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Buy into refocused John Menzies

The aviation support group is set to accelerate its earnings this year, due to game-changing acquisitions and global expansion
June 15, 2017

John Menzies (MNZS) has changed shape during the past two years. Management has been focused on increasing scale in its aviation business, particularly across North America. At the same time, it skilfully managed the gradual downsizing of its newspaper and magazine distribution business. Now it is planning to get rid of this business through a sale with logistics specialist DX (DX.), although it will retain a stake in the enlarged group. Menzies reversed three years of profit decline in 2016, and growth is expected to surge this year after the game-changing acquisition of aircraft services provider ASIG in February.

IC TIP: Buy at 723p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Declining exposure to distribution
  • Building scale in aviation
  • Earnings acceleration
  • Cross-selling opportunities
Bear points
  • Trading above historic average
  • DX Exchange under investigation

Menzies' aviation business has been playing an increasingly important role within the group in recent years. Last year it grew underlying operating profit by more than a quarter to £34.2m at constant currency last year - 58 per cent of the total - after fixing operational issues at Heathrow and Gatwick and repricing or not renewing underperforming contracts. The business was particularly strong on ground handling and is now the largest handler at Gatwick, after gaining 16 contracts at that airport when a competitor failed last year.

 

How Menzies' profits break down

 

Building scale is important and expanding geographically has been a core aim for the aviation business to help sell more services, in more airports to existing and new clients. A Dubai office was opened last year, after signing a joint venture with Oman Air, its first meaningful step into the Middle East. And management plans to open an office in Malaysia later this year to take advantage of the growing opportunities for aviation outsourcing from many low-cost carriers in the region.

 

 

The business has also been expanding in North America by focusing on existing clients. And in Europe, the aim is also to cross-sell services to existing customers in locations the business already operates, in order to enhance margins.

February's $202m (£159m) acquisition of ASIG also significantly increased Menzies aviation footprint to 209 airports in 34 countries. It doubled the size of its North American operations, as well as strengthening its presence at major airports such as Heathrow, San Francisco and Los Angeles and adding fuelling services. It's also expected to materially boost earnings this year.

In contrast, Menzies's distribution business has faced difficult trading conditions during the past six years as newspaper and magazine circulation has fallen while the national living wage has increased costs. This has squeezed profits (see chart). During the time, management has rationalised its distribution network and has been trying to concentrate on the retail logistics sector.

However, the group looks set to reduce its reliance on the distribution business even further, by selling it to DX. If the deal goes ahead, Menzies' shareholders will own 60 per cent of the newly enlarged group, DX's shareholders will take a 35 per cent, while its pension scheme will hold the remaining 5 per cent stake. Menzies will also get £40m in cash.

However, Menzies has said it is now considering its positions following DX's announcement this month that its exchange operations, a secure documents service, are under investigation by City of London Police Economic Crime Directorate. But even if the deal isn't pulled off, we feel the direction of travel for Menzies is now very clear.

JOHN MENZIES (MNZS)

ORD PRICE:723pMARKET VALUE:£603m
TOUCH:720-723p12-MONTH HIGH:732pLOW: 451p
FORWARD DIVIDEND YIELD:3.1%FORWARD PE RATIO:12
NET ASSET VALUE:153p*NET DEBT:55%

Year to 31 DecTurnover (£bn)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
20142.0044.649.016.2
20151.9938.242.716.8
20162.0849.747.718.5
2017**2.4664.055.220.4
2018**2.5172.162.322.4
% change+2+13+13+10

Normal market size: 300

Matched bargain trading

Beta: 0.59

*Includes intangible assets of £104m, or 125p a share

**Numis Securities forecasts, adjusted PTP and EPS figures