We present the long case for a company trading on the London Stock Exchange. The company has a PE of 5, PB of 0.80, P/S 2.0, nice return on equity. The company has been reducing leverage and has an improving balance sheet, with both quick and current ratios now at one. We see over a 30% upside using our most pessimistic growth assumptions, and closer to 50% upside using a more optimistic growth assumption.
Dart Group Plc. (LSE:DTG)
Current Market Price: £103.75 (GBX)
Address | DART GROUP Plc.
Low Fare Finder House Leeds Bradford International Airport Leeds LS19 7TU, United Kingdom |
Website | http://www.dartgroup.co.uk |
Exchange | London Stock Exchange |
Industry | Integrated Shipping & Logistics |
Market Cap | £138.5 Million |
52 Week Range | £56.55-100.00 |
Beta | 0.6627 |
Price/Book | 0.8 |
Price/Earnings (Forward-2012) | 5.1 |
Price/Earnings (2012) | 6.1 (at current prices) |
Fundamental Analysis
Industry Analysis
The global shipping and logistics industry in 2012 witnessed trends like cutting cost in the system, mitigation risks and sustainable environment. The global economy has been sluggish due to European debt crisis, the American recession etc.
Barclay’s report stated that the growth momentum which the logistics industry received at the latter half of 2011 continues with the air transport being at the top. According to Boeing Air Cargo Forecast Report 2012-13, air cargo traffic has contracted roughly 2%, according to year to date statistics. The global economic downturn, rising fuel prices and improving surface transport mode have resulted in the downgraded the growth trend. The report forecast that the industry will be more than double over the next 20 years compared to 2011 levels. The industry will grow on an average 5.2% years on year basis.
It also forecasted that the number of airplanes will increase by more than 80% over the next two decades. However, the world air cargo traffic has expanded only 3.7% on average since 2001 and traffic has grown only 2.0% per year since 2004, which is of a great concern for the industry. The slowing air cargo growth is attributed to rising fuel prices and the economic downturn of 2008-09. The economic downturn witnessed the worst contraction of the industry. However, on an optimistic note, it is expected that the world economic growth will increase, averaging 3.2% over the next two decades coupled with stable fuel prices, which in turn can propel the growth in air cargo industry.
It is expected the UK economy to grow by 1.7% next fiscal as per Barclay’s report. Moreover with the increase in consumer spending it is hoped that the logistics industry will bounce back in the next fiscal.
Company Analysis
Dart Group Plc. is an England based company, having presence in leisure aviation, package holidays, and distribution and logistics. The company has a long history and is growing by leaps and bounds. In its leisure aviation kitty, it has Jet2.com, which is a leading leisure airline providing low cost flying experience and services in England, and connecting leisure destinations throughout Europe. Besides this, it has Jet2 charters, which offer customized flying experiences to companies and individuals and it also has cargo services. It also operates in a package holiday segment and distribution of fresh produce and temperature controlled food products with its Fowler Welch throughout the United Kingdom.
The company’s overall turnover grew by 26% to £683m in 31st March in 2012, which was £543m in the preceding fiscal. Earnings per share increased by 31% in March 2012 compared to the previous fiscal. The company registered growth in all segments of its business operations. Package holiday revenue increased by 140% by the year ended 31st March 2012 compared to the previous fiscal. However, the group’s PBT grew by only 7% to £28.1 million. The company attributed this decrease to reduced profitability in the leisure airline business and the rising cost of fuel prices.
The group received total cash amounted to £180m (2011: £135m) at year end from Jet2holidays and Jet2.com customers in advance of their trips. The cash generation was mainly driven by the Leisure Airline division, which continues to benefit from strong forward bookings.
The company also reduced its capital expenditure significantly from £68m to £47.3m in the current fiscal year, while making the acquisition of the Hub, Fowler Welch’s North West distribution center, and an above average number of Boeing 757 engine overhauls. The Group’s balance sheet continues to strengthen, driven by both profit performance in the year and cash generation from advance bookings.
Philip Meeson, Chairman was quoted saying (in the financial report of the company) that “Fowler Welch has a number of business development opportunities throughout its network and is benefiting from recent wins in the North West. Jet2holidays is set for further growth in the current year, with forward bookings at encouraging levels”.
The company also registered increased Net Margin TTM by 3.32% and EBIT TTM margin by 4.11%. The share of the company registered year to date change in prices at 48.33%. However, Dart Group Plc. has PE which is lower than the industry average (Dart-6.4 Indusrty-18.2). The forward PE of the group stands at 5.2. The company’s operating profit also increased in the current fiscal year (March 2012) to £28.5 m from £26.9 m in earned in the previous fiscal year. The profit of the year also increased by £5.4 m (22.7-2012 and 17.3-2011), however this is partially due to reduced taxation rates, which resulted in reduced deferred tax liability.
From the above graph it is clear that the stock price of the group has consistently performed well for the last year. It reached its lowest level somewhere around Feb 12, after this it gained momentum and consistently performed well and even outperforming the FTSE 100 index in a number of occasions. The company is cautious about the change in UK and EU policy to apply additional taxes to the aviation industry, and moreover the political uncertainties to countries where Jet2.com flies. However, from a long term value perspective, we feel the stock is good with good fundamental value and will maintain its consistent performance for the year to come.
Key Data
(unaudited) six months ended Sep 30, 2011 £m |
(unaudited) six months ended Mar 31 2011 £m |
year ended Mar 31 2012 £m |
|
Revenue |
445.7 |
542.9 |
683 |
Earnings per share US $ (Basic) |
21.82p
|
12.20p
|
16.01p
|
Book Value per share |
– |
– |
1.88p |
Operating Margin |
9.49% |
4.95% |
4.17% |
Return on Assets |
7.35% |
3.68% |
4.19% |
Return on Equity |
19.52% |
11.70% |
14.29% |
Net Margin |
6.98% |
3.19% |
3.32% |
Leverage |
2.66 |
3.18 |
3.41 |
Asset Turnover |
105.34% |
115.49% |
126.04% |
(Data source: Company Reports and our calculation)
DuPont Analysis
ROE=Net Profit Margin x Total Asset Turnover x Leverage
The return on equity in 1H12 increased significantly due to the significant increase in net margin, despite decreased leverage. In the yearly performance, the ROE decreased mainly due to lower margins even though improved leverage. It is expected that this pattern will continue and net margin and return on assets will improve with increase in sales and improved politico economic conditions in UK and throughout Europe where the company operates its leisure airline jet2.com flies.
Important Highlights
Financial Highlights 1H12
- Turnover increased from £542.9 million in 2011 to £683.0 million in March 2012 (26%)
- Advanced sales increased to £256.8 million in Mar 2012 from £177.1 million in the same period of the previous year.
- Net assets increased to £158.9 million in Mar 2012 from 147.9 million registered in the previous fiscal.
- Total Leisure Airline turnover increased by 25% to £461m in March 2012.(2011: £369m)
- Package Holidays segment revenue increased by 140% to £115m (2011: £48m) mainly due to increase in number of customers.
- The Group’s distribution business, Fowler Welch, registered growth in revenue of 6% to £152.4m
- Declared a final dividend of 0.89 pence per ordinary share for the financial year ended 31 March 2012.
Operational Highlights
- Operating expenses increased to £654.5 m in Mar 2012 from £516 million in 2011.
- Both current assets and current liabilities increased to £296.6 m and £328.3m in 2012 from £221.4 m and £269.2 m from the previous year’s respectively.
- Cash and cash equivalents decreased significantly from £98.3 m in 2011 to £75 m in 2012, while the retained earnings increased to £132.2 m from £110.9m of the previous fiscal.
- Company purchases five Boeing 737-300s, enabling the fleet to be increased to 42 aircraft and further investment in Fowler Welch infrastructure, while three leased aircraft were returned.
- In Oct 2012, Company added Glasgow Airport as a base to fly flights for three new exciting destinations with an additional aircraft to be based at the airport.
- Jet2.com continues to improve its fuel efficiency by means of its wide-ranging “efficient flying” program.
- Jet2holidays’, the holiday package operator, revenue increased by 140% to £115m (2011: £48m).
- In the distribution and logistics segment, the company faces fierce competition as a result of consolidation and exit by smaller players and loss of substantial customers, however they have focused on cost control and improved service levels
Relative Valuation
Industry |
DTG |
0E7D |
DPO |
0N0B |
0DDA |
0P5E |
BNZL |
|
Market Cap |
— |
£ 138.5 Million | 23.2 Billion (DKK) |
£18.0 Billion EUR |
$11.2 Billion | $6.5 Billion | 3.8 Billion EUR | £3.4 Billion |
Revenue (2011) |
— |
543 Million GBP |
43,710 Million DKK |
52,829 Million EUR |
309 Million USD |
1,247 Million USD |
7,246 Million EUR |
5,110 Million GBP |
Price/Earnings TTM |
— |
6.1 |
17.5 |
13.9 |
4.1 |
3.2 |
— |
26.0 |
Price/Book |
— |
0.8 |
4.2 |
1.6 |
1.2 |
0.6 |
1.3 |
4.4 |
Price/Sales TTM |
— |
0.2 |
0.5 |
0.3 |
4.6 |
0.8 |
0.5 |
0.6 |
Rev Growth (3 Yr Avg) |
— |
15.9 |
5.3 |
-1.0 |
-39.4 |
-1.3 |
-13.4 |
7.0 |
EPS Growth (3 Yr Avg) |
— |
-6.2 |
3.4 |
— |
-30.5 |
27.8 |
— |
-5.1 |
Operating Margin % TTM |
— |
4.2 |
5.1 |
4.6 |
129.7 |
39.7 |
0.6 |
5.5 |
Net Margin % TTM |
— |
3.3 |
3.1 |
2.4 |
110.8 |
24.9 |
-1.5 |
2.5 |
ROE TTM |
— |
14.8 |
24.7 |
12.1 |
32.4 |
19.3 |
-6.5 |
16.3 |
Debt/Equity |
0.1 |
0 |
0 |
0.9 |
0.9 |
0.1 |
0.6 |
|
Price/Earnings |
18.0 |
6.1 |
17.5 |
13.9 |
4.1 |
3.2 |
-33.7 |
26.0 |
Price/Book |
4.1 |
0.8 |
4.2 |
1.6 |
1.2 |
0.5 |
1.3 |
4.4 |
Price/Sales |
0.9 |
0.2 |
0.5 |
0.3 |
4.6 |
0.8 |
0.5 |
0.6 |
Price/Cash Flow |
9.0 |
1.5 |
14.4 |
9.3 |
6.3 |
3.3 |
18.6 |
12.7 |
Dividend Yield % |
2.4 |
1.3 |
— |
3.5 |
2.6 |
1.9 |
0.1 |
2.6 |
(Data Source: www.morningstar.com)
Dart Group Plc. has grown over the years and emerged as a dominant player in the leisure aviation and package holidays segment in the United Kingdom. Over the years, it also grown its distribution and logistics segment and consolidated its position in the segment. However, it is still minuscule in the industry and still has to go long to attain the prowess of some of its competitors in the fiercely competitive industry.
It can be seen from the above table that Dart Group has the best Revenue growth rate in the industry. Its price to sales ratio is the lowest and price to book ratio is second lowest in the industry. It is among the lowest in debt/equity parameters in the industry. The company has not made any significant strategic changes and in spite of this it has grown considerably since its inception, but it is still lagging behind the big players of the industry. From the above graph it is also evident that it has considerably better performance with respect to dividend yield and ROE TTM than other big players in the industry.
Fair Price Calculation
Projected Income Statement
Optimistic |
Pessimistic |
||||||
Fiscal year ends in March. GBP in millions |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
|
Revenue |
429 |
439 |
434 |
543 |
683 |
887.9 |
819.6 |
Gross profit |
429 |
439 |
434 |
543 |
683 |
887.9 |
819.6 |
Operating expenses |
0 |
0 |
|||||
Operating income |
429 |
439 |
434 |
543 |
683 |
888 |
820 |
Other income (expense) |
-418 |
-406 |
-412 |
-517 |
-655 |
-845 |
-780 |
Income before income taxes |
12 |
34 |
22 |
26 |
28 |
44 |
40 |
Provision for income taxes |
3 |
6 |
7 |
9 |
5 |
11 |
10 |
Net income from continuing ops |
9 |
27 |
16 |
17 |
23 |
33 |
30 |
Net income |
9 |
27 |
16 |
17 |
23 |
33 |
30 |
Net income available to common shareholders |
9 |
27 |
16 |
17 |
23 |
33 |
30 |
Earnings per share |
0 |
0 |
|||||
Basic |
0.06 |
0.19 |
0.11 |
0.12 |
0.16 |
0.23 |
0.21 |
Diluted |
0.06 |
0.19 |
0.11 |
0.12 |
0.16 |
0.23 |
0.21 |
Growth rates and Cost of Equity Calculations
Average Income Growth Rate (3 year) |
0.2677923 |
|||||||
ROA |
5.3% |
|||||||
Retention Ratio |
90% |
|||||||
Debt/equity |
– |
|||||||
Interest rate |
8.0% |
|||||||
Tax Rate |
25.0% |
|||||||
Fundamental Growth Rate |
4.8% |
|||||||
Optimistic Growth rate |
10.71% |
|||||||
Pessimistic Growth rate |
8.03% |
|||||||
Sustainable Growth rate |
2.00% |
|||||||
Beta |
0.66 |
|||||||
Risk Free Rate |
3% |
|||||||
Return from Market |
7% |
4 Yr Avg Return FTSE100 |
||||||
Cost of equity |
5% |
|||||||
Free cash flow calculation (OPTIMISTIC) |
|
|||||||
|
|
|||||||
All Figures in ‘000s except per share data |
High Growth |
Stable |
||||||
Year |
2013-03 |
2014-03 |
2015-03 |
2016-03 |
2017 Onwards |
|||
Growth in Net Income |
10.00% |
10.00% |
10.00% |
2.00% |
||||
Net Sales |
887.9 |
976.69 |
1074.36 |
1181.79 |
1205.430798 |
|||
Depreciation |
568.256 |
625.0816 |
687.59 |
756.349 |
771.4757107 |
|||
Net Income |
32.73 |
36.003 |
39.6033 |
43.5636 |
44.4349026 |
|||
CAPEX |
62.153 |
68.3683 |
75.2051 |
82.7256 |
84.38015586 |
|||
Change in Working Capital |
15.0943 |
16.60373 |
18.2641 |
20.0905 |
20.49232357 |
|||
Cash Flow to equity |
523.739 |
576.1126 |
633.724 |
697.096 |
711.0381339 |
|||
Cost of Equity |
5.00% |
5.00% |
5.00% |
5.00% |
5.00% |
|||
Terminal value |
23701.3 |
|||||||
Present value of cash flows |
498.799 |
522.5511 |
547.434 |
19116.8 |
||||
FCFE (In ‘000) |
20685.5 |
|||||||
No of shares |
143.35 |
|||||||
Share price per share acc to valuation |
||||||||
Optimistic |
144 |
|||||||
Current Market Price |
103.75 |
|||||||
Free cash flow calculation (PESSIMISTIC) |
|
|||||||
|
|
|||||||
All Figures in ‘000s except per share data |
High Growth |
Stable |
||||||
Year |
2013-03 |
2014-03 |
2015-03 |
2016-03 |
2017 Onwards |
|||
Growth in Net Income |
8.00% |
8.00% |
8.00% |
2.00% |
||||
Net Sales |
887.9 |
958.932 |
1035.65 |
1118.5 |
1140.86825 |
|||
Depreciation |
568.256 |
613.716 |
662.814 |
715.84 |
730.1556803 |
|||
Net Income |
32.73 |
35.3484 |
38.1763 |
41.23 |
42.05498124 |
|||
CAPEX |
62.153 |
67.1252 |
72.4953 |
78.295 |
79.86077753 |
|||
Change in Working Capital |
15.0943 |
16.3018 |
17.606 |
19.014 |
19.39476026 |
|||
Cash Flow to equity |
523.739 |
565.638 |
610.889 |
659.76 |
672.9551238 |
|||
Cost of Equity |
5.00% |
5.00% |
5.00% |
5.00% |
5.00% |
|||
Terminal value |
22432 |
|||||||
Present value of cash flows |
498.799 |
513.05 |
527.709 |
18093 |
||||
FCFE (In ‘000) |
19632.4 |
|||||||
No of shares |
143.35 |
|||||||
Share price per share acc to valuation |
||||||||
Pessimistic |
137 |
|||||||
Current Market Price |
103.75 |
|||||||