Buy Gama Aviation
November 2, 2023
AIM: GMAA
Market Cap: £54MM
Price: £0.84
Price Target: £2.04
Upside: +142%
Summary
Gama Aviation PLC announced on October 18, 2023 that it is selling its US MRO business for $131MM. At the time of the announcement, Gama Aviation had a market cap of $41MM USD and an enterprise value of $53MM USD. Gama Aviation has appreciated from 53GBp to 84GBp. But the stock still looks undervalued. Once the transaction closes (shortly after shareholder approval on November 3), Gama Aviation PLC will have net cash of $88MM vs. its current market cap of $65MM. Further, management has committed to paying a special dividend of at least 55GBp. Assuming RemainCo deserves to trade at 0.5x revenue, it is worth GBp149 per share. Add in the 55GBp special dividend, and there appears to be over 100% upside.
Resources
Full Analysis
Gama Aviation PLC announced on October 18, 2023 that it is selling its US MRO business for $131MM.
In Aviation, MRO stands for maintenance, repair and overhaul.
The Aviation MRO industry is large and growing. It’s expected to benefit from the secular tailwind of increased travel.
Here is the website for Gama Aviation’s US MRO business (it’s called Jet East)
When will the deal close?
The sale requires shareholder approval. A vote will take place at 9am on November 3. The transaction is expected to close shortly after the vote (within 3 business days of November 3).
Shareholders representing 50.3% of shares outstanding have indicated to management that they intend to vote in favor of the transaction.
As such, the shareholder vote is a formality.
What will be done with the proceeds?
Gama Aviation writes in its Deal Circular:
“The Net Proceeds from the sale, after the repayment of debt, transaction and deal associated costs and the amounts due to Jet East management under an equity plan arrangement, are expected to be approximately US$100 million…..Immediately following Completion, the Company is expected to have gross cash balances of approximately US$99 million and net cash (exclusive of lease obligations) of approximately US$88 million.”
So Gama will have $88MM of cash.
It has committed to paying 55 pence out per share.
How much net cash will be left after the dividend?
Gama has 63.96MM shares outstanding.
As such, the total dividend payment will be $42.6MM.
After the dividend, Gama will have $45.4MM of net cash.
What business will be left after the sale of its US MRO Business?
Through the first half of 2023, Gama Aviation generated $145MM of revenue and $0.5 adjusted EBIT. Over the same period, the US MRO business generated revenue of $70.7MM and adjusted EBIT of $0.9MM. As such, RemainCo generated revenue of $74.3MM and adjusted EBIT of -$0.4MM during the first half of 2023.
On an annualized basis, RemainCo is currently generating revenue of $149MM and EBIT of -$0.8MM.
As you can see below, the RemainCo will be made up of 3 business units: Non-US MRO, Special Missions, and T&O.
Non-US Business Aviation (MRO)
Business Aviation is focused on the delivery of the following lines of business to clients principally in Europe and the Middle East (US business is being sold).
- Management. The operational management of an aircraft (or fleet), and its crew, that the owner wishes to place on one of the Group’s air operating certificates (AOCs)
- Charter. The sale of available flight hours on aircraft to charter brokers or to direct clients worldwide
- Fixed Based Operations (FBO). The management of our strategically positioned fixed base operations at airports in the UK, Channel Islands and Middle East
- Maintenance (MRO). The delivery of comprehensive maintenance and repair operations that support business aviation aircraft operators and owners
The US aviation market has been very strong. As a result, many UK, Europe, and Middle East clients have taken advantage of robust pre-owned aircraft values in the US and the strong US dollar to sell their aircrafts. As a result, Gama’s non-US MRO business has suffered due to the reduction in assets amongst its customer base.
Non-US Business Aviation (MRO) generated $44.7MM in revenue and -$0.5MM in EBIT in the first half of 2023.
Special Mission
Special Mission provides the mission expertise to assist governments and businesses in exploiting a variety of aviation assets (principally fixed wing and helicopters) within the following sectors:
- Air Ambulance & Rescue. The delivery of fixed wing and rotary mission solutions in Scotland, Jersey, and Guernsey as well as the circa 21 helicopter air ambulance charities operating within the UK
- National Security & Law Enforcement. Providing “intelligence as a service” aviation platforms to the UK Government to protect the national interest.
- Infrastructure & Survey. The monitoring of critical national infrastructure for the purposes of failure monitoring, environmental controls, mapping, or other such studies
Special Mission generated $27.0MM of revenue and $2.8MM of EBIT in the first half of 2023.
In February 2023, Gama announced that it won a new seven year, £65M Air Ambulance contract.
This contract will generate $11.2MM in revenue and $1.2MM of EBIT per year (I estimate) starting in 2024.
Technology & Outsource (TAO)
Technology & Outsourcing is focused on the delivery of advisory, technology and outsource services to aviation customers who seek to gain a decisive advantage using real and near real time intelligence. The Technology & Outsourcing SBU comprises four lines of business which trade as Gama Aviation, and two further brands, FlyerTech and myairops®.
- Software and data services via myairops®. myairops® has developed a suite of business aviation products deployed as “Software as a Service” (SaaS) and mobile app solutions for flight and aircraft management, maintenance tracking, ground operations and crew scheduling and operations.
- Maintenance management and advisory services. Comprehensive range of services from full Continuing Airworthiness Management and Airworthiness Review Certificates through to supplying the software for an organization to manage the through-the-life maintenance of its aircraft.
- Ground operations. Providing third party trip support services, including flight planning and the arrangement of services such as permits, slots and fuel, to aircraft operators who are seeking to outsource their flight operations tasks.
Technology & Outsourcing generated $2.5MM of revenue and -$1.5MM of EBIT in the first half of 2023.
Will the RemainCo burn cash?
Yes.
In the Deal Circular, Gama wrote the following:
“Immediately following Completion, the Company is expected to have gross cash balances of approximately US$99 million and net cash (exclusive of lease obligations) of approximately US$88 million. This net cash balance is expected to decline in future months reflecting the operating cash outflows (including the impact of the loss of recovery of cost allocation to Jet East) and other financial commitments.”
Let’s try to estimate how much cash RemainCo will burn?
RemainCo generated an adjusted EBIT loss of $0.4MM during the first half of 2023 or $0.8MM on an annualized basis.
So the loss isn’t very significant.
Further, the Special Missions business unit won a new contract which is expected to generate ~$1.2MM in EBIT starting in 2024.
As such, I think the company should be able to operate at about breakeven in 2024 and beyond.
What is a reasonable valuation?
First things first, the company should not trade at a negative enterprise value.
Gama Aviation writes in its Deal Circular:
“The Net Proceeds from the sale, after the repayment of debt, transaction and deal associated costs and the amounts due to Jet East management under an equity plan arrangement, are expected to be approximately US$100 million…..Immediately following Completion, the Company is expected to have gross cash balances of approximately US$99 million and net cash (exclusive of lease obligations) of approximately US$88 million.”
So Gama will have $88MM of cash.
Gama Aviation currently has a market cap of $65MM.
At a bare minimum, Gama Aviation’s market cap should equal its net cash balance (implies a £1.14 share price).
But a £1.14 share price would imply the RemainCo business is worth $0.
This doesn’t make sense to me.
Gama’s Critical Mission business should generate $6.8MM / £5.6MM in EBIT in 2024 and beyond.
Public government services companies trade at 24x EBIT on average.