As a result of difficult conditions in Europe and the Middle East, jet services provider Gama Aviation (LSE:GMAA) has endured some heavy turbulence this year, falling from highs of 267p to its current 179p. In spite of a flat set of H1 2018 results, the firm remains stoic in its belief that it can perform in line with market expectations this year as it gears up for a period of rapid expansion funded by a recent £48m placing.
Here, Gama’s chief executive Marwan Khalek tells us why the company’s recent efforts to improve efficiency and immediate US-focused growth plans could soon see shares re-rate.
Taking off
As it stands, Gama Aviation splits its operation into two divisions – air and ground. Its air arm offers jet owners a comprehensive fleet management service, including services like crew personnel, fuel, airworthiness assessments, hangar space, valeting and travel arrangements. Gama also acts as a charter aircraft broker, sharing any revenues with the underlying owner of the hired aircraft.
Finally, its air division provides outsourced solutions to public agencies for time critical services like air ambulances and aerial survey. This side of the business received a boost inMaywhen Gama announced an extension of its seven-year contract with the Scottish Ambulance Service. This bolt-on contract is expected to bring in £50m of revenue.
Gama’s ground division also offers a wide variety of services. The biggest of these is its aircraft maintenance offering, which it operates on both a fee and contract basis. Here, it carries out regular, planned maintenance, as required under law, and unplanned (line) maintenance for when something has gone wrong with an aircraft. It also offers design and modification services like avionics or cabin system upgrades. Finally, the ground division also provides services like parking, hangarage and can carry out ground handling tasks like fuelling at several airports.
In May, Gama announced a major restructure of its ground services in the UK, combining its maintenance facilities in Farnborough and Oxford airports into a single, larger facility at Bournemouth airport. Gama said the $2m move, funded from operational cashflow, will pay for itself through efficiency savings and revenue synergies from next year onwards. It added that it will also facilitate future growth.
Khalek said that despite offering a wide variety of services, both sides of its business run very capex light models as they make money from other people’s aircraft and facilities. He added that this has allowed Gama to enjoy attractive company-wide profit margins:
‘In air, our predominant activity is running other people’s aircraft, so we do not have to buy the assets here, aside from some long-term contracts. Across ground we do not own facilities, so the only expenses are tooling, equipment, and inventory. As a result, our target margins are c.45pc in air and c.20pc in ground. These are not aspirational margins either; they are ones that we have delivered and continue to deliver. To ensure they continue to improve, we are focused on quality of earnings, running efficiently, and scale.’
Stoic outlook
Before releasing its results last month, Gama warned the market on two occasions that its H1 performance would be flat. Therefore, it came as little surprise last month when the business revealed that revenues over the first six months of the year were $104.6m, down from $108.1m in H1 2017. Meanwhile, gross profits hit $22.1m, down from $22.7m, and EBITDA came in at $8.1m, down from $8.4m.
Gama’s ground division delivered strong organic growth in the US, with revenues up 21.3pc to $17.2m. The firm said this reflects the buoyant American market and investment in new capacity throughout 2017. However, it saw ground revenues decline across both Europe and the Middle East. In Europe, it put this down to weak performance in Oxford, which it has addressed by moving to Bournemouth. In the Middle East, it put this down to geopolitical tensions, which it said are now easing.
Meanwhile, Gama’s air year-on-year revenues rose 5.8pc over H1 2018 from $254.9m to $269.8m. The company again put this down to strong performance in the US, where it is benefitting from the merger of its US aircraft management and charter divisions with BBA Aviation last year. It also said a large-scale investment in its US sales force has helped operating margins over the period. However, like in air, Gama struggled to make as much progress in Europe and the Middle East. In Europe, it said political and economic uncertainty damaged performance, highlighting Brexit in particular. Likewise, it said uncertainty and political turmoil hit the Middle East.
Interestingly, despite the flat performance, Gama reported no change to its full-year expectations. As such, given the flat performance in H1, the business will presumably have to deliver a stronger than expected second half to meet analysts’ growth expectations. Khalek said Gama’s refusal to back down on its full-year estimates should reassure investors:
‘We have three analysts covering us, and there is a consensus about what our profitability will for this year. We have full visibility when it comes to our potential internally, and we are happy to reiterate our full-year position. We have made this claim on several occasions. Now we have been able to make this claim three months on from the end of the H1 results period, and three months from the end of the year, our confidence in Gama’s future based on our internal visibility should provide investors with some reassurance.’
Expansion plans
Gama’s ultimate aim is to become a global market leader in business aviation services, which it plans to achieve through organic, joint venture and acquisition-led growth. The firm took a significant step towards accelerating this growth strategy in February when an investor called Hutchison bought 21pc of its shares in a £48m placing.
Nearly $20m of the funds were immediately used to buy Hutchison’s Hong Kong aviation interests, its 50pc stake in a JV called Gama Aviation Hutchison and its 20pc stake in China Aircraft Services. The remainder of the money was set aside for accelerating Gama’s growth strategy and, as of 30 June, the company had a $21.1m cash balance.
Gama now expects to spend c.$20 on adding base maintenance capacity in the Western and Eastern corridors of the US. The work will see it expand capacity at its current line maintenance operation in Las Vegas to develop a base maintenance capacity that can serve the Western US market. It is also in advanced discussions around securing hangar capacity in SouthFlorida to strengthenits ability to provide maintenance service to the Eastern US market. Finally, it will also be expanding its high-turnaround base maintenance capabilities at its existing line maintenance centres in New York, Palm Beach, Dallas, and Los Angeles.
In its recent results, the organisation said it expects this work in the US to complete before year-end, and begin generating revenues in 2019. It added that it is continuing to pursue ‘an active pipeline of acquisition opportunities with a number in advanced stages of discussions’.
To position itself for this next stage of growth, the firm has also made severalsenior level management changes. In January, it hired Richard Steeves, founder of FTSE 250 outsourcer Synergy, and Neil Medley, current chief operating officer, to its board as non-executive directors. Then, in May, it hired David Stickland, former chief financial officer at Addison Lee, as its new finance boss to replace Kevin Godley, who resigned in February.
With all these wheels in motion, Khalek reiterated that he is not concerned about the flat performance in H1 2018:
‘The numbers may be flat, butI certainly do not feel flat. We made a strategic decision to fast-track our growth, andwe are now busy executing on all these things. When we carried out the raise, we said we were going to be diluted this year because the money raised would take the best part of a year to deploy and bear fruit. As evidenced before, we have an underlying profitability and next year- oncewe have deployed the placing proceeds- we expect to return toearnings neutrality and move upwards rapidly from there. There is an awful lot of work going on underneath the surface, andH1 was always going to be about getting those building blocks in place. We have now made great progress on doing that.’
Time for take-off?
With Gama’s shares currently down 32pc on their highest level this year and at their lowest level since the beginning of 2017, Khalek’s confidence is veryappealing.The negative sentiment towards the business appears to be driven mainly by macro issues out of its control – particularly in Europe and the Middle East. Should the impact of these headwinds lessen – as Gama has confidently predicted – then the firm will be left looking a lot stronger. Indeed, it is turning over a profit – which it was previously growing – and is on the verge of entering its next vital growth stage with the cash to back it up.
If you think Gama’s ambitious growth plans and promises of a strong FY2018 can shake the negativity that has been hampering its shares, then its current £116m market cap could be worth a look.
