(At the time of writing, I hold a long position in this share). Charter air specialist Air Partner today reported a weaker than expected Q4, which saw its full-year adjusted profit estimates being trimmed. The share price move was in line with the reduced expectations:
There have been a spate of profit warnings in January so far – much more than any previous month seen (and this includes some warnings that have slipped by for coverage). This is especially painful for me personally as this is the first one this year that I have been caught up in. An (uncrystallised) loss of 20% is usually very difficult to make up on the day (or week) even in a diversified portfolio. But then again, we should not be so interested in the short-term.
The share price action for Air Partner has been quite interesting. The most notable event of the past couple of years was an accounting error. Since then the shares have seen a recovery of sorts, only to be plunged back to the 70p level. Today’s news puts us close back to that.
What’s gone wrong at Air Partner?
The bad news comes in a trading update for the full-year. We get to the point:
The Group’s UK Charter division has been impacted by slower than expected Q4 trading and as a result the Board expects to announce underlying profit before tax of not less than £4.3 million for the 12 months to 31 January 2020, which is lower than previously expected.
This is significant on both counts. Private jets accounted for almost a quarter of net profits last year. The UK was also relevant for the company as well, as half of all revenues come from this region.
The projected profit figure (according to a broker note on Research Tree) was £5.5m, so this downgrade is large. We have some reasoning:
Our UK sales have been impacted by: (i) a single UK customer suspending a complex global flying programme in H1, which did not revert in H2 as expected. We continue to support this customer on an ad hoc basis; (ii) a soft UK private jet market, which worsened in Q4; and (iii) an A330 Remarketing mandate, where, at the date of this announcement, the sale and purchase agreement is signed but remains subject to closing conditions. As a result, it now looks highly likely that this will fall into the next financial year for revenue recognition purposes.
According to the last accounts, no customer made up more than 10% of revenues, but this still does not sound great. Of course, the reasoning sounds fairly believable: last year we had significant Brexit and General Election worries, and on top of this a growing trend of environmental awareness. Private jets and their usage may have dropped significantly in the public perception at least in this country.
Air Partner: Transitioning amidst turbulence
Air Partner have some pretty solid operations: they operate private charter flights for business and leisure. Clearly there will always be demand for these types of services, as commercial flights do not serve all routes and airports, or at a time convenient to the client.
Since then the business has branched out into a range of related services: aircraft broking, emergency logistical planning and personnel education for example. It’s latest acquisition this year was for an educational company called Redline.
Much of the growth in the past years has been via acquisitions:
This has led to a weakening of the balance sheet as we see intangibles mount up. Given that underlying profit at the half-year was £3.0m, this does seem that Q4 could even have been marginal or loss-making to get to the figure of £4.2m. There also may be some reasonable-sized adjustments to be made to that as the Redline acquisition is processed.
Profit growth has definitely slipped to ‘jam tomorrow’ here, as it is promised that the uplift from Redline and the effects of opening new offices in the US, as well as the UK issues will fall back into 2020.
On that note, investors have been comforted by the fact that dividends, and some good yields have been paid out in recent years. The dividend policy states that the targeted cover was 1.5-2.0x of underlying earnings per share. This has been put to the test in the last year and the dividend was upheld reflecting ‘the Directors confidence in the Groups potential for H2’. Now that H2 has not delivered, it may be the case that there is not much standing in the way of a cut. With £2.89m paid out in the last year, it is likely that a cut would be significant.
It should also be noted that cash balances at Air Partner are not as great as they would appear: much of the available cash is pre-paid income by companies on the ‘JetCard’ scheme: this is simply paying up-front for flights. This cash is returnable on demand and is similar to accrued income.
Are Air Partner shares good value?
My enthusiasm for this share has cooled a little over the past few months. It is understandable that they should wish to build up the Consulting and Training division. These types of revenues offer less volatility and are not as adversely affected by a downturn in demand. They also potentially could be highly operationally leveraged (for example if a course sells extra places, there are only marginal costs assessed). But the amount paid for these acquisitions seem high, and this is a field where there may be little to stop a new entrant from coming in. The uniformity of air laws around the world also make training possible elsewhere.
The charter division offers much greater margins and some barriers to entry. But visibility is limited here, and demand may be unpredictable. But at a very basic level, there will always be a certain demand and there is are no real substitutes. A football team could drive from one end of the country to another, but the cost in fatigue and time wasted is more than likely to outweigh the cost of the aircraft and any perceived environmental impact.
The market cap has also dropped to a very low level of £40m. However, given the lower levels of profits stated here, that might be about the right price for now, given that visibility in the charter division is poor and the impact of the acquisitions and new office openings is yet to be seen. 3/5.