As regular readers will be aware I have been a fan of the company all year, having first flagged up the investment case when the share price was 310p ('A share ready to take off', 7 January 2013). At the time Air Partner was a classic recovery play and one that provided us with a tantalising rock solid 6 per cent dividend yield. For good measure the company was being valued on a bargain basement 6.5 times earnings estimates net of cash.
I subsequently reiterated the advice when the price was 380p ('Get ready for take-off', 7 August 2013) and again at 445p ahead of the full-year results to end July ('Flying high', 17 September 2013). At the time I upgraded my fair value price target to 530p, a level that was hit yesterday. We have also banked total dividends of 20.5p a share this year, having locked into that bumper 6 per cent yield in January. This means the holding has provided a total return of 77 per cent, easily outperforming the FTSE SmallCap index which has produced a total return of 27 per cent in the same ten month period.
So, with my target price hit, it makes sense to take another look at the investment case to ascertain whether there is further share price upside even after taking into account the stellar share price performance this year.
Flying high
Last month's full-year results were certainly positive enough as Air Partner reported a 31 per cent uplift in pre-tax profit to £4.2m on slightly lower revenues of £221m. That partly reflects an anticipated fall in freight revenues which was more than offset by bumper growth from the key private and commercial jet broking divisions. In fact, turnover from the private jets business soared 22 per cent to £53.6m and fuelled a near 50 per cent rise in underlying profits from the segment to £1.49m.
It was also clear that Air Partner's focus on North America and Europe has been generating new opportunities for revenue growth, which management had predicted. In the US, sales of the company's JetCard quadrupled, albeit from a low base, and the company sold its first $1m JetCard. Importantly, renewals are up so clients are happy continuing to do business with the company. In fact, activity is at record levels buoyed by new initiatives that include the launch of a new corporate card to offer customers day return flights.
Air Partner's commercial jet division has been gaining altitude, too, and delivered a bumper 46 per cent increase in underlying profits before tax to £2.3m on a 4 per cent rise in revenues to £145m. This mainly reflects new business wins in the higher margin tour operator, sport, automotive and oil & gas sectors and less work for governments and in the conference market. Client numbers in the oil & gas segment have surged 50 per cent in the past year alone and a number of large contract wins helped drive revenues from tour operators up by a third. Since the spring, Air Partner has launched flying programmes for Silver Ski, Olympic, Sunvil Holidays and GIC.
The US operation is also a key driver. Revenues from the region have been in ascent, and sharply too, as the economy recovers and corporations ease their purse strings. It's only realistic to expect further growth in the region for Air Partner's bespoke charters of airliners seating 20 or more passengers.
Scope for a higher rating
Following earlier earnings upgrades, analyst Edward Stanford at broker Oriel Securities expects Air Partner to increase pre-tax profits to around £4.4m in the financial year to July 2014. On that basis, expect EPS on continuing operations of 27.7p, which means the full-year dividend of 20.05p, up from 18.2p in the year just ended, is covered almost 1.4 times.
The board has been confident enough to raise the payout by 10 per cent for the past two years and I would not be surprised at all to see it raised by the same amount again in the current financial year. Analysts at Liberum expect something similar, pencilling in a payout of 22p a share. On that basis, the prospective yield is a market beating 4.2 per cent. Moreover, it's not as if the board are short of the funds to pursue the progressive dividend policy given the cash pile soared by a third year-on-year to £20.7m, or the equivalent of 200p a share. This burgeoning cash pile reflects the ongoing recovery in profits and a keen focus on tight cost control and working capital management.
What this healthy cash position also means is that once you strip out that cash pile from the current share price of 535p, Air Partners shares are priced on an earnings multiple of 12 net of cash. Or, put it another way, if you strip out that £20.7m cash pile from Air Partner's £55m market value, then a business conservatively forecast to make £4.4m of profit in the current year is being attributed a value of only £34m.
Positive technical indicators
Interestingly, Air Partner's share price has been toying with the 515p to 518p level for the past seven weeks, meeting resistance twice so far. This is hardly surprising since the 530p level coincides with a technical resistance level dating back to April 2011. But with this level being taken out yesterday, then a run up to the 2009 high around 645p looks firmly on the cards. On the point and figure chart (5 points per unit), yesterday's close of 532.5p signalled a triple top break-out. More often than not such a break-out is a major buy signal.
The technical set up certainly supports such a price move as the 14-day RSI is giving a reading in the low 60s, so is not yet overbought. The peak in August occurred when the reading was way above 80, so offering scope for the share price to rally further. For good measure, the share price is not over extended above the short-term trend line, the 20-day moving average, which is close by at around 500p.
In the circumstances, I am upgrading my target price as I feel that the conservative forecasts in the current financial year can easily be exceeded and I am prepared to bet that Air Partner will deliver results ahead of analysts’ earnings expectations. But even without anticipated upgrades, the shares are still only trading on 12 times earnings estimates for the 12 months to July 2014 net of cash, and a prospective yield of around 4.2 per cent is worth having.
So, ahead of Air Partner's pre-close half year trading statement at the end of January, I am lifting my target price to 640p. On a bid offer spread of 530p to 535p, the shares rate a trading buy.
Please note that when making this recommendation I have taken into consideration news that Tony Mack, non-executive director of Air Partner, and the 64 year old son of the late Tony Mack Senior, who founded Air Partner in 1961, sold 360,067 ordinary shares at a price of 500p on 4 November. Mr Mack still has an interest in 700,000 ordinary shares, or 6.8 per cent of the issued share capital, and made this disposal for retirement and tax planning purposes as he will be retiring at the time of the annual meeting next year.
■ Finally, as a pre-Christmas offer exclusive to Investors Chronicle readers, all telephone orders placed with YPDBooks for my new book Stock Picking for Profit will receive complimentary postage and packaging. This offer is strictly for a limited period, is subject to stock availability and applies to only telephone orders placed until Friday, 15 November 2013.
Please note the book is only being sold through YPDBooks and no other source. Full details of the content of the book is available online at www.ypdbooks.com. If you would like to take advantage of this offer, please contact YPDBooks on 01904 431 213 and quote reference 'ICOFFER'. The book is priced at £14.99. Internet orders will continue to incur the normal postage and packaging cost of £2.75. I have also published an article outlining the content of the book: 'Secrets to successful stock picking'.
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