Join our community of smart investors

Gama shares lose altitude on warning

Shares in the operator of privately owned jet aircraft dive on news of the company overstating its cash position
February 5, 2019

It’s fair to say that the credibility of the management team at Aim-traded Gama Aviation (GMAA:72p), an operator of privately owned jet aircraft, has been shredded following the events of the past fortnight.

Having warned on profits and downgraded annual profit expectations by $3m (‘Gama shares hit major turbulence’, 5 November 2018) a matter of weeks after I had interviewed the directors at the time of the interim results in September when they reaffirmed guidance for a strong second-half trading performance, the directors have now slashed a further $3m off pre-tax profit guidance for the 2018 financial year.

This means that excluding exceptional items, at best you can expect Gama to report underlying pre-tax profits of $14m for last year rather than the $21.8m forecast by analysts at broking house WH Ireland when Gama issued its annual results last March. It also falls 18 per cent shy of the underlying pre-tax profit of $17.1m Gama reported in the 2017 financial year.

The reason this time around for the hefty downgrade relates to unspecified accounting adjustments resulting from a comprehensive balance sheet review process carried out by the new finance team; changes in accounting treatment of certain organic investment costs; and a lower than expected share of associates profits, principally in the US. In addition, in the second half of last year, the company incurred “further significant exceptional costs including those associated with the move to Bournemouth, legal entity reorganisation and diligence costs on potential M&A opportunities”. These costs will be reflected in the statutory reported results in 2018. The board is conducting a thorough and full review of its financial reporting methodology to simplify the presentation and improve the consistency of financial information.

To make matters worse, the board is guiding investors to expect a flat pre-tax profit performance in 2019. To put the loss of earnings momentum into perspective, following a placing 12 months ago that raised £48m at 245p a share, analysts were predicting earnings growth of 50 per cent in the 2019 financial year, pencilling in earnings per share (EPS) of 39.8¢ based on pre-tax profits of $32.1m. So, despite the benefit of the extra capital raised for expansion purposes, pre-tax profits this year could be 18 per cent less than the $17.1m reported in the 2017 financial year.

If that wasn’t bad enough, this morning the directors announced that they have identified “the receipt of two overpayments, in error, from Gama Aviation LLC, its US Air associate, of $5.75m and $2m in June 2018 and December 2017, respectively, and which were reported in cash and trade creditors in the respective half- and full-year reporting periods. Both of these overpayments have been re-paid in full”. This raises further question marks in the accounting function of the company.

In the circumstances, it’s hardly surprising that shareholders have been pressing the ejector seat button. True, the shares are now rated on a forward price/earnings (PE) ratio of around 5 – but only if you exclude a raft of one-off items that will depress the annual reported results when they are released on Monday, 18 March 2019. I have completely lost faith in the directors’ ability to run this business and am bailing out too. Sell.