Interactive Investor

Stockwatch: what scope for a turbo-charged takeover?

11th February 2022 12:00

Edmond Jackson from interactive investor

Our companies analyst considers whether this leading aviation services business is likely to do better if it can fight off the current speculative approach.

Aviation services are a current hot spot, as the industry acts to exploit stock ratings depressed by Covid before flights recover too much further.  

Following the current takeover of £78 million Air Partner (LSE:AIR) by a US executive jets operator, the circa £440 million cargo and passenger ground handling services group John Menzies (LSE:MNZS)  is now subject to a takeover approach from Agility, an infrastructure and supply chain services group listed in Kuwait and Dubai. 

Air Partner had traded at around 80p before a 125p agreed offer, so saw a premium of over 56%, while the Menzies board has rejected ‘possible offers’ initially at 460p a share, and also an improved 510p from Agility that would represent a 73% premium to a recent stock price of around 295p.  

Motivation exists for Agility to reach a deal, given that the near £1.2 billion revenue projected for Menzies this year would re-rate Agilitys operations, which achieved £4 billion equivalent revenue in 2020. There would also likely be integration benefits and scope to achieve economies such as slashing Menzieshead office costs.  

Perfect timing, inflection point for the business 

Menzies is one of a few global leaders in its industry, so Agilitys stock would likely benefit if it were seen to acquire Menzies at a shrewd point in the cycle and without overpaying. 

I drew attention to Air Partner as a ‘buy’ last December at 82p, and a few weeks previously, in November, highlighted John Menzies at 295p on the grounds of recovery and takeover potential. I argued that the business was at an inflection point, as does Menziestakeover defence available now on its website.  

Menziesstock opened at around 440p after Wednesday mornings news of the approach, trading at over 470p at one point. It has consolidated at around 455p after Thursday morning saw Agility make its own announcement of a ‘possible offer’ via its National Aviation Services subsidiary NAS Holding. And it was at around 470p on Friday morning.

Given that a genuine offer is yet to materialise, Agility is as yet exploring shareholder sentiment. On Wednesday, I assumed its advisers would consult with Menziesinstitutional holders, so it seems Thursdays announcement is a formal basis on which to do so. 

Much therefore depends on whether the institutions prefer to accept cash now, as enough did at Air Partner, or choose to trust in the Menzies boards bullish agenda for standalone recovery. 

510p a share is only median the historic range 

When I rated the stock a ‘buy’ last November, I noted it was trading around the same level 20 years ago after the Menzies newsagents chain was divested.  It traded up to 700p in 2013 and 2018, but with lows of 60p in March 2009 and 99p in March 2020.  

A 510p offer would therefore only be midway in the historic range and could prove a steal if accepted. The exit PE multiple would be just 12.4x the markets current consensus target for EPS of 41.2p in 2022. That is modest in itself, besides offering no premium for control. 

Moreover, last November I also pointed out that if Menzies in due course restores anything like the 20.5p a share of annual dividend it paid in respect of 2017 and 2018, you could potentially also lock in a near 7% yield. The stock would have to rise, otherwise such a yield would be over-generous.  

This represented nothing especially optimistic, given that last November it represented nearly twice earnings cover according to the 2022 EPS forecast then, and is over 2x now. 

Such thoughts are introductory reasons why Agilitys claim to an ‘attractive’ offer at a 76% premium to Menzies stock just over a week ago is a cunning one.  

Market pricing has been flawed, partly due to Covid disrupting air travel and then just lately to the Ukraine crisis; but is a reminder how UK small caps especially, when they enjoy strong positions in their operating markets, can attract takeovers. 

Historically low operating margins could improve  

Significantly, the reason for Menziesstock falling so low at times of general crisis in 2009 and 2020 was persistently low single-figure operating margins (see table). Such a profile instilled fear that material changes in revenue would have an even greater effect on near-term profit.  

But Menzies now says: Since 2019, the business has been re-shaped with £25 million permanent costs removed… a refocused commercial approach has generated £120 million of net new annualised revenue. There are new fuelling operations, and extending cargo and ground services to emerging markets should result in higher margins."  

The sense of overlap with Agility – which has operations in the Middle East, Africa and Asia – is palpable.  

Citing a full pipeline of opportunities”, Menzies reckons it can generate a further £80 million of net new annualised revenue; furthermore, it anticipatesseveral business development opportunities that will deliver £150-200 million new revenue over the short to medium term – all of which are expected to be at higher margins.” 

The situation does indeed appear to have advanced in three months since I cited some £13 million of net profit expected for 2021 and a record £31 million in 2022. Consensus is now £14.7 million rising to £34.8 million, representing EPS of 24.6p rising to 41.2p.   

This takeover attempt significantly hinges on the feedback from the institutions: crucially, on whether they indicate a price level at which they would accept an offer and Agility is ready to step up to it. 

John Menzies - financial summary
Year-end 31 Dec

  2015 2016 2017 2018 2019 2020
Turnover (£ million) 1,899 1,982 1,274 1,291 1,326 824
Operating margin (%)                1.3 1.3 1.6 2.5 3.0 -12.1
Operating profit (£m) 24.9 25.3 20.7 32.6 39.4 -100
Net profit (£m) 10.1 8.5 12.6 -5.7 10.8 -127
EPS - reported (p) 14.5 11.8 2.6 14.6 10.8 -151
EPS - normalised (p) 35.7 46.2 36.9 34.4 16.0 -154
Operating cashflow/share (p) 33.2 33.0 48.6 34.4 85.3 104.0
Capital expenditure/share (p) 35.7 37.7 38.9 38.5 41.6 29.9
Free cashflow/share (p) -2.5 -4.7 9.7 -4.1 43.7 74.1
Dividends per share (p) 14.8 17.9 20.5 20.5 6.0 0.0
Covered by earnings (x) 1.0 0.7 0.1 0.7 1.8 0.0
Return on capital (%) 9.1 9.3 4.3 9.0 8.0 -24.4
Cash (£m) 34.1 38.9 72.8 78.0 90.5 209
Net debt (£m) 122 64.8 216 201 392 353
Net assets (£m) 70 124 136 105 87.4 -43.9
Net assets per share (p) 100 149 163 125 104 -52.1

Source: historic Company REFS and company accounts

Risks for Agility and an independent Menzies 

Air travel could indeed be in an improving medium-term trend as people and governments learn to live with Covid; moreover, cargo stands a fair chance of remaining busy after a decline affected Menzies a few years ago. 

There remains the off chance of a trickier Covid variant emerging, although the far greater risk is a potential war in Eastern Europe dealing another blow to flight activity.  

Another significant element of investor behaviour is thus any tilt towards risk-aversion once again, both as inflation and war risks manifest. Shareholders might favour an easy sell-out as a means to raise cash levels. 

Time will tell if another bidder is flushed out, as integrating Menzies with Agility is likely to foster competitive advantage – rivals might want to thwart that. But that would depend on their financial capability to act swiftly. 

Agility currently keeping its options open 

The bidder for Air Partner offered enhanced commercial prospects – for a smaller company management to become part of a bigger international group – and therefore the board agreed to an offer.  

Agility would probably remove Menziesboard, which partly explains the latter’s resistance. Yet if Agility had conviction of purpose, it would already be pitching a genuine offer. The question arises as to whether this is leaving room more easily to walk, with 510p genuinely a ceiling for what it is prepared to pay. 

Another reason may however be to get feedback as to likely acceptances rather than get constrained by takeover rules. 

The situation is therefore highly speculative; war games kicking off in Belarus, as well as Menziesfinancials, could be a determinant over the next fortnight or so.  

It is possible to conjecture scenarios both for around 20% of speculative upside to say 550p (via either a raised or a rival offer) and a similar extent of downside to about 370p if Agility walks. Thus overall: Hold.    

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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