UK Edition
Questor: there’s plenty of scope for this aviation firm’s undervalued shares to soar
“Obscenely cheap.” This is how one fund manager described the share price of one of his holdings when he started to build a stake last year.
At that time, shares in the company concerned, Gama Aviation, were trading at only about five times earnings. True, they have rallied since then but even now they are rated at only about seven times expected profits for 2018 – very much the kind of bargain-basement price that attracts Questor’s eye.
Better still, Gama is a fast-growing, cash-generative business, which operates in a sector that is both rapidly consolidating and relatively immune from attack by new entrants, said Nick Hawthorn of Downing, which owns about 6pc of the Aim-listed company in various portfolios.
Gama’s operations are divided into two parts: “air operations”, which provides services such as fuel, crew and food for private aircraft owned by firms, governments and individuals; and “ground operations”, which involves maintaining planes on behalf of those and other owners.
“It’s an attractive model,” Hawthorn said. “The firm is protected from much of the cyclicality that one might expect in the sector. Forward visibility is high, with more than 70pc of gross profits contracted and a further 20pc that could be deemed to be “recurring”, where an owner has used Gama’s services for many years.
“Unlike airlines, the business has no exposure to fuel prices – the management fee is fixed and fuel prices are passed straight through to the user – or residual values, as Gama does not own aircraft. This reduces operational and cyclical risk.”
He pointed out that the firm earned fees whether or not its customers actually used their planes: “In a scenario where owners fly their planes less, or not at all, Gama will continue to collect the same management fees and will continue to carry out maintenance work that is ‘calendar-based’, as opposed to being due after a certain number of flying hours.”
Hawthorn said the firm’s “jewel in the crown” was probably its “special missions” business: “Typically these are long-term government contracts. Gama has managed, and successfully tendered for multiple times, the Scottish Air Ambulance contract since 1991 and has multiple maintenance contracts with the MoD.”
Gama has said it expects to improve operating margins from 2.9pc to 5pc on the “air” side and from 13.6pc to 20pc in “ground”.
Hawthorn added: “Gama operates in a highly fragmented market, which we believe is prime for consolidation. It is a top-five industry player globally but manages less than 1pc of the total US fleet and less than 2pc of the total European fleet. No single operator has more than a 4pc share in the overall market.
"The benefits of consolidation to aircraft owners are significant – scale increases buying power for consumables such as fuel, while global coverage ensures consistency and availability of service wherever an owner’s aircraft happen to be located. We believe that this is a more attractive proposition for owners than the small, localised players that dominate the market currently.”
These smaller outfits are also finding it harder to operate as increased regulation drives up their fixed costs. Some are going bust, with the customers migrating to other operators such as Gama, while others are selling out to stronger rivals.
“Gama is in prime position to be the consolidator as it is the only large operator with the ability to tap the public markets to fund growth,” Hawthorn said.
He described the most recent interim results as “positive”. Statutory operating profits of $9.6m (£7.3m) in the first half compared well with $3.8m in the same period last year.
Stripping out exceptional items, operating profits increased by 25pc from $5.6m to $7m. Cash flow was much improved, with $5.7m of free cash aiding the reduction of net debt to $13.3m. The firm is expected to be debt-free by 2019.
Hawthorn concluded: “Gama is a highly cash-generative business growing at double digits but trading on a single-digit multiple of earnings. It trades at close to a 40pc discount to its peers, which is unjustified given the quality of its earnings and growth potential.
"These attributes, combined with a dividend and a management team who own more than 30pc of the company, make Gama a compelling long-term investment.”
Questor says: buy
Ticker: GMAA
Share price at close: 193.5p
- Questor archive: telegraph.co.uk/questor