Equity Research Report On Nigerian Aviation Handling Company Plc September 2007 This report is based upon information from various sources that we believe are reliable. However, no representation is made that is not accurate or complete. This report is not an offer to buy or sell, nor a solicitation to buy or sell the securities mentioned therein. This report is provided solely for the information of clients of LeadCapital Limited (LeadCapital) who are expected to make their own investment decisions without sole reliance on this report. LeadCapital accepts no liability for any direct or consequential loss arising from any use of this report or its contents. Investments can fluctuate in price and value and the investor may get back less than was originally invested. Past performance is not necessarily a guide to future performance. This information has been issued by LeadCapital, which is licensed by the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE). Enquiries relating to any matters in this report should be directed to Bamidele Adewole (01 4611269 ext 130)
Offer Highlights Issuer Method of Offer Shares on Offer Nigerian Aviation Handling Company Plc Offer for Subscription 90 million ordinary shares Offer Price N17.50 Offer Size Issued Share Capital Market Capitalisation (at offer price) N1.575 billion 750 million ordinary shares N13.125 billion Offer Opens September 10th, 2007 Offer Closes September 28th, 2007 Use of Proceeds Purpose N M % 2 Estimated Completion Period Equipment Purchase 1,000 49.94 15 Months Information Technology 150 7.49 8 Months Construction of Cargo Shells 100 4.99 24 Months New Stations 100 4.99 6 Months Restructuring 430 21.47 6 Months Re-branding 100 4.99 6 Months Working Capital 122.59 6.12 Continuous Total 2,002.59 100.00 The company is also offering by way of rights 35 million ordinary shares at N16.50 per share to existing shareholders as at 18 th May 2007.
Company Overview NAHCo was incorporated as a Private Limited Liability Company on 6th December, 1979 with Nigerian and foreign equity ownerships in the proportion of 60% and 40% respectively. The then Nigerian Airports Authority (NAA) 1 owned 60% while four foreign airlines owned and still own the remaining 40% of the Company's share capital. On the 4 th of August 2005, the company changed its status to a Public Liability Company through a Federal Government s divestment and public offer for sale of 18 million units at N5.50k. The public offer was 80% oversubscribed and this led to the full privatization of the company. The Nigerian public now owns 60% stake while four foreign airlines own the remaining 40% (British Airways 12%, Air France 12.5%, Sabena 8% and Lufthansa 7%). NAHCo is currently organized around three major services which include Aircraft/Ramp Handling, Passenger Handling and Cargo Services. The company s board comprises of 10 directors including 3 representatives from Air France, Lufthansa and British Airways. The authorised and paid-up share capital is 1 billion and 750 million ordinary shares respectively and the company has issued scrip dividends six times in the last 16 years. Key Selling Points Management Team. The company comprises of a strong and competent board and management team with vast experience and proven track record. First movers advantage. The company is a pseudo-monopoly in its industry. Its only competitor SAHCOL is a government-owned parastatal which is currently unquoted and as such cannot posses any direct threat to its stock market performance. Growing brand name. NAHCo has a growing reputation in the aviation sector as a reliable and efficient passenger and cargo services company. This is hinged on its improved performance, experience in the industry and consistency in meeting the needs and requirements of its various stakeholders. Large clientele base. The company has a very robust clientele base which consists of the major airline operators in the country. Their clients currently include the likes of Air France, British Airways, Emirates, KLM Royal Dutch Airlines 2 and have recently been contracted by North American Airlines and Turkish Airlines to provide a wide range of ground handling services. The company is however pursuing an aggressive market development strategy as it intends to develop its services to local airlines in Nigeria as well as other airlines in the West African Sub-region. 1 Now Federal Airports Authority of Nigeria (FAAN) 3 2 This list is not exhaustive
Stock market performance. NAHCo has performed exceptionally well since it was listed on the floor of the NSE in November 2006. The stock which came to the market through an offer for sale in 2005, was listed at N5.50 and is currently frozen at N22.81. This therefore translates to a capital appreciation of 314.73% during the period. Challenges & Risk Factors Industry Risk. The Nigerian Aviation industry is currently undergoing significant structural changes. It however still requires a lot of improvement in its safety standards and overall service quality. The spate of recent air mishaps and other disasters as well as general fall in industry standards therefore serves as a threat to the going concern status of many of the airlines, some of which are clients of NAHCo. Business risk. Since NAHCo s business is highly dependent on the operations and processes of the airlines, its direct influence on income generation and profits is restricted. Its income streams are therefore not adequately diversified Competition. The proposed privatization and possible listing of NAHCo s main competitor SAHCOL as well as the possibility of other new entrants into the airline services sub-sector may increase the competition faced by the company. 4 Company Strategy In response to the risks associated with the falling standards in the aviation industry, the company has put in place certain strategies aimed at militating against those risks and consolidating on its position within its sub-sector. Some of the proposed plans of the company are as follows: The company intends to form strategic partnerships and alliances with international organizations and explore the opportunities of business strategies. Such partnerships could bring about exchange of international best practices and global recognition of the NAHCo brand. NAHCo is also planning an aggressive business expansion strategy which would culminate in the company increasing its clientele base and enable it explore opportunities in the West African sub-region. The company intends to commence a general upgrade of its information and communications technology systems through the introduction of IT softwares such as the Integrated Multi User System (IMUSE) and the Oracle e-business suite. The company will continuously embark on staff training and development in order to ensure that it continues to improve on its general quality of service delivery.
Operating Performance Turnover (N'bn) 4 3.05 3.25 3 2.17 2.34 2 1.85 1 0 PAT (N'bn) 0.5 0.43 0.4 0.32 0.3 0.2 0.16 0.14 0.10 0.1 0.0 2.5 Total Assets (N'bn) 2.25 2.08 2.0 1.81 1.93 1.5 1.28 1.0 0.5 0.0 The turnover of NAHCo has experienced a constant rise over the last 5 years as evidenced by its increase from N1.85bn to N3.25bn (15% CAGR). This increase could be attributed to the company s steady growth in market share, clientele growth, an aggressive market development strategy and its leverage as the leading aviation handling services company. The company s forecasts put its turnover for FYE 2007, 2008 and 2009 at N3.8bn, N5.27bn and N6.6bn respectively. We however see these estimates as conservative, considering the company s current strategies and the likely benefits which might emanate from its public offer assuming a 100% subscription. Profit after Tax (PAT) declined marginally between FYE 2002 and 2004 but then experienced a sharp increase of 217% in 2005. The increase could be precipitated by its initial public offer which was done in 2005 as the company was able to raise the needed funds used to grow its revenues while reducing its unit costs. With the exception of FYE 2005, the total asset base of NAHCo has been on the rise during our review period. From an initial figure of N1.28 billion in 2002, the company was able to grow its assets to 2.25 billion in 2006, representing a 15% CAGR. This is evidence of the company s organic expansion over the years. 5
15 12 9 6 8.56 Profit Margin (%) 10.42 6.38 4.27 13.38 Profit Margin also declined in the first three years of our analysis from 8.56% to 4.27% but then experienced a sharp rise in 2005 and 2006 (CAGR of 33% in the last 2 years). The company thus benefited immensely from its public offering in 2005 and has been able to efficiently manage the trend since then. 3 0 1.8 1.5 1.2 0.9 0.6 0.3 EPS (N) 1.45 1.06 1.06 0.92 0.67 The Earnings per Share 3 of the company has also followed a similar trend as its margins. An initial decline in its first three years was translated to a steady recovery in the last two years. During the period, the company rose from N1.06 to N1.45, representing an 8% CAGR. Baring any further increases in its paid up share capital, we expect the company to maintain its current growth in EPS as its earnings should increase at a greater rate than its post public offer shares outstanding. 0.0 120 100 80 60 40 20 Dividend Payout (%) 105.57 78.58 72.44 28.33 20.73 NAHCo has undertaken a rather restrictive dividend policy over the years. In 2003 the company paid out dividends in excess of its PAT (105.57% payout), thereby leading to a retained loss at year end. It subsequently recorded declines in its dividend payout (CADR 4 33%) suggesting that it would probably prefer to retain profits for long-term expansion and growth rather than issue dividends. 0 3 Earnings per Share is based on shares outstanding of 150 million ordinary shares for FYE 2002 2004 and 300 million ordinary shares for 2005 2006. 4 Compound Annual Decline Rate 6
Forecasts and Valuation For the purpose of this analysis, we are comparing NAHCo with Airline Services and Logistics Plc ( Airservice ). Airservice has been selected as NAHCo s peer based on the following rationale: Absence of a more suitable alternative (NAHCo being the only quoted aviation handling company) Similarity of service offerings, target market and clientele base. (They both operate in the aviation industry Similarity in size as evaluated by market capitalization and current share prices. For the purpose of valuation, we have used the latest 12-month earnings (trailing earnings) for both companies. For NAHCo, we are using their latest annual accounts up to December 31st, 2006. For 2007 forecasts, we have included the additional shares that would be raised during this exercise in the computation of the 2007 EPS. If the offer is 100% successful, the company would have outstanding number of ordinary shares of 875 million (750m+90m+35m) by December 2007, when the company s new shares would be listed. Based on its trailing earnings, at the market price of N22.81, NAHCo is valued at 39.41 times its earnings, compared with that of Airservice at 82.34x. At the offer price of N17.50, the valuation improves to 30.23x, which compares favourably with that of Airservice. 7 The company s Price to Book Valuation (P/BV) also compares favorably with that of its closest competitor. The company has a P/BV of 6.09x as against that of Airservice. At the offer price, the company s P/BV drops to 4.67x which makes it even cheaper. For YE 2007, the shares outstanding would have increased to 875 million (from its present 750 million - assuming 100% success of the current offer). If we assume a year-end PAT of N557 million, forecast Year-end EPS would increase to N0.64 from its present N0.58 while the 1- year forward P/E valuation would drop to 27.33x from its present 30.23x. Assuming a 30% growth in PAT, the expected P/E valuation of Airservice would be 63.34x. NAHCo s valuation, based on its price earnings ratio and price to book value compares favourably with that of Airservice. Recommendation Based on the above analysis, and considering other factors such as market sentiments and market psychology vis-àvis its share price performance post public offer 2005, we recommend NAHCo as a BUY for investors with short term horizon. For investors with long term horizon, we also recommend a buy but advise that investors apply some caution. This is because NAHCo s prospects depend to a large extent on the success of the ongoing reforms in the aviation sector and its ability to sustain its current trend and achieve its projected forecasts.
Balance Sheet Assets Employed N'000 N'000 N'000 N'000 N'000 Fixed Assets 1,276,174 1,806,201 2,074,289 1,925,131 2,248,215 Investments 7,420 7,420 7,420 - - Current Assets 1,283,594 1,813,621 2,081,709 1,925,131 2,248,215 Stocks 108,891 97,859 158,837 97,200 68,849 Debtors & Prepayments 250,675 370,235 472,998 707,404 574,700 Deposits for fixed assets 309,234 151,525 187,171 417,551 Cash at bank and in hand 128,083 95,144 64,811 523,113 620,321 Current Liabilities 796,883 714,763 696,646 1,514,888 1,681,421 Borrowings 18,764 127-163,441 191,291 Creditors and Accruals 572,015 979,706 1,142,955 1,183,412 1,329,063 Taxation 53,139 61,663 50,581 140,581 147,044 643,918 1,041,496 1,193,536 1,487,434 1,667,398 Net Current Assets/(Liabilities) 152,965 (326,733) (496,890) 27,454 14,023 Total Assets Less Current Liabilities 1,436,559 1,486,888 1,584,819 1,952,585 2,262,238 Long Term Creditors Deferred Retirement Benefits 720,000 777,053 845,427 935,465 875,001 Deferred Tax 184,000 185,000 187,000 237,000 263,000 904,000 962,053 1,032,427 1,172,465 1,138,001 Total Net Assets 532,559 524,835 552,392 780,120 1,124,237 Represented By Share Capital 150,000 150,000 150,000 150,000 150,000 Share Premium 320 320 320 320 320 Revenue Reserves 382,239 374,515 402,072 629,800 973,917 Shareholders' Funds 532,559 524,835 552,392 780,120 1,124,237 8
Profit and Loss Accounts N'000 N'000 N'000 N'000 N'000 Turnover 1,851,277 2,173,277 2,343,618 3,050,539 3,245,553 Cost of Operations (1,099,823) (1,212,421) (1,255,759) (1,316,131) (1,903,533) Gross Profit 751,454 960,856 1,087,859 1,734,408 1,342,020 Administrative Expenses (598,985) (797,736) (981,202) (1,197,240) (856,744) Trading Profit 152,469 163,120 106,657 537,168 485,276 Other income 68,624 44,692 77,284 71,196 94,547 Interest Payable & Similar Charges (16,236) (13,498) (28,634) (42,318) (23,877) Exceptional Items - (108,318) - - - Profit before Taxation 204,057 194,314 155,307 457,728 555,946 Taxation (46,479) (55,621) (55,319) (140,000) (121,829) Profit after Taxation 158,378 138,693 99,988 317,728 434,117 Proposed Dividend (124,461) (146,417) (72,431) (90,000) (90,000) Retained Profit for the year 33,917 (7,724) 27,557 227,728 344,117 Retained Profit brought forward 348,322 382,239 374,515 402,072 629,800 Retained Profit carried forward 382,239 374,515 402,072 629,800 973,917 9
Performance Indicators Shares Outstanding (000) 150,000 150,000 150,000 300,000 300,000 Interest Charges (N'000) 16,236 13,498 28,634 42,318 23,877 Dividend (N'000) 124,461 146,417 72,431 90,000 90,000 Net Assets (N'000) 532,559 524,835 552,392 780,120 1,124,237 Gross Margin, % 40.59 44.21 46.42 56.86 41.35 Profit Margin, % 8.56 6.38 4.27 10.42 13.38 EPS, N 1.06 0.92 0.67 1.06 1.45 DPS, N 0.83 0.98 0.48 0.30 0.30 BV/Share, N 3.55 3.50 3.68 2.60 3.75 Div Payout, % 78.58 105.57 72.44 28.33 20.73 Earnings Yield, % 6.03 5.28 3.81 6.05 8.27 Div Yield, % 4.74 5.58 2.76 1.71 1.71 PE ratio, x (Based on Offer Price) 16.57 18.93 26.25 16.52 12.09 Price to Book, x (Based on Offer Price) 4.93 5.00 4.75 6.73 4.67 Div Cover, x 1.27 0.95 1.38 3.53 4.82 Interest Cover, x 12.57 14.40 5.42 10.82 23.28 Current Ratio, x 1.24 0.69 0.58 1.02 1.01 Liquidity Ratio, x 1.07 0.59 0.45 0.95 0.97 Cash Ratio, x 0.20 0.09 0.05 0.35 0.37 Debtors Turnover, x 0.14 0.17 0.20 0.23 0.18 Creditors Turnover, x 0.31 0.45 0.49 0.39 0.41 Fixed Asset Turnover, x 0.69 0.83 0.89 0.63 0.69 10