Bristow Group is the world’s largest provider of helicopter services to the offshore oil and gas industry. Bristow owns 375 aircraft directly and participates in a number of joint ventures, together operating another 115 aircraft. 67% of revenue is from long term contracts for the servicing of production platforms. 33% comes from exploration and development.
This is a succesfull turnaround hiding in plain sight due to high growth capex. The investor gets downside protection due to the liquid and cheap assets.
Mr. Market offers us this company that is poised to grow at a mere 7x owner earnings.
The opportunity exists because:
* Earnings are hidden from view due to high growth capex.
* The OSX space is less popular these days due to lower oil prices
* This is perceived to be a commodity business with no opportunity for differentiation.
Valuation of Assets and liabilities
Bristows main asset is of course it's fleet of helicopters. Many can be and have been monetized for more than their original newbuild costs. Of the fleet of 490, ~70 or so are more than 25 years old. This, by the way is below the industry avearge of 25%. The company expects to sell these older aircraft.
Just to be conservative and keep the calculations simple I shall value only the wholly owned aircraft. Average prices are based on my own research.
* 88 small helicopters (Bell 206 L3 and similar) => 100m
* 135 medium helicopters (Bell 412ST and similar) => 600m
* 78 large helicopters (Sikorsky S61 and similar) => 400m
* 70 training helicopters and some fixed wing => 20m
Let's say the fleet could be liquidated at ~1.1B.
Just to check for sanity....
* 1B was invested in the fleet in the last three years alone
* 50 small aircraft were sold in october for 60M. (a 40m profit on book value of the aircraft by the way)
* The market for used helicopters is ~ 800 aircraft per annum.
* We ignored the value of aircraft in Joint Ventures.
* Well maintained aircraft in this industry depreciate at less than 4% annually.
* The sale of aircraft by Bristow has historically been profitable. This is an indication that book value understates market value.
1.1B of fleet value - 1.1B of total debt + .75B of current assets = 0.75B
At a market cap below 700M the investor is getting more than he is paying for.
Estimate of earnings power
EBITDA is ~200m. The problem here is that Bristow spends more than 250m a year on capex. The questions is, what part of 250m is maintenance and what part of it is investing for growth. Helicopters are written off in ~30 years. we just calculated the fleet to be worth 1.1B. That means we need 50m to keep the fleet current. Technical maintenance is al accounted for in operations so we don't need to account for that twice.
This leads to an estimate of 150m of owner earnings before taxes. Let's call it 100m of owner earnings. A 14% yield on a market cap of 700m.
In downturns, Bristow has histrically mothballed it's older aircraft. This eliminates the high operating costs (fuel, maintenance and pilots). The low cost of depreciation makes this excercise bearable. When the economy bounces back, the aircraft are brought back into service.
Just to check for sanity....
* An estimate of 100m of earnings on 1B of revenue
* Bristow is investing ~250m annually for growth and increased profitability
* Revenue has increased from 500m to 1B in five years while flight hours have increased by just ~25% !
Since the current CEO took over the helm, he has consistently worked on making this company the most profitable and safest company in the business. He has transformed the fleet, created a global footprint and focussed on safety. Revenue has doubled, accidents are now rare while while flight hours have increased by only 25%.
In the mean time, general hourly rates in the business as a whole have not gone up at rates high enough to account for the increased profitability. This is plain evidence of the transformation of Bristow to the best in the business. I'm impressed.
* Consolidation of operators and a tight supply/demand situation has created an easier environment whereby a competitor doesn’t need to compete on price. Bristow has been able to find additional work whenever it walks away from a suboptimal bid.
* As the projects become more demanding, safety has become a top differentiating factor and a considerable barrier to entry for start-ups. BRS has distinguished itself on its superior safety record.
* Many of the newer offshore developments are further from land and in more difficult environments. Bristow is well placed to profit from this trend.
* As an OSX type name, Bristow may trade in sympathy with the OSX index. The stock will likely trade down on market sentiment, even though the lower commodity prices have little fundamental impact on Bristow’s business.
* Bristow is involved in legal issues and insurance claims regarding accidents. It comes with the business.
* Price competition. The primary market competitors are currently pricing rationally. If any of the players were to abandon their current discipline and price for market share that could upset the industry dynamics.
* Because many countries have restrictions on foreign ownership of aircraft operators, Bristow hes structured some of its foreign operations in complicated JVs. As a result, 25% of BRS’s fleet are held by unconsolidated JVs. It is critical for BRS to maintain solid internal controls.
Any and all coments welcome as usual.....