Distribution obsures Menzies' potential

John Menzies’ business is made up of two divisions, newspaper-and-magazine distribution and aviation, which offers a wide range of services from ground handling to re-fuelling. Historically, distribution was the core business but in the face of structural decline in the print-media industry the group has pivoted towards aviation, significantly bulking up the division with the $202m (£151m) acquisition of airline services group ASIG in February last year, the largest acquisition Menzies has ever made.

Having taken aviation from just over half group profits five years ago to 70 per cent (this included a nasty spot of turbulence for aviation profits in 2014 and 2015) the group had planned to spin out the distribution business by merging it with rival DX Group. Menzies would have received £40m cash and a 65 per cent stake in the merged group. However, the plans were scuppered when The City of London Police’s Economic Crime Directorate opened an investigation into DX (closing it a little over a month later). Since then Menzies has been stripping out costs as it works to find another buyer – a process that is taking longer than management originally expected.

In the meantime, the aviation business has been building momentum helped by the increased range of services it offers following the ASIG acquisition. Last year it had 150 net contract wins from across the globe and the combination of underlying growth and the acquisition pushed underlying operating profit up 72 per cent to £58.8m. Since then the group acquired a de-icing business to build out its service offering and is looking at other potential deals. Meanwhile, ASIG surpassed annualised synergy targets of £10.5m last year and is expected to deliver more than £15m by the end of 2018.

However, the ASIG deal pushed net debt up considerably, and at the end of 2017 it sat at 1.9 times cash profits, from 0.8 times a year earlier. Broker Numis expects net debt to only fall by £15m to £200m by the end of 2019 and the group also has a £50m pension deficit. That's certainly gives reason to question the group's commitment to a progressive dividend policy, not least given free cash flow (FCF) of £8.9m last year failed to cover the £15.9m paid out to shareholders. Nevertheless, Numis thinks FCF will hit £17.8m this year, almost covering £18.8m of forecast dividends, while £21.1m of FCF in 2019 would cover a forecast £20.7m payout. What's more, the successful sale of the distribution business could provide a positive balance sheet surprise.