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OPINION

Taking a watching brief

Taking a watching brief
April 15, 2014
Taking a watching brief
IC TIP: Buy at 500p

It's a risk worth taking because having lifted pro-forma pre-tax profits by almost 30 per cent to £4.3m in the 12 months to end January 2014, and raised the final dividend by 10 per cent to 14p a share (ex-dividend date of 14 May), the shares are hardly highly rated. In fact, strip out a cash pile worth almost 180p a share from the share price, and the cash adjusted earnings multiple is only 10.5 times underlying EPS of 29.8p for the latest 12-month period. To put that into perspective, it means that a business that made £4.3m of pre-tax profit is being attributed a value of less than £34m once you deduct net cash of £18.4m from Air Partner's market capitalisation of £52m.

Admittedly the change of financial year-end complicates matters as the latest reported figures were actually for an 18-month period to end January 2015 and included a thumping 34p a share of dividends. On a pro-forma basis, the annual dividend was actually around 20p a share, a 10 per cent rise on the prior year. It's also reasonable to assume that the payout will be 22p a share in the current financial year to January 2015 given that the board of Air Partner are targeting 10 per cent growth. On this basis, the prospective dividend yield is around 4.4 per cent. In other words, covered almost 1.4 times by post-tax earnings, the payout looks solid given that Air Partner has a cash rich balance sheet with net funds equating to 35 per cent of its share price alone.

True, analyst Gerald Khoo at broking house Liberum is not predicting much in the way of profit growth this year as a result of a hefty investment in IT systems. In my opinion, it makes sense to take some short-term pain for long-term gain by taking that hit now as it gives Air Partner a competitive advantage over less well capitalised rivals to better target its client base. In any case, there are enough positives in both the company's private and commercial jet broking businesses to believe that the company can generate more than nominal growth in earnings in the current year, even after factoring in the forecast higher spend on IT systems which sliced £400,000 off Liberum's previous profit estimate of £4.8m for the 12 months to end January 2015. As I see it the main risk to forecasts is the emergence of an economic downturn to derail activity in the company's key US and European markets which have been successfully offsetting weakness in freight.

Four key profit drivers

It's worth pointing out that having prioritised the US market, the European private jet business and broking in the oil & gas and tour operating sectors as key growth drivers, revenue from these four areas grew by 91 per cent to £91.4m in the latest 12-month period. They now account for 40 per cent of the group total, albeit the continental European private jet market is still challenging, held back by the subdued economic conditions in the region.

For instance, in the latest 12-month trading period, the commercial jet business accounted for two thirds of Air Partner's annual revenues of £224m and more than half of its pre-tax profits of £4.3m. The division has been gaining altitude, propelling profits 38 per cent higher on 14 per cent revenue growth, reflecting 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 in the past year and a number of large contract wins is driving revenues from tour operators too. Indeed, on the back of a trebling of revenues in the past year, the leisure segment now accounts for over a third of the commercial jet business, buoyed by flying programmes for Silver Ski, Olympic, Sunvil Holidays and GIC. The commercial jet business even won a trophy contract to fly the Fifa World Cup to 90 different countries before the tournament starts in Brazil in June.

Private jet broking is just as important to Air Partner as this business accounted for £1.5m of the company's pre-tax profits of £4.3m last year. In the 12 months to end January 2014, turnover from the private jets business soared by a fifth to £55.9m and fuelled a £400,000 rise in underlying pre-tax profits to £1.5m. In my opinion, there is little reason to expect this positive momentum to grind to a halt just yet as it is clear that Air Partner's focus on the North American and European market continues to generate opportunities to grow the business profitably. Air Partner's JetCard is proving popular, too, particularly in the US, which is reflected in an 84 per cent rise in card utilisation rates and a 29 per cent increase in sales and renewals in the 12-month period. Overall, US revenue jumped by almost two thirds.

Technical perspective

Interestingly, Air Partner's share price has drifted down from January's multi-year high of 620p to test its 200-day moving average at 500p, a long-term trend line that should offer strong support in bull runs. Moreover, a successful test of the trend line support is likely to be a good buy signal, too. For good measure, the 14-day relative strength indicator (RSI) is in oversold territory. Risk averse investors may wish to adopt a watching brief until the share price has confirmed a low is in place and that the downward drift is finally over, but on an eight-month basis I can see far more upside than downside on a bid-offer spread of 480p to 500p. My target price remains in the range 620p to 640p, well below the 700p target price of Liberum.

Please note that I am working my way through a long list of companies on my watchlist that have reported results or made announcements recently including: IQE (IQE), Pure Wafer (PUR), LMS Capital (LMS), Communisis (CMS), Eros (EROS), Inland (INL), Netplay TV (NPT), API (API) H&T (HAT) and Record (REC).