|
Stobart Group |
|
H119 results boosted by Aviation and Energy |
|
H119 results update |
|
Industrial support services |
|
23 October 2018 |
Share price performance
Business description
Next event
Analysts
Stobart Group is a research client of Edison Investment Research Limited |
|||||||||||||||||||||||||||||||||||||||||||||||
We see investor opportunity in Stobart’s main divisions of Aviation and Energy, which continue to perform well and will benefit from planned investment, notably in Aviation, which should expand the business and drive long-term profitability. Underlying EBITDA grew strongly, up 10% in the first half. Aviation saw a strong rise in both passenger numbers and underlying EBITDA per passenger at London Southend airport, its main business. Energy’s performance has benefitted from higher volumes, a better customer mix, operational gearing and cost management.
|
Year end |
Revenue (£m) |
Underlying EBITDA* (£m) |
EPS* (p) |
DPS (p) |
P/E (x) |
Yield (%) |
|
02/17 |
129.4 |
34.4 |
8.0 |
13.5 |
27.0 |
6.3 |
|
02/18 |
242.0 |
154.1 |
32.6 |
18.0 |
6.6 |
8.3 |
|
02/19e |
278.5 |
25.7 |
2.3 |
18.0 |
91.8 |
8.5 |
|
02/20e |
310.8 |
41.4 |
5.0 |
18.0 |
42.7 |
8.5 |
Note: *Underlying EBITDA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Underlying H119 EBITDA rose from £15.4m to £17.0m, reflecting growth in the main divisions of Aviation and Energy. In Aviation, London Southend airport (LSA) saw strong growth of 37% in passenger numbers and 87% in underlying EBITDA per passenger. Management outlined new airline agreements and plans for further retail development at LSA which should boost future performance. Energy’s underlying EBITDA rose from £4.6m to £8.7m; plants commissioned last year are now approaching commercial volumes, customer mix improved and operational gearing improved in tandem with cost management. On the negative side, Rail & Civils’s underlying EBITDA swung from £1.4m profit to a loss of £4.8m, although management emphasises that this division is already turning around.
Since our last note in January we have reviewed our model for Stobart Group and take this opportunity to reset forecasts. We reduce our FY19 underlying EBITDA from £39.0m to £25.7m, mainly to account for the move from profit to loss at Rail & Civils, and introduce a FY20 estimate of £41.4m, reflecting a return to profit in Rail & Civils and continued growth in Aviation and Energy.
We have adjusted our valuation from 285p per share to 275p, mainly to reflect the reduction in our forecasts, partly offset by a reduction in WACC. Our valuation uses a core DCF and an additional value for the company’s stake in Eddie Stobart Logistics (ESL).
We see considerable value in Stobart’s main divisions, Aviation and Energy, as we feel they have good structural growth prospects. Both divisions performed well in H1, partly offset by a weaker performance at Rail & Civils. In H119, Stobart reported an increase in underlying EBITDA from £15.4m to £17.0m, excluding the £123.8m profit made from the sale of a stake in ESL in April 2017 (Exhibit 1).
Exhibit 1: H1 results comparison
|
£m |
H118 |
H119 |
Change (%) |
|
Revenue |
124.6 |
151.3 |
21% |
|
Underlying EBITDA |
139.2 |
17.0 |
(88%) |
|
Underlying EBITDA |
15.4 |
17.0 |
10% |
|
Underlying profit before tax |
122.2 |
(8.8) |
N/A |
|
Underlying EPS (p) |
35.0 |
1.9 |
(95%) |
|
Underlying DPS (p) |
7.5 |
9.0 |
20% |
Source: Stobart Group
Exhibit 2: Divisional revenue comparison
|
£m |
H118 |
H119 |
Change (%) |
|
Energy |
25.3 |
29.9 |
18% |
|
Aviation |
82.4 |
87.1 |
6% |
|
Rail & Civils |
20.2 |
22.6 |
12% |
|
Investments |
- |
2.0 |
N/A |
|
Infrastructure |
1.9 |
1.1 |
(43%) |
|
Eliminations |
(11.7) |
(7.1) |
N/A |
|
Underlying total |
118.0 |
135.6 |
15% |
|
Effect of UKFFO* |
6.6 |
15.7 |
140% |
|
Reported total |
124.6 |
151.3 |
21% |
Source: Stobart Group. Note: *The financial effect of the accelerated investment in growth at LSA, through the UK Flybe franchise operations.
Exhibit 3: Divisional underlying EBITDA comparison
|
£m |
H118 |
H119 |
Change (%) |
|
Energy |
4.6 |
8.7 |
89% |
|
Aviation |
13.7 |
15.7 |
15% |
|
Rail & Civils |
1.4 |
(4.8) |
(450%) |
|
Investments |
0.8 |
2.8 |
261% |
|
Infrastructure |
0.5 |
(1.1) |
(307%) |
|
Central function and eliminations |
(5.5) |
(4.3) |
(22%) |
|
Underlying sub-total |
15.4 |
17.0 |
10% |
|
Profit on disposal of investment in ESL |
123.8 |
- |
(100%) |
|
Underlying total |
139.2 |
17.0 |
(88%) |
Source: Stobart Group
Aviation saw underlying EBITDA increase from £13.6m to £15.7m, boosted by strong growth in both passenger numbers and underlying EBITDA per passenger at LSA. Passenger numbers at LSA rose by 37% from 610,492 to 838,742. easyJet, the main airline customer at LSA, has decided to base a fourth aircraft at the airport which should lead to over 1m easyJet passengers in 2018. Stobart has also signed a five-year agreement with Ryanair to base three aircraft at LSA, which will add 1m passengers annually from summer 2019. Including agreements with Air Malta and Adria Airways, LSA expects to handle around 2.5m passengers in 2019, with expansion plans underway for 5m passengers.
Underlying EBITDA per passenger at LSA rose by 87%, from £1.74 to £3.26 and the results presentation conveyed a clear sense that this figure could rise further, particularly as more retail space is opened and the cost per passenger fell as airport capacity is better utilised. LSA’s development of retail space should be enhanced by the agreement it has signed with The Restaurant Group to introduce six new food and beverage brands at the airport, with Giraffe STOP and Costa Coffee already opened under this agreement. It also expects to open a new bespoke pub, The Navigator, later this year. The Holiday Inn had over 90% occupancy.
The presentation included a video presentation on LSA and one of the main points we thought interesting was how quickly passengers transit through the airport, from rail/car arrival to plane boarding, which we think should be a competitive advantage compared to the other more congested London airports. The Civil Aviation Authority recently rated LSA the most accessible airport in London and the South East.
Aviation’s three smaller businesses also showed a good performance. Stobart Jet Centre has already exceeded the volume of business seen in the whole of 2017 as capacity increased and it attracted more international customers. Stobart Air saw a 17% increase in passengers from 0.9m to 1.1m, while revenue per passenger also increased. The UK Flybe franchise operation (UKFFO), for which tickets went on sale in December 2016, commenced flights in May 2017 but is being withdrawn following the agreements with EasyJet and Ryanair to expand their operations at LSA. Stobart Aviation Services won its first external contract at London Stansted with easyJet.
Stobart Energy is the UK’s leading provider of biomass. The division reported an increase in underlying EBITDA from £4.6m to £8.7m. The results benefitted from a 72% rise in tonnes sold from 382,775 to 657,950, due mainly to plants in commissioning last year coming on line. Underlying EBITDA per tonne rose by 10% from £12.01 to £13.19 led by customer mix, the benefits of increased volume and cost management, and is running ahead of management’s strategic target of £12. We would expect further increases in underlying EBITDA per tonne as utilisation increases and more third-party power stations come on-line.
Divisional underlying EBITDA swung from £1.4m to a loss of £4.8m. Management had been strengthened, including a new finance director, and a review of ongoing contracts led to a reduction in their forecast outturn, with a more prudent accounting policy in terms of revenue recognition. The management team is placing more focus on contract quality and securing contracts with external tier one customers. Management states that an improvement in the division’s performance has already commenced and should strengthen into next year. The division has also secured two framework agreements with Manchester’s Metrolink and achieved delivery partner status for Transpire, the Trans Pennine route upgrade.
Infrastructure reported a small loss of £1.1m after a small profit of £0.5m. The loss was due to Carlisle Lake District airport being closed for development work. During the period the Carlisle office and Widnes properties were disposed of at book value or above.
In H118, the underlying EBITDA was £124.6m, which included £123.8m for the sale of the stake in ESL in April 2017 and £0.8m, which was mainly the dividend from ESL and payment for use of the Stobart brand name by ESL. The underlying EBITDA in H119 was £2.8m.
During the period Stobart strengthened its board with the appointments of Nick Dilworth as chief operating officer and Ginny Pulbrook as non-executive director. Michael Williamson was appointed interim chief financial officer. Russell Reynolds has been appointed to identify additional board appointments including for a new chairman as Iain Ferguson will retire next year.
Stobart’s net debt rose from £36.6m to £75.6m, although gearing is still only 22% (Exhibit 4). A number of factors caused the increase in net debt including:
■
Working capital increased due to the unwinding of some advanced sales.
■
£18m (£9m H118) investment by Stobart Air in accelerated route development, marketing, brand and customer awareness at LSA. This investment is expected to significantly reduce next year.
■
Further increase in cash returns to shareholders through dividends and share buybacks.
Management also said that in H219 it would conduct a capital review to assess the right level of investment in the business and dividend to shareholders.
Exhibit 4: Cash flow (£m)
|
H118 |
H119 |
|
|
Profit before tax |
111.6 |
(18.8) |
|
Working capital and tax |
(1.0) |
(5.4) |
|
Non-cash adjusting items |
(117.6) |
6.1 |
|
Cash flow from operating activities |
(7.0) |
(18.1) |
|
Purchase of PPE and property inventories |
(53.2) |
(11.7) |
|
Other cash flow from investing activities |
222.0 |
36.0 |
|
Dividends paid |
(26.4) |
(31.3) |
|
Other cash flow from financing activities |
(127.0) |
11.4 |
|
(Decrease)/increase in cash |
8.4 |
(13.7) |
|
Cash at the beginning of the year |
30.6 |
43.1 |
|
Cash at the end of the year |
39.0 |
29.4 |
|
Net debt |
36.6 |
75.6 |
Source: Stobart Group
We forecast net debt increasing over the next three years, partly as capex will rise to fund further investment at LSA. However, two variables could mitigate this increase:
■
We assume the dividend is maintained. However, management said at the results meeting that it is conducting a review of the company’s capital structure. We think, therefore it could be that the dividend is adjusted. Historically, Stobart has had a high payout/yield because the dividend was partly funded by asset disposals.
■
Management has stated that at some point Stobart may sell part/all of its 11.8% stake in ESL, currently worth £49m.
Since our last note in January we have reviewed our model for Stobart Group and take this opportunity to reset forecasts. We reduce our FY19 underlying EBITDA from £39.0m to £25.7m, mainly to account for the move from profit to loss at Rail & Civils, and introduce a FY20 estimate of £41.4m, reflecting a return to profit in Rail & Civils and continued growth in Aviation and Energy.
Exhibit 5: Changes to estimates
|
Year end February |
Revenues |
Underlying EBITDA |
||||
|
(£m) |
Old |
New |
Change |
Old |
New |
Change |
|
2019e |
321.7 |
278.5 |
(13.4%) |
39.0 |
25.7 |
(34.0%) |
Source: Edison Investment Research
We have reduced our valuation from 285p per share to 275p, mainly to reflect our reduced forecasts, partly offset by a reduction in WACC (Exhibit 5). Our valuation is based on a core DCF valuation, using a WACC of 6.9% (previously 8.4%) and a terminal growth rate of 1% to which we add the current value of Stobart’s 11.8% stake in ESL. The main change in the WACC is due to a change in the market risk premium we used from 9% to 4%.
Exhibit 6: DCF valuation for Stobart
|
£m |
|
|
Total discounted cash flows (FY19 to FY29) |
290 |
|
Discounted terminal value |
744 |
|
Stake in Eddie Stobart |
49* |
|
Total EV |
1,083 |
|
Net debt (FY19) |
(109) |
|
Equity value |
974 |
|
Number of shares (m) |
354 |
|
Value per share (p) |
275 |
|
£m |
|
Total discounted cash flows (FY19 to FY29) |
|
Discounted terminal value |
|
Stake in Eddie Stobart |
|
Total EV |
|
Net debt (FY19) |
|
Equity value |
|
Number of shares (m) |
|
Value per share (p) |
|
290 |
|
744 |
|
49* |
|
1,083 |
|
(109) |
|
974 |
|
354 |
|
275 |
Source: Edison Investment Research, Bloomberg for pricing. Note: *Priced at 30 October 2018.
Exhibit 7: Financial summary
|
2017 |
2018 |
2019 |
2020 |
2021 |
|
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|
|
PROFIT & LOSS |
|||||
|
Revenue |
129 |
242 |
279 |
311 |
335 |
|
EBITDA (underlying) |
34 |
154 |
26 |
41 |
52 |
|
Operating Profit (before amort. and except.) |
25 |
139 |
8 |
22 |
28 |
|
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
|
Exceptionals |
(35) |
(36) |
(42) |
(13) |
(2) |
|
Other |
2 |
(1) |
4 |
0 |
0 |
|
Operating Profit |
(8) |
102 |
(30) |
9 |
26 |
|
Net Interest |
0 |
(2) |
(3) |
(4) |
(4) |
|
Profit Before Tax (norm) |
27 |
136 |
8 |
18 |
24 |
|
Profit Before Tax (FRS 3) |
(8) |
101 |
(33) |
5 |
22 |
|
Tax |
(1) |
(1) |
2 |
(0) |
(1) |
|
Profit After Tax (norm) |
28 |
133 |
8 |
17 |
23 |
|
Profit After Tax (FRS 3) |
(9) |
100 |
(31) |
5 |
21 |
|
Average Number of Shares Outstanding (m) |
345.0 |
348.8 |
346.0 |
346.0 |
346.0 |
|
EPS - normalised (p) |
8.0 |
38.0 |
2.3 |
5.0 |
6.6 |
|
EPS - normalised and fully diluted (p) |
8.0 |
37.1 |
2.3 |
5.0 |
6.6 |
|
EPS - (IFRS) (p) |
(2.7) |
28.7 |
(9.1) |
1.5 |
6.1 |
|
Dividend per share (p) |
13.5 |
18.0 |
18.0 |
18.0 |
18.0 |
|
EBITDA Margin (%) |
26.6 |
63.7 |
9.2 |
13.3 |
15.5 |
|
Operating Margin (before GW and except.) (%) |
19.3 |
57.3 |
2.8 |
7.0 |
8.4 |
|
BALANCE SHEET |
|||||
|
Fixed Assets |
510 |
487 |
509 |
517 |
516 |
|
Intangible Assets |
108 |
104 |
100 |
97 |
93 |
|
Tangible Assets |
399 |
378 |
404 |
416 |
419 |
|
Investments |
3 |
5 |
5 |
5 |
5 |
|
Current Assets |
156 |
167 |
185 |
201 |
212 |
|
Stocks |
64 |
52 |
60 |
67 |
72 |
|
Debtors |
48 |
65 |
75 |
84 |
91 |
|
Cash |
31 |
43 |
43 |
43 |
43 |
|
Other |
13 |
7 |
7 |
7 |
7 |
|
Current Liabilities |
(89) |
(107) |
(119) |
(130) |
(138) |
|
Creditors |
(70) |
(90) |
(102) |
(113) |
(121) |
|
Short term borrowings |
(18) |
(17) |
(17) |
(17) |
(17) |
|
Long Term Liabilities |
(190) |
(141) |
(213) |
(276) |
(312) |
|
Long term borrowings |
(133) |
(63) |
(135) |
(198) |
(234) |
|
Other long term liabilities |
(57) |
(78) |
(78) |
(78) |
(78) |
|
Net Assets |
387 |
406 |
361 |
312 |
279 |
|
CASH FLOW |
|||||
|
Operating Cash Flow |
(2) |
(8) |
(5) |
46 |
68 |
|
Net Interest |
(2) |
(3) |
(3) |
(4) |
(4) |
|
Tax |
0 |
(0) |
0 |
0 |
0 |
|
Capex |
(14) |
(75) |
(42) |
(30) |
(25) |
|
Acquisitions/disposals |
53 |
124 |
2 |
0 |
0 |
|
Financing |
21 |
33 |
40 |
(12) |
(12) |
|
Dividends |
(35) |
(58) |
(64) |
(62) |
(62) |
|
Net Cash Flow |
21 |
12 |
(72) |
(63) |
(36) |
|
Opening net debt/(cash) |
48 |
121 |
37 |
108 |
171 |
|
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
|
Other |
73 |
(72) |
0 |
0 |
0 |
|
Closing net debt/(cash) |
121 |
37 |
108 |
171 |
207 |
Source: Stobart Group (historics) and Edison Investment Research (estimates)
|
|