BBA Aviation PLC (LSE: 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 maintained the 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.  The group has around 400 locations, operating in five continents, with more than 6,000 employees working under it. Sir Nigel Rudd was appointed as the Group Chairman in December 2016. 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



Top Shareholders

 

Segments Performance

The company’s operations are differentiated into two segments being Signature and Ontic. The Signature segment provides operations related to ground handling, refuelling, line maintenance and other services related to the commercial aviation and B&GA (Business & General Aviation) markets. The Ontic segment provides services related to maintenance and support of aerospace components and systems. In the FY2018, the revenue from both the segment had increased against the FY2017 data. The company’s operating profit had increased from both Signature and Ontic segments in the current financial year. The company’s revenue from Mainland Europe, North America and Rest of the world geographic segments had increased in the current year whereas, the revenue from the United Kingdom segment had declined.

Trading Update (1^st Jan - 30^th April 2019)

The company’s revenue (continuing business) was up by 23.1 per cent against the previous year data. The increase was driven by organic growth and the acquisitions done during the year 2018 which includes Firstmark, Ontic and EPIC. On a like-for-like basis, revenue was up 1.1 per cent (constant currency, adjusting for fuel prices and before acquisitions). The company’s revenue from Signature business was up by 22.7 per cent and 0.4 per cent on a like-for-like basis against 2018 data for the same period. For the Q1 to 31^st March 2019, B&GA flight movements in the US was up by 0.3 per cent. The company’s revenue from the Ontic business grew by 33.6 per cent and 14.4 per cent based on like-for-like. The company integrated Firstmark business within Ontic and shown increased results as forecasted by the company.

Financial Highlights – Financial Year 2018 (US $, million)

 

(Source: Annual Report, Company Website)
 
The company’s continuing revenue surged by 26.4 per cent to $2,347.3 million as compared with the financial year 2017 of $1,857.3 million, which includes $292.5 million from the EPIC’s acquisition and acquisition of Ontic licence and Firstmark contributed $12.3 million. In FY2018, the continuing underlying EBITDA stood at $417.7 million against $416.2 million in FY2017. The group’s continuing underlying operating profit was $340.2 million as compared to $336.5 million in 2017. Continuing underlying operating profit increased by 1.1 per cent to $340.2 million as compared to $336.5 million in 2017. The underlying profit before tax (continuing) stood at $273.9 million as compared with the financial year 2017 of $275.0 million.  Continuing group profit before tax was $147.2 million as compared to the financial year 2017 of $157.6 million, due to the increase in the exceptional and other items charged. Adjusted basic earnings per share for continuing operations declined by 3.7 per cent to 21.0 cents as compared to 21.8 cents in 2017. Unadjusted basic EPS (continuing operations) stood at 11.4 cents. The management team proposed a final dividend per share of 10.07 cents, up by 5 per cent from the last year data due to the progressive dividend policy adopted by the board and confidence in the company’s future development prospects. The company’s total dividend per share for FY2018 stood at 14.07 cents.

Key Performance Indicators



Organic revenue growth

Underlying growth of the business is measured using organic revenue growth. It removes the impact created by fuel price fluctuations, foreign currency and contribution from disposals and acquisitions of businesses. In FY2018, Signature FBO business delivered 3 per cent organic revenue growth.


Adjusted earnings per share

Adjusted EPS excluding the effect of exceptional items and measures the profit attributed to shareholders. 2018 adjusted earnings per share declined by 2.9 per cent as 4 per cent growth in underlying operating profit was offset by an increase in the interest payable and the underlying tax rate.


Cash conversion

Cash conversion measures how effectively the company’s operating profit can be converted into cash. This measure helps effective working capital management and decisions related to capital deployment and enabling the company to invest in growth opportunities. Cash conversion of 118 per cent in 2018 was down as compared to 2017 data.


Return on invested capital

ROIC confirms the appropriate utilization of the company’s assets and capital to generate operating returns. ROIC surged by 40bps in 2018.


Dividend per share

The Group remains well-organized with its capital allocation approach to maximise the shareholders’ wealth. The dividend pay-out shows effective capital management. 2018 total dividend per share surged by 5 per cent in FY2018.

Financial Ratios

 

(Source: TR)
 
The reported gross margin in FY2018 declined by 4.1 per cent to 22.2 per cent against 26.3 per cent reported last year for the same period. The reported EBITDA margin of 17.8 per cent for the FY2018 stood lower than the industry median of 43.4 per cent. Net margin reported was 5.1 per cent for the financial year 2018, reflecting a decrease of 2.4 per cent when comparedwith last year data. Return on equity for the current financial year stood at 6.1 per cent which was lower than the industry median of 11.8 per cent. On the liquidity front, BBA Aviation Plc’s current ratio was lower than the industry median of 1.50, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the BBA Plc’s was 0.74x which was lower as compared to the industry median of 0.99x, reflecting that the company is less leveraged as compared to its peers.  
 
Share Price Performance

Daily Chart as at June-10-19, before the market close (Source: Thomson Reuters)

On June 10, 2019, at the time of writing (before the market close, at 1:30 PM GMT), BBA Aviation Plc shares were trading at GBX 264.40, up by 0.38 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 354.00/GBX 207.00. At the time of writing, the share was trading 25.31 per cent lower than the 52w High and 27.73 per cent higher than the 52w low. Stock’s average traded volume for 5 days was 1,681,558.60; 30 days – 2,132,374.43and 90 days – 2,272,215.03. The average traded volume for 5 days was down by 21.14 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.22, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £2.73 billion with a dividend yield of 4.08 per cent.

Valuation Methodology
Method 1: Price to Cash Flow Approach (NTM)
 

To compare BBA Aviation Plc with its peers, Price/Cash Flow multiple has been used. The peers are Go-Ahead Plc (NTM Price/Cash Flow was 8.16), Vesuvius Plc (NTM Price/Cash Flow was 9.61), Wizz Air Holdings Plc (NTM Price/Cash Flow was 7.49) and Essentra Plc (NTM Price/Cash Flow was 10.44). The Average of Price/Cash Flow (NTM) of the company’s peers was 8.92x (approx.)

Method 2: Price to Book Value Approach (NTM)
 

To compare BBA Aviation Plc with its peers, Price/Book Value multiple has been used. The peers are Ryanair Holdings Plc (NTM Price/Book Value was 2.12), Essentra Plc (NTM Price/Book Value was 1.83), Clarkson Plc (NTM Price/Book Value was 1.59) , Aeriporto Guglielmo Marconi di Bologna SpA (NTM Price/Book Value was 2.23) and Societe Marseillaise du Tunnel Prado Carenage SA (NTM Price/Book Value was 1.74). The Average of Price/Book Value (NTM) of the company’s peers was 1.90x (approx.)

Growth and Risk Assessment

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. The company is generating decent revenues from the majority of geographic locations in which it operates. The company’s operations are exposed to risks related to liquidity and funding, currency fluctuations and interest rate movements.

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 a few growth drivers, specifically from Ontic and Signature Flight Support. The company’simproved business performance of Flight Support segment, strong market position and cost efficiency are its major strengths, even as declining working capital remains an area of concern. In the future, increasing competition, risks related to unforeseen circumstances and stringent regulations in the aviation industry may impact the company’s performance. However, strategic acquisition, the long-term outlook for the aviation industry and business expansions are likely to present new growth opportunities to the company. 
Based on  fundamental prospects and support from valuation done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 263.40 (as on 7th June 2019) with lower double-digit upside potential based on 8.92x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.) and 1.90x NTM Price to Book Value (approx.) on FY19E book value per share (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on 10th June 2019).
*All forecasted figures and Peers information has been taken from Thomson Reuters.Currency exchange rate taken for 1 USD = 0.78777 GBP

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