The damage has been caused by the company’s commercial jet operation which is dependent on ad-hoc projects such as disaster relief or emergency evacuation flights. An absence of such business for its larger jets since the annual meeting in early June has led to a profit shortfall. This is despite the fact the company’s private jet operation continues to flourish and trading in the freight business is recovering, albeit from a low base. So, even though margins have improved, reflecting the higher contribution from the private jet operation in the business mix, and costs has been kept in check, the underperformance of the commercial jet business means that analysts at Liberum Capital have slashed their revenue estimates for the current financial year to the end of January 2015.
The broker now predicts revenues of £177m, down from £224m in the prior year, to produce pre-tax profit of £2.4m, a sizeable decline from the previous estimate of £4.4m. On that basis, expect adjusted EPS of 15.5p, almost half the level reported in the previous fiscal year. It would also appear that there is little upside to these downgraded estimates since the second half is the traditionally weaker period. That alone tempers my enthusiasm even though Air Partner’s board has announced a 10 per cent rise in the half-year dividend to 6.66p a share for the six months to the end of July 2014. Liberum is pencilling in an uncovered full-year payout of 22.1p a share for the 12 months to the end of January 2014, a dividend I expect to be declared since the company is sitting on a £19m cash pile, including £11m held as deposits from Jetcard customers. Sales of Jetcard have been very strong, but are not recognised as revenue and profit until the customers actually take the flights and use the credit.
Excluding the Jetcard deposits, net cash equates to 78p a share, so on a cash-adjusted basis the forward PE ratio is 19 with the shares trading on a bid-offer spread of 356p to 370p. Factoring in the whole of the company’s cash pile – equating to half of Air Parner’s market capitalisation of £38m – the prospective PE ratio is 12. True, the earnings multiple is high only because earnings are depressed, and a prospective yield of 6 per cent is supportive. That said, the company has to eat into the cash pile to make the payout as it will not be covered by cash flow given the aforementioned profit shortfall. Again this tempers my enthusiasm, as does the return of volatility of earnings.
So having seen Air Partner’s shares take-off and double within 12 months after I recommended buying at 310p ('A share ready to take off', 7 Jan 2013), I am less confident on prospects now. In my last update three months ago when the price was 500p (‘Taking a watching brief’, 14 Apr 2014), I noted: “I feel there is a very reasonable chance of further gains over the remainder of this year, assuming of course the tailwinds driving the business prove as favourable as they have been.” Unfortunately, those tailwinds have changed direction and the business is facing some strong headwinds in its commercial division. Moreover, I concluded at the time: “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.”
I would still adopt a watching brief as I feel that the shares could drift lower in the coming months. Liberum is less confident too, having slashed its target price from 700p to 400p and moved its recommendation from 'buy' to 'hold'. In the circumstances, if you followed my previous advice I believe it’s best to bail out before the shares lose any more altitude. Sell.
■ Simon Thompson's new book Stock Picking for Profit 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. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
