I started this analysis with an open mind. Given the recent share price drop, talk of pe=4, and with a view to enter the stock, I was keen to look at how AIR is valued on a normalised basis . By this I mean using profit margins for the last 10 years and depreciation values that reflect average capital spend.
As we know, when airline margins expand, competitors come in, fuel prices fluctuate. Additionally, we know AIR is not immune to a weak economy. So we expect margins to contract and expand depending on the business cycle and competitive environment.
The table below shows the EBITDA margin and capex for the last few years (and forecasts). I have averaged these up to get a normalised EBITDA % and CAPEX.
|
Revenue |
EBITDA |
EBITDA % |
Capex |
2018 |
5818 |
1157 |
19.9 |
962 |
2017 |
5565 |
1293 |
23.2 |
945 |
2016 |
5336 |
1361 |
25.5 |
982 |
2015 |
|
|
19.2 |
1118 |
2014 |
|
|
19.5 |
644 |
2013 |
|
|
15.6 |
426 |
2012 |
|
|
11.2 |
623 |
2011 |
|
|
9.8 |
797 |
2010 |
|
|
11.2 |
433 |
2009 |
|
|
10.6 |
318 |
2008 |
|
|
14.5 |
284 |
2007 |
|
|
13.0 |
571 |
Average |
|
|
16.1 |
675 |
It is worth noting that management and analysts think the EBITDA margins will peak in 2016.
My normalised Capex should be equivalent to normalised depreciation when calculating profit. I have chosen not to normalise interest charges. I'll accept we may have low interest rates for longer.
The table below normalises NPAT using the average EBITDA margin of 16% and depreciation of $675m as calculated above. This is much higher than the analyst forecast of just $420m in FY16.
Year |
Revenue |
Actual EBITDA |
Normalised EBITDA |
Normalised EBIT |
Interest |
NPBT |
NPAT |
eps |
EV/EBITDA |
EV/EBIT |
PE |
2018 |
5818 |
1157 |
937 |
262 |
87.0 |
174.6 |
125.7 |
0.112 |
4.0 |
14.4 |
21.1 |
2017 |
5565 |
1293 |
896 |
221 |
41.0 |
179.8 |
129.5 |
0.115 |
4.2 |
17.1 |
20.5 |
2016 |
5336 |
1361 |
859 |
184 |
62.0 |
122.0 |
87.8 |
0.078 |
4.4 |
20.5 |
30.2 |
I must admit being a bit shocked by the result. In 2016 we get an actual pe=4. But we get a FY16 normalised pe=30! It drops to 20 in fY17. Still, at current prices and on a normalised basis, we could argue for a much lower share price.
So surely I must have missed something here. Will EBITDA margins stay elevated for longer? Is it different this time? Should the GFC margins be excluded? Is this why management are selling?
So as an exercise, I put in a margin of 19% given analysts are look looking at the margins in FY18. See below
Year |
Revenue |
Actual EBITDA |
Normalised EBITDA |
Normalised EBIT |
Interest |
NPBT |
NPAT |
eps |
EV/EBITDA |
EV/EBIT |
PE |
2018 |
5818 |
1157 |
1105 |
430 |
87.0 |
343.2 |
247.1 |
0.220 |
3.4 |
8.8 |
10.7 |
2017 |
5565 |
1293 |
1057 |
382 |
41.0 |
341.1 |
245.6 |
0.219 |
3.6 |
9.9 |
10.8 |
2016 |
5336 |
1361 |
1014 |
339 |
62.0 |
276.6 |
199.1 |
0.177 |
3.7 |
11.1 |
13.3 |
Perhaps this is more reasonable. But what the exercise highlights to me is the sensitivity of the EBITDA margins and the impact a normalised depreciation has on the NPAT.
GLTAH