Overview

BBA Aviation PLC (Ticker Symbol: BBA) is a London, United Kingdom-headquartered multinational company, which provides global aviation assistance and aftermarket services, with the primary focus on serving the Business and General Aviation (B&GA) market. The company was founded in the year 1879 in Scotland, which grew to be known as BBA Group. The company has continuously re-invented itself to take advantage of opportunities from changes in markets and customer needs, and in 2006, after the demerger of its materials technology division, Fiberweb, the company turned its sole focus towards aviation support and aftermarket services business and was renamed BBA Aviation. After acquiring Landmark Aviation in 2016 and selling ASIG in 2017, the company has its sole focus on supporting the global Business and General Aviation market. The group is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.

While the company’s primary focus is on Business and General Aviation, its Signature Flight Support business is the world’s largest fixed base operation (FBO) and line maintenance network for Business & General Aviation users, the company is also engaged in Engine Repair & Overhaul (ERO) which provides services to regional commercial operators flying with engines in the sub-20,000 lb thrust category. The group has around 220 locations, operating in five continents, with more than 6,700 employees working under it.

Management

Sir Nigel Rudd was appointed as the Group Chairman in December 2016 and is Chairman of Meggitt PLC and Sappi Limited as well. The current Chief Executive Officer is Mark Johnstone. He was appointed as the Chief Executive in April 2018. David Crook holds the responsibilities of the Group Finance Director and appointed to the Board in June 2017.
 

Key Statistics

Segments

The company’s operations are differentiated into two segments: Flight Support and Aftermarket Services. The Flight Support business comprises of Signature Flight Support, which is the world’s largest fixed-base operation network for B&GA users covering destinations in North America, Europe, Caribbean, Africa and Asia, and segment provide refueling, ground handling, line maintenance and other services to the Business & General Aviation and commercial aviation markets. The Aftermarket Services division consists of Engine Repair & Overhaul and Ontic. The segment is focused on supporting maturing aerospace platforms through high-quality equipment and cost-effective solutions and helps in maintaining and supporting engines, components, sub-systems and systems.

Key Financial Metrics (for six months ended 30^th June 2018, in $m)

(Source: Company Filings)
 

Key Financial Highlights (H1 FY2018)

The group’s revenue increased by 8 per cent to $1,281.9 million in the first half of the financial year 2018 as compared to the corresponding period last year, assisted by an increase of 15.4 per cent in Signature’s revenue, reflecting a 5 per cent increase in the organic revenue. This growth was achieved despite soft market conditions. The topline number was also positively affected by foreign exchange movements. Company’s underlying operating profit increased by 3.3 per cent to $180.5 million; Signature network outperformed a weak market, while statutory total operating profit reported a rise of 4 per cent to $128.2 million vs $122.7 million in 2017. However, underlying operating profit margin fell to 16.3% against 17.1% in H1 FY2017, due to investments made in Signature. Company’s underlying EBITDA increased by 2 per cent to $222 million against $217.8 million reported last year. Company’s continuing statutory profit before tax decreased to $83 million from $84.7 million in H1 2017. Company’s continuing statutory profit after tax increased to $66.7 million from $52.5 million in H1 2017. Flight Support constitutes 87 per cent of the group’s continuing underlying operating profit, organic revenue was up 5.0 per cent over the last year with network agreements contributing to outperformance. Aftermarket Services constitutes 13 per cent of the group’s continuing underlying operating profit, operating profit reported a growth of 8.6 per cent to $23.9 million, driven by Ontic licence acquisitions. The group reported a robust free cash flow of $114.5 million in 2018 against $56.6 million in 2017. The underlying total adjusted basic EPS rose by 3 per cent to 11.7¢, while total basic EPS increased by 27 per cent to 6.5¢. The management announced an increase of 5 per cent in the interim dividend to 4 cents.

Ratios

(Source: Thomson Reuters)

Ratios Commentary

The company’s profitability margins till operating profit level are significantly below the industry median, showcasing high operating costs. However, the net margin and return on equity are better than other profitability ratios. Moreover, the net margin and ROE increased during the first half of FY2018 and is moving towards the industry median. The liquidity position, though below industry levels, has substantially improved for six months ended 30 June 2018. The group is still less leveraged than its competitors, while the position has remained stable over the periods. The company is able to generate more revenue per unit of an asset than its competitors. This reflects the optimal usage of resources, and the ratios have increased over the period.

Valuation Methodology
 

Method 1: Price/Cash Flow Multiple Approach (LTM) (Cash Flow Per Share (FY19E) approximately)

 

Method 2: Price to Book Value Multiple Approach (LTM)

To compare BBA Aviation with its peers, Price/Book has been used. The peers are Northgate PLC (LTM P/B was 0.92), National Express Group PLC (LTM was 1.84), Stagecoach Group PLC (LTM P/B was 5.09), Go-Ahead Group PLC (LTM P/B was 3.56), Easyjet PLC (LTM P/B was 1.6) and Ryanair Holdings PLC (LTM P/B was 2.85). The median of Price/Book (LTM) of the company’s peers was 1.84x.

* All forecasted figures and peers have been taken from Thomson Reuters.

**At the time of writing the report, the exchange rate was trading at $1.3259/£.

Historical Surprise

In FY 2018, the company had beaten the consensus estimates for Earnings per share by 8.2 per cent. Similarly, the EBITDA reported by the company in the last year had been substantially more than the street estimates. In FY2016, the company reported EBITDA 19 per cent more than the industry estimate. In FY2017, the company reported EBITDA 22 per cent more than estimates.

Share Price Commentary

(Source: Thomson Reuters)

On 27th February 2019, BBA Aviation shares closed at GBX 243.2, down by 2.01 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 354.00 /GBX 207.00. At the closing price, the share was trading 29.66 per cent lower than its 52w High and 20.29 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 1,760,167.60; 30 days - 1,755,073.47 and 90 days - 2,226,520.87. The average traded volume for 5 days was up by 0.29 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 15x as compared to the industry median of 16.5x. The company’s stock beta was 1.14, reflecting more volatility as compared to the benchmark index. Total outstanding market capitalisation was around £2.50 billion and a dividend yield of 4.14 per cent.

Risks Assessment and Growth Prospects  

The company is targeting that the Signature will outperform US B&GA movement growth by 2.5 per cent over the medium term. Fundamental changes in the world’s economic status or cyclical fluctuations can adversely affect B&GA and commercial flying and military expenditure, leading to weakness in sales in the ERO sector. The company has a leading presence in the segments it operates. It has several FBO locations worldwide. This helps the company to improve its cost efficiency.

Conclusion

While broad-based challenges can be seen ahead of the group, the current trading levels still indicate a positive movement in the stock with support coming from few growth drivers, specifically from Ontic and Signature Flight Support. Based on decent fundamental performance indicating a potential for upside, and the valuation done using the above two methods, we have given a BUY recommendation with a high single-digit upside potential range based on 8x LTM Price/Cash Flow on FY18E Cash Flow per Share and 1.84x LTM Price/Book on FY18E Book value per share.

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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