Airwork backs NZX to help it soar

THE CAPTAIN: Airwork CEO Chris Hart with an upgraded Honeywell 850 helicopter engine.
THE CAPTAIN: Airwork CEO Chris Hart with an upgraded Honeywell 850 helicopter engine.

The aviation business is like a trainspotting supermodel - superficially glamorous yet devoted to nitpicking detail.

Think Heidi Klum on platform four of a Monday night, engrossed in Locomotives and Coaching Stock 2013 by Robert E Pritchard.

For all the high-flying shiny technology it's a nitty-gritty game of procedures, checklists and level-headed practicality.

Investors seeking liftoff will therefore be kept appropriately grounded by the prospectus for Airwork's $40 million initial public share offer. Any excessive excitement will be sucked out by 170-odd, mainly black and white, pages presented as the law requires.

Even the 75-page investment statement is a teetotal affair, though it does have blue in it.

Airwork's imminent arrival on the NZX follows some big bang IPOs and a big chunk of stock in fellow aviator Air New Zealand. It is nothing like them.

The company has been around in one form or another since the 1930s, when it was working on Tiger Moth biplanes for the air force in Wellington.

Its current incarnation is based in Auckland and makes most of its revenue from leasing aircraft and small helicopters to corporate customers. It also has a substantial engineering operation specialising in helicopter maintenance, repair, overhaul and upgrades.

The reason Airwork is coming to market relates to the position of its controlling shareholder Hugh Jones, who bought the business with a partner in 1984.

In essence, Jones is selling down his shareholding and starting Airwork's transition to new ownership and management.

The deal offers up to 15.4 million shares at $2.60 a share to raise $40m in exchange for up to 30 per cent of the company. A full take-up of the offer would mean Jones receiving $25m, comprising $20m for shares and $5m to repay money loaned by one of his companies.

The other $15m would be available for working capital and to repay the offer costs.

At that price, the offer values Airwork at $130.6m. Is that a reasonable valuation?

It is quite a bit above two small transactions this year noted in the prospectus. In April, 30,000 shares were acquired by Jones from a "third party" for $45,000, or $1.50 a share. The same third party has the right to buy them back for the same price until April 2017.

Although not explained in the prospectus, this arrangement is understood to relate to a shareholder friend of Jones's who needed cash and doesn't really indicate company value.

The other transaction was the acquisition of 4.1 million shares in March by Condor Holdings, a company related to Jones. The shares were bought for $1 each from a company associated with the late Allan Hubbard, called Hornchurch.

This transaction is related to a deal between Jones and some Airwork executives, including chief executive Chris Hart, in which Jones has effectively lent them money to buy the shares.

The arrangement allows 10 per cent of the holding to be sold or transferred to the executives every year.

Again, this doesn't look like a deal with implications for the valuation, more an executive pay scheme organised by the boss.

Of greater import for investors are the earnings and dividends generated by the business.

In the year to June, Airwork had net profit of $6.5m from revenue of $118m. Before interest and tax, the company's earnings were $15.7m. That year the dividend paid was $3.2m.

This coming year to June 2014, the company is projecting net profit of $8.4m from revenue of $124.8m.

Before interest and tax it projects earnings of $17.5m. The forecast dividend is $6.7m.

At the offer price, those numbers imply a net dividend yield of 5.4 per cent, which is in the ball park for many investors, although it appears to require an increase in the payout ratio.

The prospectus gives a price/earnings ratio of 11.1, which is well below the current NZX average of about 16 and the sort of number you would expect to see from a stolid, low growth business.

However, achieving that figure requires ignoring IPO costs on the grounds they are one-offs. If you were strict about it and put them back in, the p/e ratio is 15.6.

The balance sheet projects total assets in June 2014 of $188.8m and equity of $90m, which means shareholders own just under half the assets.

That's an improvement on this year, when shareholders owned about 37 per cent of the assets, and it mainly reflects the equity injection from the IPO.

It looks like Airwork is used to operating with fairly high gearing, which probably reflects the capital hungry nature of the business. The company owns 12 fixed-wing aircraft and 24 helicopters, and operates several more, providing them on long-term leases to customers in air freight and industrial sectors such as resources and tourism.

As well as the aircraft operations themselves, Airwork has certification to carry out helicopter maintenance and modifications, which is an important source of income - engineering generated more than $30m of revenue this year.

The picture emerging here is of a relatively stable business with a strong competitive position. Some growth opportunities are mentioned in the offer documents which provides some upside, but this does not look likely to be a major growth stock.

But even if Airwork doesn't set the pulse racing, the great thing is that an engineering business of this size sees the NZX as a good platform to build its future.

Tim Hunter is deputy editor of the Fairfax business bureau.

Sunday Star Times