Nigerian Aviation Handling Company Plc Valuation

NIGERIAN AVIATION HANDLING COMPANY PLC

Ticker:                            NAHCONature of Business:    Transport Related ServicesLocation :                              Nigeria
Recent Price:           NGN3.50    52-Week High/Low: NGN3.70/2.00Estimated Fair Value:      NGN3.14-NGN4.72
Expected Return:      31.5%Consider Buy:                   Below NGN3.14Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               WeakCorporate Governance: Strong

Company Overview
Nigerian Aviation Handling Company (NAHCO) was established as a private company in December 1979 by the Federal Government of Nigeria in collaboration with four foreign airlines of Air France, British Airways, Lufthansa and the defunct Sabena. The company was fully privatised when the Federal Government of Nigeria sold its shares through an Initial Public Offer (IPO) in 2005. It was listed on the Nigerian Stock Exchange in November 2006.

Godsmart Nigeria Limited, the major shareholder of NAHCO, owns 27% of its outstanding shares. NAHCO provides aircraft and cargo ground handling services to domestic and `international airline businesses such as Emirates, Lufthansa, Qatar Airways, Air France, Air Peace, Virgin Atlantic and RwandAir. The company is also engaged in leasing, logistics and power distribution. NAHCO has three subsidiaries, namely Mainland Cargo Options Limited (logistics), Nahco Energy Power and Infrastructure Limited (power) and Nahco Free Trade Zone Limited.

Dr. Seinde Oladapo Fadeni, who replaced Arc. Usman Arabi Bello in 2018, remains the chairman of the board of directors. The group managing director of NAHCO is Mrs. Olatokunbo Adenike Fagbemi. Mrs. Fagbemi was named a non-executive director in August 2018; she became the company’s managing director in December 2018.

Investment Thesis
NAHCO is a leading aviation ground handling company that operates in major airports in Nigeria. The principal services offered by NAHCO are aircraft handling, passenger handling, crew transportation, and cargo handling.  It is a member of aviance, an international alliance of companies offering ground handling services to the aviation industry in over 100 airports scattered across 17 countries.

 The disruptions to air transportation in the year 2020 as a result of the COVID-19 pandemic led to a 10-year Compound Annual Growth Rate (CAGR) of 1.2% in total revenue as against 5.1% of the prior fiscal year.  Passenger and cargo handling produce over 90% of total revenue. But the contribution to total revenue from other sources (leasing, equipment rental and maintenance) has increased. In addition, gross profit margin from other sources is close to 50%; gross profit margin from ground handling services hovers around 32% while that of cargo handling is approximately 28%. The upward review of handling charges in the year 2021 by the regulator, the Nigerian Civil Aviation Authority, will boost the revenue and profit margins of operators going forward.

NAHCO is investing in the acquisition of new equipment and upgrade of its facilities in a bid to boost its earning capacity.  Consequently, the ability of the company to produce positive free cash flow on a regular basis is hampered. Besides, it is diversifying its operations. We expect the investment in non-aviation-related business activities to cushion the effect of volatility in the aviation industry. Being a major shareholder of Nahco Energy and Infrastructure Limited, it stands to gain when the company begins power distribution in Nigeria. Mainland Cargo Options Limited (MCOL), a subsidiary of NAHCO, began providing cargo logistics in 2015. MCOL made revenue of NGN189.5 million in the year 2020 notwithstanding the slowdown in economic activities experienced in the year (2019: NGN163.7 million).

NAHCO is a low geared company. Though it has increased by 3.1% on a 3-year CAGR basis, the company’s debt is manageable as it generates adequate operating profit and operating cash flow to settle its interest obligations. Net debt was NGN409.7 million while net debt to shareholders’ equity stood at 6.4% at the end of the 2020 fiscal year. As global economies gradually recover from the impact of COVID-19, we anticipate a rally in terms of aviation cargo volumes and passenger numbers. NAHCO and, by extension, aviation ground handling companies will benefit as they offer essential services to the aviation industry. The company is profitable and compensates investors regularly. Over the past 10 years, the average dividend yield was 6.5% and the payout ratio was roughly 76%. Return on Equity (RoE) and Return on Asset (RoA) averaged out to 9.3% and 4.5% respectively. Currently, NAHCO’s shares are trading within our fair value estimate; investors should buy a share of NAHCO below NGN3.14.

Valuation
We have valued the stock of NAHCO and arrived at a fair value ranging from NGN3.14 to NGN4.72 per share. A return of 31.5% is anticipated on the company’s shares.

Financial Overview
Revenue from passenger and cargo handling dropped 31.2% year-over-year to NGN6.4 billion due to COVID-19 induced restriction of flight operations.  Revenue from other sources (leasing, equipment rental and maintenance) gained 5.3% from NGN687.1 million in 2019 to NGN724.1 million in 2020. Altogether, total revenue dropped NGN2.9 million or 28.7% year-over-year to close at NGN7.1 billion at the end of the 2020 fiscal year. Gross profit lost 30.3% in the current period compared to a rise of 4.3% in the earlier year. NAHCO declared an operating profit of NGN478.1 million in 2020, down from NGN1.5 billion recorded a year before. Though they were lower than the prior year’s figures, Profit Before Tax (PBT) and Profit After Tax (PAT) were NGN361.3 million and NGN302.1 million respectively.

Gross profit margin decreased by a marginal rate of 0.8% between 2019 and 2020 even though gross profit lost NGN1 billion or 30.3% to NGN2.3 billion. The operating profit margin declined from 14.7% to 6.7% due mainly to a rise in administrative expenses as a proportion of turnover from 24.1% in 2019 to 33.2% in 2020.

Total assets shrank by 6.5% year-over-year to close at NGN13.8 billion while total equity shed 2.8% to NGN6.4 billion. Net operating cash flow jumped from NGN989.2 million in 2019 to NGN1.7 billion in 2020. Free cash flow per share of NGN0.15 was produced in spite of a 6.8% rise in capital spending per share to NGN0.93 at 2020 year-end. Total interest-bearing debt was NGN1.2 billion, down from NGN1.5 billion recorded in the preceding year. Debt accounted for 9.1% of total assets and 19.3% of shareholders’ fund. NAHCO can offset its debt obligations from its operating profit and net operating cash flow.

Business Risk
The fluctuations of economic activities affect the aviation industry as a whole. Presently, the bulk of NAHCO’s revenue and profit come from aviation passenger and cargo handling services. NAHCO suffers a dip in earnings as aviation passengers and cargo reduce. We believe that diversification of its product line can limit the losses that it may incur as a result of the subpar performance of its core services.

Recommendation: Hold

Earnings Chart of Nahco Plc

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