LON:GMAA | Gamma Aviation Plc - Recent Tie Up With BBA Aviation

3rd Jan '17 by Dearg Doom

4 comments 3947 reads

Share Price 155p (up 14% today)

Market Cap £70.2 million

The Company

Gama Aviation is involved in the business of chartering, managing. and maintenance of planes as well as providing plane engineering training courses.

Latest News

Business news was pretty light on the first day back for trading in London for 2017. Only one piece of business news caught my eye. That news came from Gamma Aviation plc at the start of trade on the proposed teaming up of Gamma Aviation with BBA Aviation in the management of their combined fleet of 200 planes. The share price jumped 14%, in early trade reflecting some initial excitement with today's announcement.

“Gama Aviation Plc teams with BBA Aviation Plc to create the US's largest Aircraft Management Business”

Valuations

Shares in the airline sector always appear cheap. Shares in this sector always seem to be on relatively low p/e multiples, despite good results. Historically, shareholders just don’t seem to do that well in this sector. It is due to the cyclical nature of the business with regular boom and bust periods. Investors getting on-board at the wrong time.

Synergy Benefits

Seems a worthwhile win-win deal for both companies with little overlapping in geographical areas. Gama Aviation may have done a slightly better than BBA Aviation in the terms of the agreement.

Provides national geographical coverage with BBA's predominantly West Cost based fleet complementing Gama Aviation's currently East Coast centric business, creating a national network to enable further growth in this highly fragmented market.

Increased Profitability

Nothing too major or ambitious on immediate profitability with additional revenue matching additional initial costs. The re-branding costs presumably are the additional costs. This appears to be a relatively low profit margin area, so competition must be keen from other players.

Expected to deliver significant cost synergies of not less than $2M over two years.

Expected to be earnings neutral in 2017 and 2018 and earnings enhancing thereafter, before the benefits of cross selling maintenance services into the enlarged fleet.

Earnings

The share price rise today added £10 million to market capitalisation. Shareholders will have a 2 year time delay before any payback and some profit growth from the teaming up. Current forecasts are circa 25p earnings per share to the y/e 31/12/16. More will be known on January 9th with a trading update.

The…

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Dearg Doom

9th Jan '17

Price 167.5p Bid/Offer 165p - 170p Market Capitalisation £79.3 million

Gama Aviation released a trading statement today the 9th of January. The compann states that its full year end results to 31/12/16 are in line with market expectations. Broker forecasts available are circa earnings of 24p per share.

"Adjusted earnings, which exclude exceptional items and amortisation, on a constant currency basis, are in line with market expectations. Earnings also exclude a material foreign exchange credit, which resulted from the unusually volatile currency fluctuations during the year."

Highlights

Ø Strong revenue growth of over 10% year on year

Ø Earnings in line with market expectations

Ø Improving European business performance

Ø 12% increase in the number of aircraft under management

Two New Contract Announcements

"We are also pleased to have announced two significant contract awards following competitive tenders. The first is a new three year contract for our Europe Ground business to maintain the fixed wing fleet of the National Police Air Service and the second is a five year contract renewal to manage and pilot a UK aerial survey platform."

Total contract value of £10 million spread over an average of 3 - 5 years. Relativlely small in size given the amount they will add each year to overall profitability.

Final Comment

The share price is in a rising trend and given the positive announcements since the New Year. The chart shows a share price that looks go higher rather than lower. A price target of 200p looks very feasible in the next few months with a p/e of 8.

While Gamma Aviation is getting bigger, I'm not convinced it benefits from scale or pricing power. I need to see substantial upgrades to earnings to wet my appetite. The sector which is fragmented just looks too competitive.The share is off the radar for investors at the moment, so there may be some hidden value here. The dividend yield is only 1.68% which looks small.

I have no position in this company.

Regards

cig

This company is controlled by insiders I think, which can be perilous.

v2001

thanks for the report on this. I see upside averaging around the 250mark.

DJLJ23

10th Jan '17

A couple of things put me off, 1) I'm struggling to identify any significant level of institutional investment 2) the accounts show quite a lot of related party transactions, which make me wonder if the money is in a merry go round. good luck

Gamma Aviation plc - Recent Tie Up with BBA Aviation

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Dearg Doom

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