Join our community of smart investors
OPINION

A share ready to take off

A share ready to take off
January 7, 2013
A share ready to take off

Improving operational performance

The company is Air Partner (AIP: 310p), a provider of aviation services to industry, commerce, governments and private individuals worldwide. Having had a close look at the company's full-year results in October, I noted with interest last month's trading update at the annual meeting when chief executive Mark Briffa said: "Air Partner's private jet and commercial jet broking divisions are performing in line with the comparative period, with a particularly strong performance in the US market, partly as a result of business related to the US elections, offsetting weaker trading in Europe. Overheads continue to be closely managed, are lower than the prior year and well within management expectations."

In other words, the company is on track to grow pre-tax profits from the £3.2m reported in the 12 months to July 2012 to £3.8m as forecast by broker Oriel Securities. On this basis, EPS on continuing operations rises 12 per cent from 21.3p to 23.8p, which means the 18.3p dividend is covered 1.3 times. That cover may look a tad tight, but the board was confident enough to raise the payout 10 per cent last year and, with the company sitting on a £15.7m cash pile at the end of July, worth 153p a share, it can easily afford the £1.88m cost of the dividend. There doesn't seem much risk to the payout, either, as analysts expect the dividend to be raised a further 10 per cent to 20p a share in the current financial year.

Moreover, strip out that cash pile from the current share price of 310p and, net of cash, the shares are trading on a ludicrously low earnings multiple of 6.5. True, that miserly rating is partly justified by what can only be described as an abysmal 2011-12 financial year, when pre-tax profits plunged by 44 per cent from £5.7m to £3.2m. A sharp drop in demand, oversupply of planes, fierce competition and the absence of an Arab Spring or Japanese tsunami to boost demand hit the company's core commercial jet broking business, in particular. In fact, profits from that unit halved to £1.6m and accounted for the majority of the shortfall in the 12-month period, albeit they were coming off record levels.

Strategy for recovery

Given this backdrop, it's therefore well worth noting that Air Partner's management team has a strategy in place to underpin the profit recovery predicted by analysts and one that is focused on developing the business in four key growth areas: the US market; private jet broking in Europe; the oil and gas sector; and growing the company's presence in emerging markets. Work is ongoing to drive sales in all of these specific areas and, according to Mr Briffa, "there has already been a significant improvement in the results of the US operation". The company's all-inclusive JetCard scheme should help Air Partner continue to pull in business in the region, and in continental Europe, too, where Mr Briffa expects to significantly boost the company's 2 per cent share of the £650m market. That claim has some foundation since there is an opportunity there for Air Partner to win the business of a number of disgruntled customers who are currently stuck in the so-called fractional ownership schemes, having previously bought a stake in a plane in order to have access to a certain number of flying days, but with the downside of the extra costs this entails. True, it's hard to get out of such schemes, but those customers that have are heading straight for Air Partner's all-inclusive JetCard - which enables them to buy flying hours for any plane whenever they want - with its royal warrant, long history and financial strength of the company's plc status. JetCard membership is now at record levels.

Clearly, the overall trading environment is far from benign given the uncertain general economic environment. But in my view this is fully discounted in the valuation because if you strip out that £15.7m cash pile from Air Partner's £31.8m market value, then a business forecast to make £3.8m of operating profit is being attributed a value of only £16.1m. In other words, the current low valuation offers us a decent margin of safety as does the share price support from the dividend.

Positive technical indicators

It's worth noting, too, that following those results in October, Air Partner's share price has been gaining altitude, having formed a multi-month base formation around 250p between February and October, and looks poised to take out the autumn highs of 315p. From a technical perspective, the risk looks skewed to the upside as the share price has close support from the 20-day, 50-day and 200-day exponential moving averages, which are all positioned between 285p and 293p; the 14-day RSI reading is not overbought; and the MACD is positive and above its signal line. In my view, a close above 320p is not only a distinct possibility, but would importantly signal a major chart break-out and one that could be realistically sparked by the forthcoming trading statement on Thursday 31 January. So, ahead of that update, I rate Air Partner's shares a trading buy at 310p and have a short-term fair value price target of 370p.