August 04, 2008 2085 VIEWS



Current Price:   N16.4K

Fair Price:         N20.87K

Year High:        N28.5K

Year Low:        N16.4K

Premium/ (Discount) to Valuation: -21.4%

Upside/(Downside) Potential: 27.3%



Business Summary:


Incorporated in 1996, Airline Services Plc provides catering and hospitality services to local and international airlines and airports in Nigeria as well as the broader corporate sector.


The Company has four business segments with an average annual turnover of N1.43 billion naira. It also operates in-flight operations which provide flight catering services such as on board catering services for both domestic and international flights. It services are offered to leading airlines while it offers lounge operations which provide services to all major African European and Middle Eastern countries. It also provides cockpit bar operations as well as warehousing operations for imported goods.



Investment Rationale:


· ASL currently enjoys a monopoly in providing catering services for the various international and local airlines that serve the Nigerian economy.


· There are prospects for improved earnings and expansions as the Company is well positioned to take advantage of the increasing participation of national carriers and other airline operators in the country’s aviation sector.


· ASL has recorded an impressive growth in bottom line having grown its Profit Before and After Tax (PBT and PAT) by a Compounded Annual Growth Rate (CAGR) of 75 percent and 86 percent respectively, in the last 5 years. Our forecasts reveal that over the next five years, PBT is expected to climb up to N1.89bn while PAT should rise to N1.67bn translating to 5-year CAGR of 39.0 percent and 38.0 percent respectively.


· For the financial year ending December 31, 2008, we project a 44.1 percent rise in PAT (i.e. N465.01mn; up from N322.7mn in 2007). Earnings and Dividend Per Share (EPS & DPS) are expected to soar by 43.1 percent and 76.1 percent respectively. This suggests a DPS of N0.09k (compared with N0.05k paid previous FYE 2007) with an average payout of 12 percent, assuming that the Company is consistent with its conservative dividend policy.


Analysis of Financials


Trends in Turnover and Earnings Growths

Air services has maintained a positive turnover growth momentum in the last five years. The company grew its top line from N516.19mn in 2003 to N3.47bn in 2007, translating into a CAGR of 61 percent. Turnover growth path peaked in 2007 at 110.9 percent surpassing the company’s projected figure for 2009 by over 7 percent. Following the quantum of funds obtained from its capital raising exercise concluded early 2007, coupled with the firm’s recent successful bidding for the management of the Nnamdi Azikwe International Airport, turnover is expected to tread an upward path in coming years. However, we believe that competive pressures from new entry following recent reforms in the aviation industry may slow down growth speed compared to prior years.


Airservices’ bottom line growth has been impressive in recent times.

Profit After Tax (PAT) grew from N27.2m in 2003 to N322.8m in 2007 translating to a 5 year-CAGR of 86 percent. However, this growth pattern was not tracked by efficient cost cutting strategies as margins exhibited a falling trend except when it arbitrarily peaked at 12.17 percent in 2006. Margins may fall further in coming years as ground handling services in the capital intensive and sophisticated aviation sector throw up higher maintenance and administrative costs. Therefore, management’s proactive approach in efficient cost maneuvering is very key to margins improvement.


Liquidity and Solvency

Airservices has maintained a deteriorating liquidity trend as shown by the current ratio which moved from 1.21 times in 2003 to 0.69 in 2007. This implies that the company’s readily available assets now cover only 69 percent of current liabilities compared to 121 percent in 2003. A similar trend is replicated in its quick ratio. Equity multiplier fell from 2.82 times in 2003 to 1.6 times in 2007 due to decreased financial leverage as a result of capital raising exercises concluded in 2007.


Asset Management and Efficiency

Airservices has maintained a upward level of efficiency in its asset utilization. This is reflected in the rising path of total assets turnover ratio which rose from 0.71 time in the 2004 to 1.77 times in 2007. With a 5-year average of 1.16, the company has been generating sales of N1.16 kobo for every naira of its asset base. However, current asset turnover fell from 4.23 times in 2003 to 2.99 times in 2007. This implies that the company has been more efficient in its use of fixed assets than in current assets. Moreover, Aiservices’ operational costs thread a growth path of 15 percent CAGR, as Opex-to-Sales ratio averaged 55 percent from 2003 to 2007.


DuPont Analysis of Profitability Airservices recorded a 5 year annual average of 23 percent with the highest ROE of 29.15 percent recorded in FYE 2006.


However, year-on-year movements in ROE have been erratic, a trend replicated in each identity component examined. We observe that the considerable leap in ROE between 2005 and 2006 could be attributed to an improved margin position as both asset turnover and equity multiplier dwindled significantly. Worsened by a sharp decline in profit margin, the falling trend continued till 2007 leading to a sharper decline of over 20 percentage points in ROE to stand at 8.4 percent in 2007, the lowest in 5 years. Therefore, we observe that Airservices needs improved margin to increase value to investors via return on equity as its margin is observed as a potent driver of ROE. In the face of expanding operation, drastic cost cutting strategies will be needed to generate improved margin position.


Airservices’ return on assets (ROA) improved significantly from 7.06 percent in 2003 to 16.47 percent in 2007. A breakdown of the components of the ROE shows that the highest leap in ROA was accompanied (preceded) by the sharpest decrease in pretax margin and asset turnover.




While the Proshare website is renowned for its  accuracy and painstaking attention and commitment to factual data, we are not liable for any incorrect information included. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions. This report is based upon information from various sources that we believe are reliable. However, we do not make any representation as to the accuracy or completeness of the report. This report is not an offer to buy or sell, nor a solicitation to buy or sell the securities mentioned therein. This report is provided solely for the information of clients of Meristem Securities Limited  who are expected to make their own investment decisions without sole reliance on this report. Meristem and PROSHARE (publishers of the report under approval) accepts no liability for any direct or consequential loss arising from any use of this report or its contents. Investments can fluctuate in price and value and the investor may get back less than was originally invested. Past performance is not necessarily a guide to future performance. This information has been issued by Meristem, which is licensed by the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE). Enquiries relating to any matters in this report should be directed to 234-1-2717350-5.

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