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BBA Aviation has announced the proposed sale of Ontic to a CVC fund for $1,365m in cash. This represents a 2018 EV/EBITDA of 20x and EV/EBIT of 23x.
BBA Aviation
Moderate profit growth was as expected against a backdrop of a relatively flat business & general aviation market. Signature continued to outperform its markets, while Ontic continued to make progress, but overall profits were pulled down by higher interest and tax costs.
A deep dive into the group's two continuing divisions gave further insights into the growth potential and attractive dynamics of Signature and Ontic. Management is now targeting greater market outperformance from Signature (250bps through the cycle vs. 200bps previously), with an emphasis on optimising core revenue streams and stimulating non-fuel ones. Ontic has set a target of $100m EBITDA by 2021. It will take time to convince the market of the achievability of these goals, and concerns persist about the current softness in flying activity, which remains unexplained. However, the long-term prospects are not reflected in the current valuation. Our recommendation remains BUY with a 365p target price.
Fears about US business jet flying activity are overdone. Recent soft data points are within the normal range of fluctuation for monthly data. Argus TRAQPak data showed a 2.1% YoY increase in US business aviation flights in August, and this series is highly correlated with the official FAA data. The macro backdrop remains supportive, with the ISM index at a 14-year high. We reiterate our BUY but trim our DCF-based TP to 365p from 370p on FX.
BBA Aviation is acquiring Firstmark for US$97m. This will become part of the group’s Ontic business, and we understand the business profile and customer base is similar. BBA is paying an EV/EBITDA multiple of 11.1x, which appears full at first glance but reflects the acquisition of a business with growth potential, rather than just licences. We had expected Ontic to be the focus of increased business development activity and incremental capital allocation. Margins and returns at Ontic are attractive and warrant the deployment of additional capital. Recent share price weakness offers a buying opportunity. Our recommendation remains BUY with a 370p DCFbased target price.
The recent share price fall has created an attractive entry point into a structural growth story with continued capital allocation improvements. Marginal weakness in US business jet activity leads us to trim estimates, but the longterm growth outlook remains intact. The plan to sell ERO is positive and has revealed the margin strength of Ontic. We upgrade our recommendation to BUY from Hold, with an increased DCF-based TP of 370p (previously 350p).
The results were in line with our forecasts at the PBT level, but with Signature light of expectations as it outperformed a soft market in the US. Aftermarket beat our forecast, but this appears to have been driven by a strong than expected rebound at ERO, which is now expected to be sold. Ontic's growth was driven by acquisitions, with an underlying fall in profit against a tough comparative. We see potential downside risk to consensus estimates if US business jet flying activity remains subdued. Our recommendation remains HOLD with a 350p DCF-based TP.
A mixed performance in the first four months. Group revenue +2.9% LFL, with Signature +5.5% and Aftermarket -3.8%. Signature continues to perform well, despite adverse weather holding back flying activity growth. Market outperformance continues, but is set to moderate in H2 as comparatives toughen. A new 20-year lease at Atlanta, a sole source location, is positive. Aftermarket was weak on phasing and a tough comparative at Ontic. Management’s FY outlook is unchanged, and we make no changes to our estimates. Our recommendation remains HOLD with a 350p target price, based on a DCF valuation.
A higher leverage target range brings higher risk, in our view. At the bottom end of the new 2.5x-3.0x net debt/EBITDA range, this risk ought to be manageable. ERO is under review, and an exit could provide additional headroom. Details of the group's future strategy are awaited, but we sense greater enthusiasm about the opportunities to invest than under the previous management. An investor day has been scheduled tentatively for Q4. Despite attractive fundamentals, we see an 18x P/E as a full valuation for mid-single digit EPS growth. We raise our DCF-based target price to 350p from 325p, but our recommendation remains HOLD.
Results in line with continued strength at Signature, a turnaround at Aftermarket but worse than expected central costs. Consensus unlikely to change materially. A new higher leverage target range was expected, but the absence of additional returns of cash to shareholders may disappoint in the short term, as may a slight note of caution on the recent growth of the business aviation market. ERO placed formally under strategic review.
As we said in March, this promises to be a big year and, on balance, we continue to feel that a group intently focused on business and general aviation will ultimately be a more valuable one. Trading is in line with expectations and the integration of Landmark is progressing as planned. Landmark integration and debt reduction remain the keys in FY16 and we await further information on the future of ASIG. We remain at Hold.
During FY16 BBA will integrate the transformational acquisition of Landmark, look to restructure ERO, work to reduce debt levels and also hope that the US economy remains positive enough to help bizjet activity. It promises to be a big year and, on balance, we continue to feel that a group intently focused on business and general aviation will ultimately be a more valuable one. We have prudently reduced forecasts (see below) but nudge up our target price to 204p (14x FY16 EPS) reflecting underlying Signature strength. We remain at Hold. Forecasts updated
The Group is to be transformed by the acquisition of Landmark which will cement the FBO business as the key driver of profitability within the Group. It would not surprise us to see future disposals from the other business areas, perhaps eventually delivering a 100% FBO focused Group, and the first sign of that is given today with a comment that approaches have been made for ASIG. Landmark integration and debt reduction are key in FY16, we await the analyst presentation but expect to remain at Hold.
As we said last week, we expected Aftermarket to be subdued following recent peer updates, but see a positive medium term future for the transformed Group assuming that US bizjet traffic remains robust. We expect to make little change to our numbers and remain at Hold.
The Group is to be transformed by the acquisition of Landmark which will cement the FBO business as the key driver of profitability within the Group. It would not surprise us to see future disposals from the other business areas, perhaps eventually delivering a 100% FBO focused Group. In the short term, we expect Aftermarket to be subdued following recent peer updates, but see a positive medium term future for the Group assuming that US bizjet traffic remains robust. As the acquisition process etc. plays out and the aftermarket challenges remain, we stay at Hold with a post rights issue target price of 186p.
The $2,065m purchase of Landmark Aviation is a transformational deal for BBA Aviation, extending its leadership in the global airport fixed-base operation (FBO) market, especially in the US. The clear focus on the Flight Support business confirms the future strategic direction at BBA’s core. While near-term debt metrics are stretched (despite the rights issue), the acquisition potentially unlocks BBA as a growth vehicle via both enhanced organic development and longer-term deals around the world.
The US bizjet market continues to improve slowly but Aftermarket has had a disappointing H1. Underlying PBT was 42% of our full year forecast but we expect Aftermarket to improve in H2. We await the presentation but anticipate reducing our forecasts by up to 5% and expect to retain our Hold recommendation.
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