Dart Group: Long with 5 PE, PB of 0.80 Improving Balance Sheet, 50% Upside

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

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