Small Cap Value Report (26 Oct 2016) - OTB, AVAP, PVCS, EPO, FLYB, CAU

26th Oct '16 by Paul Scott

18 comments 18722 reads

Good morning!

I had a late surge yesterday, and added several more sections to yesterday's report - so here's the link for that, to get you started whilst I'm busy writing today's report!

I added sections on;

Braemar Shipping Services (LON:BMS) - good reasons to expect earnings to recover somewhat, but not strikingly cheap. Divis look unsustainably high.

Pendragon (LON:PDG) - very good update. Looks dirt cheap, but what impact will price rises have next year?

M P Evans (LON:MPE) - unsolicited bid approach.

OTB - On the Beach

Unfortunately, the technical gremlins struck, and the section on OTB vanished. However, to recap, all I said was that it's worth a look. The company (an online travel agent, specialising in short haul beach holidays) delivered 12% turnover growth, but increased profits further by restraining its marketing spend.

The valuation of OTB looks quite appealing, although as with most retail or travel-related companies, the market is naturally worried about the impact of weaker sterling. I've put OTB back onto my watch list, but am holding back on buying shares right now, as the price/chart look rather weak.

My feeling is that Brits will still want our summer holidays abroad again next year, despite stronger sterling. We just might trade down to a cheaper destination, and perhaps trim back on luxuries such as eating out - e.g. I often take a few packets of noodles (18p each from Aldi) with me in my suitcase, when holidaying.

So bombed-out holiday company shares might be worth considering, who knows? Especially something like OTB, which seems to be gaining market share from conventional travel agents. Anyway, I'll give it some more thought, haven't made my mind up yet about that one.

Avation (LON:AVAP)

Share price: 161p (up 5.9% today)
No. shares: 58.9m
Market cap: £94.8m

Possible sale of aircraft - an intriguing announcement this one.

Here's an edited version, of the key points;

Avation PLC (LSE: AVAP), the commercial passenger aircraft leasing company advises that it has received an expression of interest for the purchase of its current portfolio of ATR turbo prop aircraft. The company will evaluate the expression of interest in due course and emphasises that…

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Carcosa

26th Oct '16

Avation (LON:AVAP) Am guessing it may be Nordic Aviation Capital that want to acquire the ATR turboprop fleet because it will then give them a great deal of pricing power especially when they start to make sales into China for the first time (and also maybe the Iranian deal). When you become effectively the only lessor with an in demand aircraft it makes sense (to me). However nearly all of those AVAP ATR aircraft are on 6+6 year leases so any lease increments are years away but nevertheless there different accounting policies may make it sensible for them to acquire the aircraft above book value.

However, for AVAP to get rid of their ATR fleet is something I am not entirely comfortable with (and it will go to a shareholder vote). That reliable income stream will disappear, relationships with financiers will change, I guess the corporate GMTN bond risk increases somewhat and may make it more expensive for AVAP to raise future capital?

According to my own figures the ATR fleet in question has:

Current Estimated NBV	$371,295,346
Loan to Book Value	76%
Outstanding Loan	$282,184,463
Cash	$89,110,883

So the substantial premium would have to be 10-20%? giving Net cash of ~$100m. Not bad for a ~$115m market cap.

I find it hard to imagine anyone paying that sort of premium; maybe 5-10% but not much more. And then we are left with AVAP with its heart cut out holding very valuable A320 assets which makes the company more risky.

AVAP would end up with 12 x A320/321's and not much else (F100's and ATR finance lease aircraft) generating ~$45m annualised revenue compared to around ~$100m otherwise.

If AVAp can secure a large premium to the NAV then they are going to have to explain it's longer term impact before they get my vote. Prior to this deal the shares are ridiculously cheap and today's announcement would have to increase the share price by 50%+ before they would get my shareholder vote; and that ain't going to happen.

mikelevie

Hi Paul, seen the RNS about CEO stepping down at £FLYB?

tabhair

Going back to yesterday, I took a quick look at Carpetright (LON:CPR) this morning. It's a share I never really looked at previously due to the eye-watering valuation that it commanded. That's obviously changed a lot as the price has crashed below £2. I can't say the collapse is surprising, or even unjustified. Their fall in like-for-like sales in the UK when competitors like SCS (LON:SCS) and United Carpets (LON:UCG) are both increasing their own LFL sales indicates that there's something going wrong operationally at the business.

At this point, I think it's all down to management and can we trust their turnaround plan. Has anyone got their ear close to the ground on this one? Are management credible, are they doing the right then?

JohnEustace

Re Avation (LON:AVAP), the aircraft are potentially worth more than book value if Avation use a conservative depreciation policy. From memory of one of their presentations the planes will continue to produce income for some years after Avation have fully depreciated them. If that is the case and Avation have a bid significantly above book value then that could be an argument for them to sell, or if not adjust their depreciation policy to reflect a longer asset life and therefore a higher current book value.

The aircraft are a type that is much in demand in the industry.

Edit: I agree with Carcosa that it would take out the heart of the company. I might support a full bid at the right price but not this approach.

Paul Scott

Hi Mikelevie,

Yes I saw the RNS about Saad Hammad stepping down from CEO role at Flybe (LON:FLYB). That was next on my list to write about - have added a short section above. It doesn't look good, does it?

Regards, Paul.

grumpy5

Re AVAP, Paul as an (ex) CA you ought to remember that net book value need not necessarily equate to market value! :-)
Does the company have any delivery slots that would also add to its residual value after the ATR fleet has been stripped out?

Thanks Paul, no not good at all. Wonder if we're into takeover territory now (he says in vain hope).

WatsonNimrod

The problem is who would actually want to buy FlyBe?

Surely not Ryanair or EasyJet who have built their strategy around 1 type aircraft fleets? Why would they want to take on smaller aircraft types serving routes which are not viable on their larger aircraft (often not viable on the DHC-8-400).

If you take a look round the aviation industry who would want to buy them?

Like I said, vain hope.

grumnmy5:

Avation (LON:AVAP) have nine new ATR72's for delivery between 2017-2019 plus options for an additional 27 aircraft. There is some discussions that two new production slots, will be sold before year end. Although the value of sold production slots can be highly variable I estimate a typical 'profit' is circa $345k plus the return of a deposit of around $100k for the production slot. However in the past they have realised a profit far in excess of $1m on occasion but I think this is unusual.

Although AVAP are committed to various production dates, ATR are generally very flexible for anything 6+ months ahead.

The market value of the aircraft would likely be increased if the China market is cracked (ATR are currently marketing the aircraft there) and in the shorter term if Iran get the American Export licenses and finance sorted out then there order for 40 aircraft asap will make those production slots more valuable.

bobo

Flybe's pricing has always been high, but the good thing is you get from some out of the way place to another. Trouble is the market is always limited. So wrong business model for the times

pierotlunaire

The EPO market cap is wrong on Stockopedia. More like £75m so with £14m of cash just now, this is £60m EV and if they do £30m of transactional revs next year, this would put it on 2x revs. Q1 has 2.3m transactions at the average £3.12 per tx, so revs of £7.8m ish which seems to support a decent uptick in revs for 2016/17. EPO is the only player in the end-to-end processing of global small payments and is increasingly winning business from decent banks and also e-commerce companies in a huge market. I appreciate they have never done their numbers, but as a former professional VC, I wd attest to the fact that no developmental stage company ever does do aspirational numbers. Management have asserted in their plan that getting to cash breakeven by late 2017 (I think their year not calendar) with £10-11m left over is sacrosanctn (per today's analyst conference) so I don't see that a further equity raise is likely. What is this company worth when nit gets past cash breakeven with £30 or £40m of highly valuable transactional revs? In the US, where there a lot more comps in SaaS and transactional business modesl, the answer is 5-10x revs. So today's £75m could be worth £200-400m down the track. So 3-5x from here in a business model which is increasingly performing, doesn't require more financing (I hope) and is the sole real player in this part of the payments processing world? I appreciate that this is a VC type analysis (ie growth focussed) and not your typical "value" analysis but you need a bit of both in a portfolio and there aren't many 3-5x ers around on the London market.

Hi pierotlunaire,

Points taken. However, my main gripe with Earthport (LON:EPO) is that it has been promising great things, with essentially the same narrative now for 15 years! It's never achieved anything worthwhile in the past, and every year they tell us why it will be different this time, but it never is!

Re the number of shares in issue being incorrect, it looks like you're right, I've amended the article. Also, I've raised a support ticket so that Stockopedia can flag the data error with Thomson Reuters & get it corrected. Thx for pointing it out. Apparently we at Stockopedia are one of the top customers for cleaning up Thomson Reuters data errors. Maybe they should be paying us, not the other way around?!

Regards, Paul.

Paul

It's been a bumpy ride with some not very good directors during this period. I think I also had to put money into a cram down round here to avoid being wiped out. However, you shd not tar the current CEO with a 15 year brush. He has built a much stronger team around him and won lots of pretty fine clients. He has of course also missed his numbers but has raised enough capital(at 42p) to get through to cash breakeven and with a 70% gross margin, if they do £30m revs, the extra £8m will reduce losses by £6m etc etc. Having sold in the 40ps when Oppenheimer recapitalised the company, I'm in the unusual position of being able to replay the game with a much stronger team.

Jardine

It seems to me Avation (LON:AVAP) have a funding problem. Their loan to value ratio is at 75% which is probably the maximum they can get away with. Their share price is derisory so a placing is probably out of the question. Interestingly at the start of October they did a very small placing of about £5m. I wonder of they tried to do a larger one and didn't get enough takers? That puzzled me.

So perhaps the only solution is to make more effective use of the capital base they already have. At 30 June they had $48m in the bank, which when you are buying aircraft probably isn't a lot.

Aislabie

AVAP has been unable to get the stockmarket to reflect the earning value of their business and I am sure it is deeply frustrating - in fact the CFO said as much in the recent round of briefings.
But lessors know the real value and by letting one demonstrate it they get a proper value for shareholders and a chunk of cash to decrease borrowing (which in this case with matched earning assets should never have worried the market anyway) and move their business further into higher value jets.
One point that also came out of recent presentations was that institutions were holding back until AVAP had a $100milion market cap. I suspect at that the sale will reveal much more than a 10% uplift to book value and pull up their market cap

stocko12345

27th Oct '16

Flyb look attractive with so much cash, they can become very profitable very quickly with the right actions. BUY

cig

Isn't most of the cash coming from fares already paid for booked flights?

Small Cap Value Report (26 Oct 2016) - OTB, AVAP, PVCS, EPO, FLYB, CAU

Avation (LON:AVAP)

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Paul Scott

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