As regular readers will be aware I have been a fan of the company all year, having first flagged up the investment case when the share price was 310p ('A share ready to take off', 7 January 2013). The company was a classic recovery play and at the time offered us a solid 6 per cent dividend yield and was rated on a modest 6.5 times earnings estimates net of cash. I subsequently reiterated the advice when the price was 380p ('Get ready for take-off', 7 August 2013) and again at around the current price ahead of the aforementioned results ('Flying high', 17 September 2013). At the time I upgraded my fair value price target to 530p, a level the shares almost achieved having hit a subsequent high of 515p last month.
In the circumstances, it's hardly surprising that some investors decided to bank bumper gains on the holding especially as the recent high coincided with the high point in April 2011 so represented a resistance level on the charts. However, having had a close look at the investment case once again, I feel they may have been premature as I still see scope for decent share price upside from here.
Profits firmly in ascent
In the financial year to end-July, Air Partner reported a 31 per cent uplift in pre-tax profit to £4.2m on slightly lower revenues of £221m. That partly reflects an anticipated fall in freight revenues, but also bumper growth from the key private and commercial jet broking divisions. In fact, turnover from the private jets business soared 22 per cent to £53.6m in the 12-month period, which in turn drove underlying profits from the segment up from £1m to £1.49m.
The strategic focus in the US and Europe has clearly been generating new opportunities for revenue growth, which Air Partner's management had predicted. In the US, sales of the company's JetCard quadrupled, albeit from a low base, and the company sold its first $1m JetCard. Importantly, renewals are up so clients are happy continuing to do business with the company and activity is at record levels. New initiatives include the launch of a new corporate card to offer customers day return flights, highlighting a more focused approach to enhance the customer offering to attract new business.
The company's commercial jet division has been gaining altitude, too, and delivered a bumper 46 per cent increase in underlying profits before tax to £2.3m on a 4 per cent rise in revenues to £145m. This mainly reflects new business wins in the higher margin tour operator, sport, automotive and oil & gas sectors and less work for governments and in the conference market. Client numbers in the oil & gas segment have surged 50 per cent in the past year alone and a number of large contract wins helped drive revenues from tour operators up by a third. Since the spring, Air Partner has launched flying programmes for Silver Ski, Olympic, Sunvil Holidays and GIC.
Business in the US is a key driver, too, as investment in personnel and targeting large corporate events paid off big time; revenues from the region surged 75 per cent in the period. Air Partner organises bespoke charters and aviation solutions for groups of every size on airliners seating 20 or more passengers, so there should be ample scope for growth as corporations ease their purse strings as the US and European economies recover.
Accelerating trends
Following earlier earnings upgrades ahead of the latest results, analyst Edward Stanford at broker Oriel Securities expects Air Partner to increase pre-tax profits to about £4.4m in the financial year to July 2014. On that basis, expect EPS on continuing operations of 27.7p, which means the full-year dividend of 20.05p, up from 18.2p in the year just ended, is covered almost 1.4 times.
That cover may look a tad tight, but the board has been confident enough to raise the payout by 10 per cent for the past two years and I would not be surprised at all to see it raised by the same amount again in the current financial year. In fact, that's exactly what analysts at Liberum predict, pencilling in a payout of 22p a share. On that basis, the prospective yield is still attractive at about 4.6 per cent. Moreover, with the company sitting on a £20.7m cash pile at the end of January, worth 200p a share, it's not as if the board are short of the funds to pursue the progressive dividend policy. That cash pile was up a third in the past year alone, reflecting the recovery in profitable and a keen focus on tight cost control and working capital management.
Furthermore, strip out that cash pile from the current share price of 455p and, net of cash, the shares are priced on a modest earnings multiple of 10. Or, put it another way, if you strip out that £20.7m cash pile from Air Partner's £49.2m market value, then a business forecast to conservatively make £4.4m of profit in the current year is being attributed a value of only £28.5m.
Positive technical indicators
Interestingly, following last month's share price ascent, Air Partner's share price took out a major resistance level of 450p on its way to the 515p high. Since then the 14-day RSI has unwound from an overbought reading and at about 40 is neutral. For good measure, the share price has found support at the previous break-out point around 450p. This is a classic chart pattern whereby buyers who missed the prior rally get a second chance to buy in.
In the circumstances, I would use the pull-back as a buying opportunity and maintain a fair value price target of 530p, slightly below Liberum's target price of 555p. That's not to say that my target price can't be exceeded. In fact, there is obvious potential for this to happen because Liberum have very conservative looking earnings estimates for the current financial year. These forecasts could easily be exceeded if the positive trends in the business continue. But even without upgrades, the shares would still only be trading on 12 times historic earnings estimates net of cash and the prospective yield would be around 4.1 per cent if my target price of 530p is achieved, hardly an exacting valuation.
In the past week, I have published five other articles on the following companies or trading strategies:
■ Inland ('Property plays with foundations, 7 October 2013)
■ Terrace Hill ('Property plays with foundations, 7 October 2013)
■ Sanderson ('A smart tech share', 9 October 2013)
■ Pure Wafer ('Time to chip in', 10 October 2013)
■ US debt ceiling deadline looms ('Debt ceiling dilemma', 11 October 2013)
■ Greenko ('Targeting special situations', 14 October 2013)
■ Polo Resources ('Targeting special situations', 14 October 2013)
