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The UK market has never really warmed to AIM listed airline SkyWest (LSE:SKYW) – something for which there are understandable reasons. It is a stock that I have followed on a website whose name I do not mention (tipping it at 12.25p in December 2006). And so with the shares at 19.25p ( and having ponied up some decent dividends along the years) this has been no disaster. But it is not exactly a superstar. However, a tie up with Virgin will change all of that.
SkyWest currently has two main businesses. One is providing charter services for mining companies ferrying men and supplies out to mines in the middle of nowhere. The second is a near monopoly on certain small West Coast of Australia coastal passenger routes. The game changer is a deal with Virgin whereby SkyWest will build up its fleet to take onsell traffic from Virgin. That will be a game changer.
Skywest is listed both in the UK and in Australia. In the land of high culture similar airlines are on a much higher rating than Skywest. But most of its shares are UK traded and the rating here (arguably 4 times one year out earnings) is virgin on the ridiculous. So why might folks in the UK not like Skywest?
- They are nervous of stocks which have no business here but seek to raise capital here. Why not raise capital in Oz not on AIM? The trouble is that the non UK stocks on AIM do include a disproportionate amount of duffers (Sefton Resources a case in point) but not all are duffers. I put Skywest among the good guys.
- CEO Jeff Chatfield is an enormous man who speaks his mind. He can be terribly rude and a right pain in the neck. Personally I do not give a damn about some of his Les Patterson attributes but I can imagine that some more sensitive flowers might be put off. As long as big Jeff delivers the numbers what do I care?
- Airlines are – as Buffett has observed – normally not a good way to make money. I would not buy shares in a flag carrier or even a peanut airline like Ryan air (another company with a CEO who speaks his mind). But the charter business and near monopolies Skywest enjoys give it revenue visibility which is very rare in this business.
- Skywest funds some of its plane purchases via a related AIM company, Avation (AVAP) . This may un-nerve some folk. But the funds are secured and provided on commercial terms. Avation is itself financially secure. I can live with this.
- There are fears that the Australian economy may slip since it is quite heavily exposed to commodities/mining and indeed China. The monopoly passenger routes would be unaffected – those who use SkyWest’s small Fokker planes have little alternative. The charter/mining business may be affected a tad but I do not see mining collapsing. Base metals/coal mining may slow but most mines Skywest services will survive and again have to use Skywest. But there is clearly some impact and I this was seen in 2012 numbers.
On 12 September, the company posted its operating statistics for August. Year on year, passenger numbers were up by 10.88%. The load factor (capacity) was down by 3.32 percentage points at 60.98%. Charter traffic was down 1.38%. The company runs 24 planes up from 17 a year ago. Those numbers are all within a margin of error and do not indicate a massive change in trading.
The Virgin deal is yet to kick in but will start soon and should drive a huge increase in volumes and – with operational gearing – profits. It is worth noting that Virgin has invested A$8 million in Skywest via a convertible loan note that converts at the equivalent of 29.2p. According to house broker WH Ireland:
“Skywest now has the opportunity to fly in excess of 36 ATR aircraft in partnership with Virgin by the end of 2018. This translates to a normalised annual revenue approaching Singapore $400m which in itself would more than double the scale of Skywest’s current operations”
And so to the numbers. Following the Virgin investment and a small placing in March, Skywest does not need to issue fresh equity to grow its fleet. At the June 30th 2012 year end it had cash of Singapore $25 million (£12 million). The P&L Table is below, using estimates from WH Ireland.
| Year ended 30th June | 2010A | 2011A | 2012A | 2013F | 2014F |
| Revenue (£) | 107 | 119 | 151 | 191 | 234 |
| Pre-Tax Profit (£) | 7 | 6.8 | 3.35 | 10 | 13.8 |
| EPS (p) | 2.3 | 2.45 | 1.75 | 3.45 | 4.8 |
| DPS (p) | 0.6 | 0.6 | 0.6 | 0.9 | 1.2 |
You will notice that 2012 was not a great year. Operational gearing can work both ways and there was an impact. Going forward any weakness in the core business will be more than offset by Virgin contributions which ( at a pre-tax level) will be £4.8 million by the 2014 financial year according to WH Ireland. That growth will continue out to 2018.
So what are the shares worth? We are already a quarter of the way into the 2013 financial year. My 1 year target based on 2014 forecasts – it is hard to say. WH Ireland has a target of c 45p which would put Skywest on a similar rating to other Aussie regional airlines based in Australia which do not have the Virgin deal. But now and the 2013 yield is a fairly decent 4.7%. That must limit the downside. I would suggest that a fair one year valuation is 34p. That would put the stock on a (then) current year yield of c3.5% ( not bad for a growth stock with a strong balance sheet) and on 7.1 times (then current year) earnings. That is hardly demanding.
I realise that my target is lower than that of the house broker and a website that I am not meant to mention. But there is an attraction in prudence. And 77% upside ( plus dividends) is a good enough reason to buy.
