Stockwatch: speculative intrigue if you are up for a gamble
28th January 2022 11:58
by Edmond Jackson from interactive investor
This successful share tip is subject of a takeover, but our companies analyst says integration benefits and macroeconomic recovery could help turbocharge the new business.
Affirming that a long-term takeover trend – of UK small-caps by US corporations – is still intact, 60-year-old Air Partner (LSE:AIR) is being acquired by 10-year-old Wheels Up Experience (NYSE:UP).
Both companies offer private jet hire, although Air Partner has an established profits record and lower risk with a spread of operations.
Air Partner’s exit value – happening in the first quarter of this year – will be £95 million versus Wheels Up at just over $1 billion (£750 million). Annual revenues compare at what looks like being £77.5 million for Air Partner’s last financial year, versus $1.15 billion or £860 million equivalent.
In price/sales terms, this implies 1.2x for Air Partner and just under 0.9x for Wheels Up, although Air Partner had a 12.4% operating margin in its financial year to 31 January 2021 versus Wheels Up making a $121 million net loss in the nine months to 30 September 2021.
Wheels Up’s rationale is to accelerate its global strategy – especially into Europe – and enhance its network with operational capabilities. Air Partner’s operations are on four continents including the US, and offer diversification into charter, freight and other services such as safety, security, emergency planning and incident response.
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A well-timed cash offer at 125p a share
This US buyer is taking control at what looks like a nadir for the stock’s performance, before it reflects progress and prospects.
As recently as December, I drew attention to Air Partner as a “buy” at 82p after it had issued three profit upgrades in respect of its financial year to 31 January 2022. Yet the stock remained low in a sideways range since the 2008 financial crisis.
Private jets – around a third of profit – were capitalising on modern wealth extremes and a desire for exclusivity as Covid becomes endemic. Freight at 20% of profit might enjoy sustained demand for another two years, or however long the pandemic persists. Charter at 27% of profit should in due course recover, according to demand from tour operators and conferences/exhibitions. Safety and security at 21% of profit should benefit from regulation as a longer-term influence.
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Then on 7 January Air Partner declared a fourth upgrade, saying the latest year’s profit would be “materially” ahead of market expectations at the time of the 17 December update. Performance had benefited from high levels of freight bookings, notably for continued transportation of vaccines. Net cash excluding customers’ segregated accounts had risen 32% to near £13 million over five months from end-July.
A dilemma for stock sentiment has been a £3 million-plus accounting error that surfaced in April 2018, which hit its price from 150p. The table shows £3.6 million net profit for the January 2018 year, rebounding to £5.5 million to January 2021 after an initial Covid-related drop.
Profit is likely to ease again when exceptional freight demand does, but forecasts have been too conservative, and the stock languished sub-100p as the market failed to recognise Air Partner’s medium-term strategic potential.
This has enabled a US buyer to present what seems a generous offer with a 50% premium for control, helping it out of an increasing credibility problem on Wall Street.
Wheels Up stock is down 70% since last July
Having started trading at around $9.7 in November 2020, it rose to $11.6 last July but has since been in a downtrend – possibly enhanced by the fact that 2.2% of equity is currently shorted. The technical situation also does not look great considering Wheels Up initially rose 7% to near $4 with yesterday’s strong US market open, but closed slightly down at $3.58 despite news of the Air Partner deal.
Last 30 September, it had $535 million of cash in the context of $883 million of net assets, although apart from $585 million of deferred revenue there was just $22 million long-term debt.
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The third-quarter results had shown a 55% like-for-like increase in revenue to $302 million, with active members up 45% to 11,375. Quite whether the 2020 numbers were an easy comparator due to the pandemic is hard to tell, although Air Partner’s first-half results to 31 July showed an 8% drop in interim revenue to £37 million.
The first nine months of 2021struck a $120 million loss on $849 million revenue; whereas Air Partner made a £2.7 million interim net profit after £5.6 million in its last financial year.
Conservative investors will want first to see an established profits record, while speculators can be intrigued at Wheels Up’s revenue dynamics and the declaration that this deal “accelerates our long-term vision to be the global leader in private aviation”.
If that is achievable then it is noteworthy in terms of the enlarged group’s eventual stock rating, and coincides with Wheels Up stock at a post-flotation low. There is speculative intrigue if you are up for a gamble.
Air Partner - financial summary
Year end 31 Jan
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |
| Turnover (£ million) | 49.9 | 42.5 | 74.3 | 77.5 | 66.7 | 71.2 |
| Operating margin (%) | 6.4 | 9.4 | 7.0 | 4.6 | 2.2 | 12.4 |
| Operating profit (£m) | 3.2 | 4.0 | 4.9 | 3.6 | 1.5 | 8.9 |
| Net profit (£m) | 2.3 | 2.5 | 3.6 | 2.9 | 0.3 | 5.6 |
| Reported EPS (p) | 3.8 | 4.7 | 6.7 | 5.4 | 0.6 | 9.3 |
| Normalised EPS (p) | 5.8 | 6.5 | 8.6 | 10.7 | 6.3 | 12.4 |
| Earnings per share growth (%) | 4.3 | 13.4 | 31.5 | 24.3 | -40.7 | 96.7 |
| Return on total capital (%) | 23.4 | 28.0 | 30.3 | 19.7 | 5.7 | 35.7 |
| Operating cashflow/share (p) | 11.4 | 3.5 | 18.6 | 3.6 | 14.4 | 23.6 |
| Capex/share (p) | 0.5 | 0.5 | 1.2 | 0.9 | 1.7 | 0.9 |
| Free cashflow/share (p) | 10.9 | 3.0 | 17.4 | 2.7 | 12.7 | 22.7 |
| Dividend per share (p) | 4.9 | 5.2 | 5.5 | 5.6 | 1.8 | 2.4 |
| Covered by earnings (x) | 0.8 | 0.9 | 1.2 | 1.0 | 0.3 | 3.9 |
| Cash (£m) | 17.0 | 17.8 | 23.2 | 25.2 | 21.4 | 27.7 |
| Net debt (£m) | -13.5 | -14.9 | -20.7 | -19.7 | -1.6 | -20.9 |
| Net assets (£m) | 10.2 | 11.0 | 11.4 | 11.7 | 9.2 | 21.1 |
Source: historic company REFS and company accounts
How will integration work out in practice?
As ever at the initial stage of a merger, both boards enthuse about complementary skills and leveraging business, that two plus two equals five.
Air Partner sees scope to “significantly enhance our technology, customer offer, and international aircraft supply”. But investors and staff still face uncertainty as to how this will pan out, and while Air Partner already has US operations there is likely to be some culture change as a result of US control. This comes at a time when costs are increasing, which may mean selective job cuts.
Again, a conservative investor would wait to see evidence that the merger is working, rather than back hopes.
What can help tip these uncertainties favourably for stock sentiment is signs that business travel is returning. At its last results, Wheels Up management pointed out that US commercial flights are recovering generally and 85% of its membership uses its planes say for the final stage of a journey.
There is also tacit evidence that the Omicron variant has boosted use of private jet use by business, which was recently up 19% in the US and 13% in Europe compared to January 2020 before the pandemic.
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Yesterday’s bullish growth figures for the US economy augur well for this trend continuing.
Should the Ukraine crisis fester, however, air travel-related stocks are liable to get pressured, which could potentially be a buying opportunity if people are now determined to get on with their lives as Covid becomes endemic.
Private jets seem likely to enjoy sustained demand after monetary stimulus has exacerbated wealth inequalities that were already widening, and given that the super-rich desire exclusivity.
Since potential for private jets was a key reason for my bullishness on Air Partner, I suspect its integration with Wheels Up will result in greater exposure to this activity.
Low chance of a rival offer
If Air Partner was a more substantive business, the deal could get out-bid. But at this small size of company, and given that both sides have negotiated on the integration benefits, I think the market is right to price the stock at 123p bid/124p offered – a small discount to the offer price.
A relatively cautious approach is to sit back and await the cash, although enterprising speculators might like to consider a switch already. If the macro situation continues to favour air travel resuming and Wheels Up achieves decent integration with Air Partners, in due course this could prompt the closure of short positions and an uptrend in its stock. Buy.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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