Stock of Airline Services: An Investment Assessment (NASDAQ: ATSG)

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“Young people talk about the future because they don’t have a past, and old people talk about the past because they don’t have a future.. “- Boyd K. Packer

Today we take an in-depth look at an aircraft rental company that has weathered the pandemic fairly well and has also seen recent insider buys. A full analysis follows below.

ATSG actions

Company presentation:

Based in Wilmington, Ohio, Airline Services Group, Inc. (ATSG) is a holding company which, through its subsidiaries, provides aircraft leasing, airline operations, aircraft modification and maintenance services, as well as other support services to industries air transport and logistics. The company owns ~ 120 (mainly Boeing (BA)) airplanes, which are used in flight operations on behalf of the US Department of Defense (DoD); or rented from Amazon (NASDAQ: AMZN) and DHL, among others. The three named customers represent approximately three quarters of consolidated air transport revenues.

Overview of the Air Transport Services Group

Source: December company presentation

The company was founded in 1980 as ABX Air, a wholly-owned subsidiary of Airborne Express, and was established in 2003 when the latter merged with DHL. The nickname changed to Air Transport at the end of 2007 when it restructured into its current holding company format. ATSG shares traded at just under $ 28.00 per share, resulting in a market capitalization of approximately $ 2.65 billion, after giving effect to 21.3 million warrants in the lesson.

Airline Services Group - Long Term Relationships

Source: December company presentation

Business model and operating segments

The company’s business model revolves around purchasing second-hand mid and mid-capacity passenger aircraft (mostly Boeing 767s that are around 15 to around 20 years old) and converting them (typically) into cargo configurations – at a cost of around $ 30 million for the 767-300s. These planes are then leased to its customers or employed in its airline operations, from which it can offer its full range of services. It has three declarable segments: CAM; ACMI services; and other activities.

Business model of the air transport services group

Source: December company presentation

CAM (Cargo Aircraft Management) provides the aforementioned rental services with Amazon the lessee of 42 of its fleet of 82 cargo aircraft as of September 30, 2021. This segment also has 18 other aircraft in the process of being modified. Most of the leases are for five to ten years, giving Transport Aérien solid visibility on revenues. It also provides flight crews and aircraft maintenance for the e-commerce giant. (The relationship with Amazon is detailed below.) DHL leases 14 planes from CAM, the latter operating eight. This division is the largest lessor of cargo planes in the industry and competes with GE Capital Aviation Services – recently acquired by an Irish company. AerCap Holdings (AER) for around $ 30 billion – and Altavair Aviation Leasing, both of which have significant passenger operations. CAM contributed $ 264.8 million to the company’s revenue in the first nine months of 2021 (YTD21), or 19% of the total before elimination of intersegment revenue.

Air transport service group - bundled services

Source: December company presentation

ACMI (Aircraft, Crew, Maintenance, and Insurance) Services is made up of three airline subsidiaries: ABX Air (cargo planes), Air Transport International (cargo planes and combined passenger / cargo); and Omni Air International (passenger planes for DoD – including the recent evacuation operation in Afghanistan). The services of these airlines are divided into ACMI; CMI; or Charter, where air travel is responsible for all costs and services (including fuel) in exchange for an all-inclusive price. ACMI and CMI installations are provided on an hourly or monthly basis. Many competitors offer ACMI type agreements, in particular Atlas Air in the world (AAWW), Northern Air Cargo Group and Western Global, among others. The company’s ACMI segment generated revenues of $ 851.3 million in fiscal year YTD21, or 61% of the total.

Other activities include aircraft maintenance and modification, sale of aircraft parts, load transfer and sorting services, as well as flight crew training for other air carriers and customers. This segment generated revenue of $ 281.2 million in YTD21, or 20% of the total.

Amazon relationship

The onset of the pandemic dramatically accelerated the transition to e-commerce, and Amazon has been by far the biggest beneficiary of this momentum. Air travel also benefited from Amazon’s expansion, with Amazon becoming the former’s biggest customer in 2021, increasing the number of aircraft leased from YE20 to YE21 (planned) from 13 to 46. The relationship began with an ACMI test agreement for five planes in 2015. It then accelerated considerably in 2016 when Amazon agreed to lease 12 Boeing 767-200s for five years and eight Boeing 767-300s for seven years. Along with this agreement, Air Transport issued warrants for 14.9 million shares to Amazon with an exercise price of $ 9.73. A similar agreement in 2018 – this time for ten aircraft and lease extensions on the other 20 – resulted in the issuance of additional warrants for 14.8 million additional shares with an exercise price of 21.53 $. Another lease in 2020 spurred the issuance of an additional 7.0 million warrants with an exercise price of $ 20.40.

GLOBAL GROWTH Airline Services Group

Source: December company presentation

Amazon exercised the 14.9 million initial warrants for 14.4 million ATSG shares – net after taking into account cashless years – in April 2021 and recently (November 2021) exercised 584,567 warrants. additional subscription to $ 20.40 to increase its stake to approximately 20%. In return, Air Transport has received approximately $ 144 million to date. If the balance of the warrants is exercised, the company would receive around $ 450 million more, with Amazon’s stake reaching around 38%.

3Q21 results and outlook

With Amazon’s continuing and growing importance, Air Transport announced its results on November 4, 2021, declaring 3Q21 Adj. EPS of $ 0.60 and Adj. EBITDA of $ 153.0 million on revenues of $ 466.0 million compared to Adjust. earnings of $ 0.41 per share and Adj. EBITDA of $ 125.5 million on revenues of $ 404.1 million for the prior year period, representing increases of 46%, 22% and 15%, respectively. More importantly, net income beat Street’s expectations of $ 0.14 per share while net income was $ 28.6 million above consensus. ACMI revenue block hours increased 9% sequentially and 17% during 3Q20, thanks to Omni Air’s assistance in the evacuation of approximately 20,000 passengers out of Afghanistan on behalf of the DoD.

Partly due to its strong third quarter and partly due to record levels of activity expected in its express parcel air transport business in 4Q21 – offset to some extent by a return to post-Afghanistan and affected passenger business by the pandemic – management has relieved its FY21 Adj. Expected EBITDA of $ 10 million to “at least” $ 535 million.

The company also announced that it has gained access to 70 aircraft conversion slots over the next five years with its Boeing 767-300 backlog full until the end of 2023.

Review and commentary from analysts:

Airline Services Group - Fleet and Debt

Source: December company presentation

Air transport generates a significant amount of operational cash flow – $ 519 million in the previous twelve months – enabling it to increase its owned and operated fleet from 108 to YE20 to 122 by the end of 3Q21, while reducing its fleet. debt of $ 1.48 billion to $ 1.37 billion during the same period. The leverage over the past year has gone from 2.9 to 2.2.

Air Transport Services Group Free Cash Flow

Source: December company presentation

Street analysts have been relatively silent on air travel for the past year, with only Stifel (buy and $ 30 price target) and Susquehanna (buy and $ 35 price target) offering comments. Going back to 2020, there were three other buy assessments (Loop, SunTrust, and Benchmark). Collectively, the street anticipates a steady growth of air transport, with a consensus FY22 Adj. EPS of $ 1.88 on revenue of $ 1.9 billion after earning $ 1.68 per share on revenue of $ 1.7 billion in fiscal year 21.

The chairman of the company’s ABX Air subsidiary, David Soaper, is optimistic about Air Transport’s future after investing nearly $ 1 million in 40,000 shares of ATSG on November 30, 2021. CFO Quint Turner also purchased 992 shares on the same date.

Verdict:

With the supply chain still in poor shape, air travel is expected to continue to achieve higher revenue block hours and possibly higher fares. Even without this problem, the company is enjoying an accelerated secular shift to e-commerce, which is expected to support demand for what is expected to be a fleet of nearly 200 aircraft by YE25 – which is expected to be funded from cash flow. operational. These dynamics should support the weak double-digit Adj. EBITDA and Aj. BPA growth over the next five years, making its EV / FY21E Adj. An EBITDA multiple of 6.6 – after giving effect to a warrant exercise assumed by Amazon – looks relatively cheap. With Amazon accounting for over a third of Air Transport’s revenue and its stake likely to increase to around 38% by 2025 based on its current shares and warrants, a buyout looks likely. . That said, Amazon is known for its good deals, so it’s hard to see a big buyout premium.

The risks in air travel are that three customers make up three-quarters of its revenue and Amazon is waiting for a period of weakness in stock prices to kick in, but ecommerce undercurrents suggest the stock Air Transport will grow steadily, making it a good “watch item position for now, as stock is cheap based on price and free cash flow. Options are available against equity. so a hedged buy strategy is viable This is how I recently initiated a small ATSG position.

“Think about tomorrow, the past cannot be mended. “- Confucius

Bret Jensen is the founder and author of articles for the Biotech Forum, Busted IPO Forum and Insiders Forum

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