This article discusses Era Group (ERA), which is one of the largest helicopter operators in the world from a growth and valuation perspective. The conclusion of the thesis is that Era Group is an undervalued stock with immense growth potential. Investors can therefore consider this stock with a medium to long-term investment horizon for reasons discussed.
Era Group is one of the largest helicopter operators in the world and the longest serving helicopter transport operator in the U.S. In addition to servicing its U.S. customers, Era Group also provides helicopters and related services to customers and third-party helicopter operators in other countries, including Brazil, India, Norway, Spain, Sweden, the United Kingdom and Uruguay.
Era Group's helicopters are primarily used to transport personnel to, from and between offshore installations, drilling rigs and platforms. As of the first quarter 2014, the company had a helicopter fleet of 165 with an average age of 12 years. This includes 147 owned helicopters with the others being managed, leased-in or operated through joint ventures. Further to this, Era Group has an order book of 20 helicopters with an option to order 19 more helicopters.
Key Investment Positives
Era Group has strong fundamentals, which enables the company to embark on an aggressive growth plan. As of March 2014, Era Group had a cash position of $25.3 million in addition to the $244 million available under the revolving credit lines. A strong liquidity position ensures that the company is well positioned to fund its aggressive capital expenditure plan to be discussed later in the article.
In terms of leverage, the company is well placed as of March 2014 with a debt to EBITDA of 3.1, a debt to capitalization of 39% and an EBITDA interest coverage ratio of 5.3, which makes debt servicing comfortable. The importance of discussing these metrics will be clear when I discuss the company’s growth plans.
Era Group has witnessed positive operating cash flow over the last five years with fiscal year 2013 operating cash flows at $64.3 million. I must mention that the company also had a positive free cash flow in 2013, which is the first time Era Group had a positive free cash flow in the last five years. The FCF was negative with high level of investments. Overall, Era Group has strong fundamentals and the company is well positioned to grow aggressively given the current financial flexibility.
Aggressive Growth Plans
Past fundamentals do not ensure that the stock will continue to do well. It is more important to look at the company’s expansion plans, which will trigger upside in revenue, EBITDA and the cash flow.
From this perspective, things look positive for Era Group. As of 1Q14, the company had an order book of 20 helicopters to be delivered over the next five years with four deliveries in 2014, 2 in 2015 and six in 2016. The regular inflow of new fleet ensures that the company’s revenue ticks higher steadily. In addition to the above, Era Group also has an option to book 19 more helicopters.
In terms of cost, the company has nearly $300 million of capital expenditure to be incurred for the 20 helicopters to be delivered over the next five years. The importance of discussing the financial flexibility before is clear, as the new fleet can be financed by internal accruals and also through debt. Including options, the cost of new fleet will go up to $700 million. I do believe that Era Group will exercise the options if the offshore drilling market remains robust (very likely).
The company’s undervaluation is one of the important reasons to discuss Era Group at this point of time besides the growth prospects discussed. As the chart below shows, Era Group is currently trading nearly 15% below the fair net asset value of its fleet (per share). I believe that this valuation difference will close down as the company continues to grow and generate strong operating cash flows.
Even apart from the undervaluation according to the NAV per share, Era Group trades at an EV/EBITDA valuation of 11.3 and a forward five-year PEG of 0.5. This is attractive when compared to its peer, Bristow Group (BRS), which is trading at an EV/EBITDA valuation of 11.9 and a forward five-year PEG of 0.96. Clearly, Era Group has upside potential and this is backed by a strong growth story.
The company’s growth is largely dependent on the offshore oil & gas industry. The offshore industry has been growing with some of the biggest oil discoveries in the recent past being made offshore. However, the industry’s growth is very sensitive to economic growth and oil price volatility. Any significant downturn in economic activity in the developed world or China can hamper the industry and in turn, hamper Era Group’s growth prospects.
Era Group is an undervalued stock in markets that are tending towards being expensive. Investors can consider the stock with a medium to long-term time horizon. I am bullish on the prospects of the offshore oil and gas industry and Era Group should benefit from this growth.