Following the merger of its operations with those of Hangar 8 at the start of 2015, the enlarged group now operates more than 140 planes on behalf of their owners from 44 locations across five continents, providing a raft of services from aircraft management and charter through to engineering and support services. Bearing this in mind, when Gama reported full-year results in late April, chief executive Marwan Khalek highlighted a contrast in trading prospects for the group’s North American and European operations.
At the time Mr Khalek noted that: “In the US, the outlook is positive with both our air and ground services operations trading and growing strongly. Our US air operation, which includes aircraft management and chartering activities, continues to gain organic market share through new aircraft additions both in the core management fleet as well as through the Wheels Up contract. Our US ground services business is also set to expand the number of line maintenance locations that we operate from.”
The US business accounted for 46 per cent of group proforma revenues of $413m last year and is expected to increase its share to over half of the total based on estimates from analyst John Cummins at brokerage WH Ireland. Though it’s faster growing, margins are lower so Mr Cummins expects the US segment (ground services and air operations) to contribute $8.3m of his group cash profit estimate of $22.4m in 2016, up from $7.4m of the group total of $20.9m in 2015.
However, in Europe the outlook is very different and Mr Khalek “expects the gradual softening of the market which has been evident over the past 12 months to continue well into 2016”. Moreover, with a cautious economic outlook and the various political uncertainties, organic growth within Gama’s European operations will be at a “premium”. He did though add that this “may be compensated by attractive acquisition opportunities and we will continue to actively pursue these”.
Given this cautious guidance, Mr Cummins has sensibly pencilled in an 11.8 per cent decline in revenues from European air operations to around $120m this year to account for just under a third of his group revenue estimate of $411m and has factored in a profit contribution of $1.6m from this unit, down from $2.1m in 2015. But this is not the key business in Europe, ground handling services is as this segment turned in cash profits of $14.4m on revenues of $45.3m in 2015.
Investor overreaction
So, although investors may have been spooked by the cautious outlook statement for Gama’s European segment, the fact is that the key ground services part of this business is still set to grow this year, albeit Gama’s acquisition of Aviation Beauport, a privately owned Jersey based business offering a range of business aviation services, is one reason why. Gama paid initial consideration of £5.3m earlier this year for a business that made at least £725,000 of cash profits in 2015.
After factoring in the contribution from Beaufort Aviation, Mr Cummins is pencilling in a $1.6m rise in cash profits from Gama’s European ground services to $16m based on revenues of $46.7m. It’s also worth flagging up that another driver of the profit growth reflects cost savings which analysts believe will add over $1m of cash profits to the unit’s contribution after management sensibly took pre-emptive action to offset the effects of the weaker trading backdrop. But it is growth nonetheless and it should be strong enough to counter reduced operating losses in the group’s new territories (Asia, The Middle East and North Africa) and enable Gama to deliver a decent rise in group cash profits to $22.3m this year as WH Ireland predict. Analyst Robin Byde is more bullish, pencilling in cash profits of $24.6m in 2016 and a rise in EPS from 41.75 cents to 43 cents (30p).
Frankly, if the company gets anywhere close to WH Ireland’s more conservative lower estimate, then Gama's shares are being very harshly valued. That’s because after factoring in net borrowings and finance leases of $9m (£6.3m), Gama’s enterprise value of £103m equates to only 7 times last year’s cash profits, falling to 6.6 times WH Ireland’s estimate for 2016. To put that rating into some perspective, another company I follow in the sector, aircraft lease company Avation (AVAP:145p), is rated on 8 times cash profits to its enterprise value. And as I highlighted this month its shares are anomalously priced ('Get ready for take-off', 2 June 2016). In fact, I have a target price 33 per cent above Avation’s current share price.
Of course there are risks and the fact that Gama’s share price has fallen by a quarter in the past few weeks indicates a fair degree of nervousness amongst investors especially as the business aircraft market is cyclical and spikes in economic uncertainty can subdue demand. That said, Gama provides support services for owning and operating an aircraft, so is actually less exposed that to cyclical factors than the wider market. Furthermore, despite the ongoing global economic uncertainty, Gama’s trading in line with the aforementioned analyst forecasts.
So, having first advised buying the lowly rated shares at 225p ('Ready for take-off', 12 May 2014) after which they rose to an all-time high of 375p ('Wired up for gains', 11 November 2014), and last rated them a hold at 270p (‘Gama hits guidance’, 10 February 2016), I feel that they are worth holding for recovery at the current depressed price. There is also a 1.3 per cent prospective dividend yield for income seekers. Hold.
