This is not investment advice and is general in nature. Do your own research before taking any positions in the securities listed below. You should consider your financial situation and goals before making investment decisions.
Firstly, before we start, I would like to apologise because it has been >2 months between posts. There are plenty of reasons for the absence from posting. However, I definitely want to get the cadence of posts back up to its usual run rate.
Let’s start with “why” $AQZ has never been a darling
$AQZ contracts/charter flights predominantly for the mining and government sectors. In addition to charters, it does wet leasing, aircraft trading, parts sales, engine leasing, and engineering for airlines. They have a fleet of 5 x Fokker 50 TP, 13 x Fokker 70 jets, 24 x Fokker 100 jets, 34 x Embraer E190 aircraft.
The best things about this business are:
Fuel cost is passed directly onto the client
Load factor is limited as the client pays regardless of the aircraft's occupancy
Whilst it is a great business model, their biggest risks are a) winning long-term charters via good customer service and b) acquiring/leasing planes at an appropriate price
Explain why $AQZ is tactically interesting
$QAN bid: $QAN launched a bid at $4.75 for the stock, however, given the current trading price ($3.3/share) it is virtually certain that ACCC will block it. That being the case, it is positive that $QAN got internal support for this valuation even if it was a scrip bid
Earnings volatility: Whilst $AQZ is not a “hidden gem” and features a lot amongst social media, however, it has never been covered by big brokers/funds because of its size and the variable nature of its track record (as shown below with their Net Operating Income)
Although I am not saying a company with earning misses is a good thing, I actually think it is something that retail investors should embrace because:
Short-term "misses" will dissuade big funds from owning it, but it may not necessarily be a bad thing if they are small misses
Longer term, there are a lot of positive trends
ROE = 10% on normal gearing (noting its highly geared at the moment)
NPAT Growth = 10-13%
Op CF = 60% of EBITDA
EBITDA/Aircraft = $1.6-1.8m (noting it differs based on type of plane)
Other Factors:
12-month Forward P/E is at an all-time low
Can likely reduce capex because ND/EBITDA is at a high
The commodities they are exposed to remain broadly diverse and strong
Why $AQZ could get snapped in a downturn
Structurally ROE won't go >15%: Although there are a few parts of this business that can really move the dial (fleet acquisition, contract wins, financing) the facts are that it is hard to get super ROEs from this because
Op CF = 60% of EBITDA (because the Cash Conversion Cycle is 100 days)
Max Gearing = 35-40%
Max NI Margin = 10%
Note on the 10% Margin - this is because, without unpacking all of the business you can see that the base EBITDA Margin = 27% (30% GM - 3% G&A), Dep'n = 10% of Rev and the interest/amort costs vary the most between years
Refi rates are increasing: Even though Lease Accounting can be complicated the best way to think about it is
WACD of 4.3%
Net Debt/EBITDA = 1.4x
Fairly material term loan with ANZ book likely to push up debt costs
M&A Prospects: As noted there has been a suite of acquisitions they have made
2023 – 4 x E190s
2020 – 15 x Fokkers
Earlier deals (2015 – Amphibious Aircraft, 2013 – SkyWest Airlines)
My primary concern is that management says these deals are ">30% Incremental ROE". Whilst this sounds great - if the whole company's ROE is 10%. I am dubious as to whether they will continue to buy planes at such a bargain as the recent Fokkers...
Conclusion - There is plenty of short-term support but I cannot buy this leading into a downturn
Whilst I think there is plenty of reasons to get excited by a stock trading at $3.3/share when $QAN offers $4.75/share, I think I would only consider $AQZ a short-term opportunity. The structurally lower (10% ROE) that this business earns, the refinancing risk and the relatively low likelihood for bargain M&A means that I am lukewarm about $AQZ unless the $QAN deal gets a go ahead
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