Recently a friend (EmpCod) reported in the french forum EntrepreneurBoursier that Canadian Helicopters could be a good value opportunity. This value investor worked closely with me in the past and had good returns on value opportunity so I think his idea is worth a look. Here is my take on Canadian Helicopters.
Through Canadian Helicopters Limited, Canadian Helicopters Group Inc. is the largest helicopter transportation services company operating in Canada and one of the largest in the world based on the size of its fleet. From over 33 base locations across Canada, Canadian Helicopters provides helicopter services to a broad range of sectors, including emergency medical services, infrastructure maintenance, utilities, oil and gas, forestry, mining and construction.
In addition to helicopter transportation services, Canadian Helicopters operates two flight schools and provides third-party repair and maintenance services. With over 60 years of experience, Canadian Helicopters is an industry leader in establishing safety standards and operating procedures.
In July 2011, it acquired the assets of Helicopters (N.Z.) Limited, including the shares of Helicopters (Australia) Pty Ltd and other wholly-owned active subsidiary companies, as well as the assets of Helicopter Nominees Limited (collectively “HNZ”). The Transaction purchase price at closing was NZD154 million.
The company now owns and operates 128 helicopters across 49 locations around the world. They also currently lease an additional 32 helicopters for a total of 160 helicopters in operation.
Canadian Helicopters did not release their last financial quarter and plan to do so in november. Usually, third quarter revenues from CHL-A are nicer than first quarters due to seasonality of Northern country flights. Q3 revenues clocked in 22% higher in previous years in Q3 compared to Q2. We cannot expected quite a rise in the current year Q3 revenues. There is a material impact in Q1-Q2 revenues caused by the contract with US Defense in Afghanistan. We should see around 10M$ increase in revenue in Q3 based on previous year Q3 difference with Q2. This 10M$ increase would get CHL-A to 73M$ revenue in Q3 . An estimate of Fiscal year total revenue would be around 220M$.
Due to the same seasonality, some fixed cost must be incurred during low revenue months to ensure aircraft maintenance and crew wages affecting margins in Q1, beginning of Q2 and end of Q4. We already saw the impact on Q1 and Q2 and can easily determine Q4. Margin of Q3 will probably be higher for CHL due to US Afghanistan contract and high seasonality of regular operations. I would expect something around 20M net income for regular operations in Q3. Fiscal year net income should come in around 45M for the full fiscal year 2011 resulting in an EPS of 3.341$. At the current price it is a P/E of 6.7 for the Canadian Helicopters division. The US military contract for 11 aircrafts is renewed yearly and is expected to last up to 5years on current terms. This revenue stream can now be included in our estimates.
Remember, you also get HNZ company profits too!
Helicopter Nominees Limited
We cannot get previous financial statements from HNZ but management gives an outlook of a consolidated statement between HNZ and CHL to show the compilation of income in both situations. Previous fiscal year with HNZ profit were recorded at 20M$ EBITDA. Under the current taxes applying to CHL, it would result in a net income of 16M before interest payment on HNZ acquisition. The acquisition required 93M$ in credit facility utilization. The previous credit facility ran over an interest rate of 1.18%. I am pretty sure, even if the new facility have an hypotech on it, that the new interest rate will be higher (lets say 3%). The interest payment (the capital must be paid in full at facility closure in 2½ year) could reasonably be estimated at 2.79M$ per year reducing the EPS by 1.89M$ (taxes adjusted amount). The new acquisition total profits for the year 2012 should be around 18M$ or 1.3$/share. We could expect one-third of this amount to apply in fiscal year 2011 due to reverse seasonality of the South hemisphere operation of HNZ. 2011 additional profit of 0.45$ per share could be a fair estimate.
Management also implies savings due to the fusion of activities between HNZ and CHL. I personally never include those assumptions in my calculations but in this case one thing must be taken in our calculations. CHL leases 27 helicopters and HNZ leases 5 helicopters. Due to seasonality not all but many of the company owned aircrafts could be used in HNZ in replacement of HNZ leased aircrafts. Average lease cost per year is 400k per helicopter. If you only consider CHL owned aircraft replacing HNZ leased ones, it results in a reduction of 2M$ in operational expenses. You could also extrapolate the same thing the other side around. Out of the 33 owned aircraft by HNZ, 10 could be leased to CHL to replace some of the 27 leased one for a cost saving of 4M$! In the estimates marked by the *, I’ve included 4M$ additional net income due to cost savings on lease aircrafts. Management also implies cost saving due to insurance and other maintenance fees, but I’m not an expert in those expenses. I’ll keep them out of my estimates for now.
There is not much to say about CHL than that it is sold under book value. Acquisition of NHZ was done in part by debt and by cash. Net book value of NHZ was the purchase price so no nice profit on acquisition but current assets are rock solid in the form of property (training center, maintenance centers, etc) and equipments (helicopters). Another important point is the AR. They are an important asset representing 41M as of June 30th representing 15% of market cap!
Debt load is important due to recent acquisition (94M$) but current profit could cover around 25 times the interest payments on the new debt. This new debt represents about 50% of book value so the leverage is still reasonable.
Dividend for this stock is inherited from the “fund” history of CHL. It is reported at 0.09$ per share per month for a yield of 4.9% on the current stock price. Management seems confident that the dividend per share should continue in the future.
One of the major risk of CHL is its dependency on major customers. With the diversification implies in the acquisition of NHZ this risk should be reduced but keep in mind that top 2 customers of CHL were responsible for 62% of total revenues of CHL before the acquisition! That is a major dependency!!!
An acquisition is always risky. You want the old team to keep in place to ensure smooth transitioning and try to keep current customers happy. We cannot be sure of the impact of HNZ acquisition until a full cycle has passed.
Management (CEO) is in with us for 2 million worth of stock. Not much compared to the 1M$ salary he receives yearly. But hey, 2M is not bad at all. Overall high management receives around 3M$ in compensation.
On a P/E basis, this stock have a 5 year average P/E at 6.2 but the industry average is 12.4. I would use a conservative estimate of 6.2 but up side should be expected around 8 to 9. In my calculation the value of the company is located from 31 to 43$. At 31$ this represents a margin of safety from 40% to 100% depending on your P/E factors.
Disclosure : None.