, with over-capacity at the major UK airports. This could lead to a price war among competitors, which would hit profits. But a focus on operational efficiency - with new IT systems monitoring attendance, rostering, and safety and security - has helped to deliver a "first class service," according to Menzies' bosses. In turn, this has kept clients happy and means management is confident about gaining new ones.
| ORD PRICE: | 429p | MARKET VALUE: | £256m | |
| TOUCH: | 425-429p | 12-MONTH HIGH: | 468p | LOW: 295p |
| DIVIDEND YIELD: | 3.5% | PE RATIO: | 8 | |
| NET ASSET VALUE: | 88p | NET DEBT: | 231% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2006 | 1.45 | 35.6 | 46.4 | 20.5 |
| 2007 | 1.54 | 31.8 | 44.2 | 25.6 |
| 2008 | 1.67 | 9.9 | -2.0 | 7.6 |
| 2009 | 1.73 | 22.0 | 25.8 | 8.0 |
| 2010* | 1.85 | 40.8 | 52.9 | 15.0 |
| % change | +7 | +85 | +105 | +88 |
Normal market size: 750 Matched bargain trading Beta: 0.8 *Brewin Dolphin estimates | ||||
Admittedly, the distribution business is in long-term decline as newspaper and magazine sales continue to suffer from the march of technology. But Menzies has just increased its market share of the commercial paper-round after a competitor, Dawsons, went into administration in 2009. Approximately £180m of additional revenues were won, of which £22m is still to be integrated, with the full effect expected in 2011. After the collapse of that rival, there are now just two big players distributing print media - Menzies and Smiths News - and it's likely to stay that way for the foreseeable future, providing a stable environment.
The group's conversion of operating profits into cash should also hearten investors, at 139 per cent in 2009. City analysts think the conversion rate should stay above the 100 per cent mark for the next few years as the distribution business is very cash generative. And, having previously burnt cash quite quickly due to start-up costs in new regions such as India, the aviation division is also expected to produce strong cashflow, particularly as management takes advantage of operating leases rather than investing in kit upfront.
