Small Cap Value Report (7 Apr 2016) - FLYB, UBI

7th Apr '16 by Paul Scott

66 comments 25726 reads

Good morning!

A slight misunderstanding has arisen over what is, and what isn't acceptable in the comments section after these reports. It's really just common sense, but for the avoidance of doubt, here is the memo.

Stockopedia is my sensible space. Other social media - arguably not so much. We don't mix the two.

As if my patience wasn't already wearing thin, Flybe has put out a trading update - that's usually a bird-strike for the share price.

Flybe (LON:FLYB)

Share price: 59.5p (down 7.1% today)
No. shares: 216.7m
Market cap: £128.9m

(at the time of writing, I hold a long position in this share)

Trading update - actually, it seems alright to me, with the key part being an in line update:

Results for the full year to March 2016 are anticipated to be in line with market expectations.

Various other details are given. The load factor of 68% seems low to me, down 2% on last year - possibly due to surplus planes being used for routes that probably wouldn't otherwise be operated. That's a lot of empty seats on an average flight - almost a third.

The terrorist attack in Paris gets a mention - although these days I don't think many people give any thought to terrorism - it's a risk when you get on a plane, same as many other risks that we face every day in life. If you're in the wrong place, at the wrong time, then that's that. It certainly won't stop me, or millions of other people from flying.

In fact, we're flying more than ever, due to lower fares:

Against the background of the highest level of market capacity growth for six years driven by low fuel prices, we continue to be disciplined in deploying our capacity, focusing investment on routes where airport partners provide cost mitigation and those which adhere strictly to our business model. We are also continuing to reduce unit cost, which provides margin resilience, as well as reviewing our capacity growth rate beyond this summer.

Note the strong balance sheet here, with cash (from customers paying up-front) considerably exceeding the market cap:

In March 2016, Flybe took ownership of three Q400 aircraft, previously on operating leases, for a cash consideration of USD34m. This is in line with Flybe's strategy of rebalancing its aircraft fleet away from reliance on operating leases and towards outright ownership which brings the…

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ridavies

8th Apr '16

Very good point fhomboid1. So Flybe are likely to be at a disadvantage over the last 2 years and going forward for a while, because they certainly havent been growing fast, and in fact have been failing to make their growth forecasts.

Further to my last point, another interesting point is WHY Flybe have been reporting their actions. I havent been through the reports, but have the other key airlines - Easyjet, Ryanair, Dart and Wizz Air - been doing the same, and if they have, how do they compare? If they have or they havent, what is the point Flybe trying to make?

Paul Scott

Hi,

The fuel hedging issue is one of the reasons why Flybe (LON:FLYB) profits have been somewhat depressed - it takes time for more expensive fuel from previous hedges to work through. However, hedges only defer price changes, so cheaper fuel is & will continue flowing through as a greater proportion of FLYB's usage. Therefore profits should rise. It's one of the catalysts for the share price to rise over the next 1-2 years. Another potential catalyst is a bid approach. A bit like with HOME, Flybe is capable of being bid for by a rival, and use Flybe's own cash to finance the bulk of the deal. Then duplicated costs could be stripped out, and bingo, the acquirer has just grown significantly for basically zero cost.

As Flybe is mainly a regional airline, there isn't a lot of overlap with other airlines. As road & rail get more congested & expensive, there is a strong case for using regional airlines. My family often fly from Manchester to Bournemouth, as it's cheaper, and much quicker than going by rail. That would have been unthinkable just a few years ago, so I like this subsector of regional airline. Most of Flybe's routes don't have any other airline competition actually.

Obviously I've called FLYB wrong so far. That doesn't matter, as it's history. All that matters is where we are TODAY - is there upside on the share from the current price? I think there is, hence why I hold & may buy more possibly.

I find that if I apply a strong balance sheet filter before buying, that tends to screen out complete disasters. Hence the stocks that do go wrong, tend to recover. It takes several years sometimes for them to recover, but I don't mind being patient. Using this approach, I tend not to bank many losers. I just wait for them to recover.

Regards, Paul.

bsharman

Fantastic discussion around Flybe (LON:FLYB) and specifically fuel hedging have reminded me why I subscribe to Stockopedia. Great contributions from all.
Have a good weekend!
Ben

garkum01

Very much agree with paul about LTIPS, VCPs etc being tantamount to theft as the managerial class already
enjoy good salaries and perks. There is a crying need for a bargepole list so we can avoid these companies.
I sold out of vislink as the greed here was excessive

Hi garkum,

It's tricky though, over executive greed. After all, we're in this game to make money from shares, not to enjoy living on the moral high ground.

So I always have a real quandary, when I like a business, but think the Directors are too greedy. What to do? It's a tricky balancing act.

On balance, I think it's best to generally avoid companies where there are red flags such as Director greed. However, in some cases, if there's a compelling reason to invest, then it is better to just hold your nose and buy the shares anyway.

It's like with Vislink (LON:VLK) - I flagged in my report here on 22 Mar 2016 when the shares were 26.9p that there was probably a 20% gain to be had;

Part of me therefore thinks that it's best not to go near this company's shares. However, it's not about moral outrage, it's about making money. So if the shares are likely to go up, then maybe it's best to just hold my nose and buy some?I'm on the fence at the moment. What do readers think? I'm wondering if there is a short term trade here, maybe to scalp a 20% gain? I wouldn't want to hold longer term, that's for sure.

With the shares now at 34.75p, that was indeed a nice trade. I didn't partake personally, but hope that some readers did, and made some money.

Regards, Paul.

Rusty2

Yes its a difficult one, I thought Vislink (LON:VLK) were a good buy when around 26p but I don't like the management so I did not buy. My quick research a few months ago revealed that about 2/3 of companies have similar schemes or generous share options at nil or low price, less so on the AIM.
One I hold is Finsbury Food (LON:FIF), very generous Executive LTIP, 2 directors have over 7m shares in options at nil cost, each year they receive 2x their salaries in share options and their salaries are not low. Its good if these things are highlight because I have not seen it mentioned anywhere. IMImobile (LON:IMO) is even worse.

Hi Herbie,

yes i noticed the comfortable LTIP arrangements for the Finsbury Food directors which put me off investing in the company. If they feel its fine to pillage the company have they got the best interests of shareholders at heart? Thats the fundamental question for long-term investors like myself.

I suppose a key thing to think about on VCPs and LTIPs, is whether you're buying the shares as a long-term holding, where everything has to be right. Or, if you're seeing a trading opportunity to make shorter term money - nothing wrong with that - markets are highly inefficient in smaller caps.

As I said to a friend in the pub yesterday, I'm now far more open to investment approaches - if I can find an approach that works, then I'll keenly look into it. So at certain times, momentum works really well - something that I've learned from Stockopedia, having haughtily dismissed that approach out of hand previously.

Although when the economy turns down, you can't beat sound balance sheets, and value.

Other approaches work well at other times though. Let's explore all of them. Whatever works!

Regards, Paul.

Blissgull

9th Apr '16

Good post Paul. It reminds me of something technical trader John Piper said.

"If throwing bones in the air works, don't question it, just use it."

I agree with most of that but there are certain companies I don't want to own shares in: Tobacco, Gold mines and Gambling are 3 I try to avoid. There are some other more grey areas. I know some people don't care as long as the shares go up.

Yes its a learning curve, I have learnt a lot in my short time here, momentum is one, I was always looking for value before which caused me to miss out on several good shares, momentum works but you have to watch it does not reverse.

Fangorn

This comment has been moderated

Calalily

Fangorn, please just give it up, you are taking up space here that has nothing to do with Stockopedia.

'Standards' please don't talk about standards. I couldn't give a flying fig what your beef is with Paul Scott, talk about it with him rather than clutter up Stocko.

This comment is under review

Communicate with him by other means if you have to. You don't think you might be overly offensive and aggressive here?

nigelpm

I wouldn't touch Flybe as an investment - the load factor of 68% pretty much tells you all you need to know. It's shocking.

Ryanair reported a load factor of 94% for March FWIW and an average of 92% for the same period as Flybe have reported here.

They are being hammered by the likes of Ryanair and Easyjet.

Edward Croft

10th Apr '16

Having been away for a week I find it very disappointing to return to read some of the abusive language and personal vitriol being used on these boards.

Fangorn - please take this as an official warning that this kind of posting won't be tolerated. You've been a long time poster, but any more of this and we'll have to suspend your account.

Stockopedia is a safe place for civilised discourse. Anybody is free to critique and challenge anyone else's opinion and contrary opinion is welcome. But vitriol, personal attacks, swearing and general abusiveness is not.

Please keep it off this site. It's not what we're about, it lowers the tone, and nobody wants to read it.

Thread closed.

Small Cap Value Report (7 Apr 2016) - FLYB, UBI

Flybe (LON:FLYB)

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Paul Scott

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