John Menzies shares offer 50% upside potential

It sold the newspapers division, but Menzies shares are down and seriously undervalued, argue some.

Despite having no more newspapers or magazines to distribute, John Menzies (LSE:MNZS) is still struggling to win over investors following its relaunch as a standalone aviation services business.

Shares fell as much as 9% as a solid first set of annual results in its new form were offset by the surprise departure of CEO Forsyth Black after 19 years with the Edinburgh group. Black is leaving with immediate effect, meaning that finance chief Giles Wilson is in charge for the foreseeable future.

The new-look stock has struggled for momentum despite jettisoning its print media and retail logistics arm in a deal that reaped £74.5 million last summer. It left Menzies focused on a structural growth market of aviation services, in which it serves 212 airports in 36 countries.

The division handles 1.3 million flights, 1.6 million tonnes of cargo and fuels 3.9 million turnarounds for customers including International Airlines Group, Air France-KLM and American Airlines. Today's results showed some promise with a 20% improvement in underlying earnings per share to 37.6p, despite challenges in some aviation markets.

Menzies said it was not only operating in a growing market, but benefiting from favourable trends as low-cost carriers boost market share and more traditional airlines look to optimise their cost base by outsourcing more services.

Source: TradingView (*) Past performance is not a guide to future performance

In its two largest categories - ground handling and into-plane fuelling - Menzies sees significant opportunity with aircraft traffic projected to grow by 4.7% per year. The world’s aircraft fleet is also expected to grow by 3% annually through to 2037.

Today's performance set the benchmark for its growth ambitions, which will include a top-line improvement of 8% per year and minimum EPS growth of 10%. It will look to continue with a progressive dividend as long as cover is between two and three times. As expected at the time of the logistics sale, today's full-year dividend has been pegged at 20.5p a share.

The shares trade on a 2019 price/earnings (PE) multiple of 12.5x, which analysts at Numis Securities think looks undemanding given the growth opportunities available. They have a price target of 790p, which would be a record high for a stock which traded as low as 488p Tuesday.

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Shore Capital is also a fan of the restructured company, which it praised for a resilient performance last year. The broker said:

"We believe that Menzies is well placed strategically and with resources in place for renewed growth in the coming years."

Net debt was slightly higher than expected in today's results at just under £200 million, partly due to FX headwinds on US borrowings. Labour shortages in North America also meant profits declined 17% year-on-year in the region, although Menzies says it is confident it can win more contracts and grasp cross-selling opportunities.

The Americas decline was more than offset elsewhere, with Europe, Middle East and Africa and cargo forwarding both boosting profits sharply.

*Horizontal lines on charts represent levels of previous technical support and resistance.