Interestingly, chief executive Dustin Dryden off loaded 500,000 shares at 260p each post the company’s half-year results in March to satisfy institutional demand. That was fair enough because the free float in the company he co-founded 12 years ago is limited, as over 70 per cent of the shares are not in public hands. Even after the share sale Mr Dryden still owned 2.76m shares, or 29.3 per cent of the issued share capital which is a chunky stake in anyone’s book.
However, the share sale and a post results lull has resulted in Hangar 8’s share price drifting back to test its 200-day moving average at 205p. This was the cue for the boss to partly reverse his March share sale and splash out £168,000 picking up a further 80,000 shares at 210p each last week. Furthermore, non-executive director George Rolls followed suit and almost doubled his holding by spending £105,000 purchasing 50,000 shares at the same price.
The director purchases are well timed given the positive divergence on the daily chart. That’s because although the share price made a slightly lower intra-day low on 7 May (210p) compared with the previous low on 15 April (213p), the 14-day relative-strength indicator (RSI) did not. In fact, there is strong positive divergence and with the price producing a long tail on its daily candlestick chart, buyers have clearly moved in on the successful re-test of the 200-day moving average. In my book, that’s as strong a buy signal as you need to warrant following the directors lead. The fundamental case for investing is equally compelling.
A business taking off
Founded in 2002, Oxford-based Hangar 8 primarily makes its money by acting as an asset manager looking after the private jets of wealthy individuals. That in itself de-risks the investment because the company doesn’t actually own the expensive planes itself. Instead, Hangar 8 charges a monthly management fee to the jet owners of up to £20,000. It also takes a slice of the fee charged to third parties when the planes are chartered out. And the really smart part of the business model is that all the direct costs are passed onto the owners of the planes so Hangar 8 doesn’t have to cover hefty overheads such as crew, maintenance, jet fuel, landing and handling charges.
It may sound too good to be true, but the business model works a dream because of the financial incentives (mainly tax and cost savings) Hangar 8 can offer to the owners to tempt them to hand over all the chartering and maintenance of their jets on a day to day basis. And of course, the owners can use the planes as and when they wish.
The key to the business model is to scale up to a level whereby all Hangar 8’s fixed overheads are covered and the natural operational gearing effect can kick in. The company is now way past that critical point which means additional charter contracts have an accentuated impact on profitability. When Hangar 8 floated in November 2010 it was managing 19 aircraft, but thanks to continued expansion and the astute acquisition of rival International Jet Club in 2012, it now has over 50 planes of which 30 are long range heavy aircraft.
Operating from 17 bases across Europe, Middle East and Africa, the company offers customers 12 different types of aircraft to suit their specific requirements. These range from the 4-seat Phenom 100 Jet to the 16-seat Embraer Lineage 1000, flying from bases as far east as Mumbai, India and as far south as Johannesburg, South Africa. In fact, Hangar 8 now has 14 super heavy jets on its books that can fly up to 9,000 km without the need for refuelling.
In recent years, the focus of the business has moved away from the traditional short-term charter market, to a more dedicated full-service management operation. As a result Hangar 8 has made a concerted effort to increase its fleet range and replace smaller light jets with long-range heavy jets to meet the demands of the growing intercontinental business air travel market. This is sensible as the long-range market is where the high growth rates are being seen, so it makes sense to direct resources to service this market most. It’s certainly paying off. In January, the company experienced the largest monthly intake of new aircraft under management when three heavy and one super heavy jet were delivered.
The management team have been doing some smart deals to capitalise on the growth in its fleet too. For instance, a new partnership has been formed with The Economist Group, granting Hangar 8 exposure to conferences and business summits across Africa. At a stroke this has given the company valuable access to government departments and political establishments, both of which are critical in driving growth in the region. Hangar 8 also enhanced its Aero-Medical operations in Africa with the addition of an aeromedical-equipped Bombardier Challenger to the fleet.
Sound financials
As a result of these deals and the increase in the fleet size, contracted revenue now accounts for 83 per cent of the total, having risen 15 per cent to £10.5m in the first half of the current financial year to end June 2014. Customers generally sign up for contracts of between one and five years, with obligations to buy a minimum number of flying hours a month. And it’s this certainty of income that underpins the business and improves the quality of the revenue stream.
The greater scale is also generating significant benefits for both the company and its clients. That’s because as Hangar 8 grows its aircraft assets under management, the savings it can secure and pass onto clients increases too. In turn, this makes Hangar’s full-service offering even more attractive for new potential clients.
And as I have indicated it’s a profitable business too. For the 12 months to end June 2014, analyst Caroline de La Soujeole at house broker Cantor Fitzgerald expects revenues in the region of £29m, adjusted pre-tax profits of £2.5m and EPS of around 21p. The respective figures for fiscal 2013 are revenues of £23.6m, pre-tax profits of £1.93m and EPS of 19.1p. The slower EPS growth reflects the full impact of the share placing in November 2012 which raised £4.2m at 170p a share. The new funds partly financed the £4.5m acquisition of International JetClub and also strengthened the company’s balance sheet.
It was money well spent as it facilitated a step change in the scale of Hangar 8's business. With the addition of ten heavy jets, all of which were super heavy long range planes, the acquisition increased the number of aircraft under management from 36 to 46 with four helicopters also under management. The acquisition also increased the proportion of long-range, more profitable heavy jets under management from 30 to 44 per cent of the total fleet. Strategically it was very well timed given the growth Hangar 8 is seeing from these markets. In fact, heavy jets now account for around 60 per cent of the fleet.
The deal also helps explain the 32 per cent surge in the company’s cash profits to £1.2m in the six months to end December 2013 and the £1m underlying increase in cash year-on-year after adjusting for balance sheet movements in relation to the acquisition. This highlights the cash generative nature of the business. At the end of December, Hangar8 had net cash of £3m on its balance sheet, or the equivalent of 30p a share. It’s reasonable to expect a further hike in net funds at the year-end as Cantor Fitzgerald is predicting the company will make cash profits of £1.4m in the second half to end June 2014.
But even without factoring in a further rise in net funds on the balance sheet, the shares are only being rated on nine times cash-adjusted earnings, hardly a punchy valuation. There is also the prospect of a maiden dividend which the board intend to declare at the time of the full-year results. This also means the shares will go on the radar of small cap income funds.
Target price
So, with the directors buying, the technical set-up very positive and Hangar 8 set to report a surge in profits and declare an inaugural dividend, then I believe that it’s well worth buying the shares now ahead of the pre-close trading update in mid-July. Trading on a bid offer spread of 220p to 225p, my initial target price is the March all-time high of 275p. Beyond that, fair value is far nearer 300p a share, or 13 times cash adjusted earnings. Even then the shares would be trading on a deep discount to the support services average of around 17 times earnings. The time frame for this trade is three months.
Please note that I am still working my way through a list of companies on my watchlist. I will try and clear the back log this week. The companies include: Inland (INL), API (API), Charlemagne Capital (CCAP), Oakley Capital Investments (OCL), Taylor Wimpey (TW.), Barratt Developments (BDEV) and Bovis Homes (BVS).
■ Finally as a special offer to IC readers purchasing my book Stock Picking for Profit before Friday 16 May, and subject to limited availability, online orders placed with YPD Books and quoting offer code 'ICOFFER' will receive complimentary postage and packaging. The book can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Telephone orders will continue to incur the £2.75 charge. I have published an article outlining the content: 'Secrets to successful stock picking'
