The Bull

Thursday 22

March, 2018 5:55 AM


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Aviation Alliance back on runway

Aviation Alliance back on runway

By Tony Featherstone 21.08.2017

Growing up in country Queensland gives one an appreciation for long-distance travel, and for regional airports that are a great indicator of a local economy’s health.

I recall my local airport being full of workers in fluorescent shirts: the fly-in, fly-out (FIFO) brigade that prospered during the mining boom peak. The airport was standing room only as cashed-up mining workers flew back and forth each week. The bar was even busier! 

It was a different story last year. The local airport was quiet and fluorescent shirts were hard to find at the nadir of the mining downturn. One could feel the slowdown in the local economy, starting at an airport that had lost its mining-worker buzz.

I noticed a few more fluorescent shirts at the airport a couple of months ago when visiting family. Nowhere near the boom times, but enough to suggest the pick-up in commodity prices this year is spurring more activity and demand for air travel from FIFO workers.

As an aside, someone should start an index of the number of fluorescent shirts at regional airports – a bit like economists keeping track of the number of cranes on city skylines as an indicator of building activity. Regional airport activity, in some areas, is a great indicator of mining services demand.

Which brings me to Alliance Aviation Services, a provider of charter aircraft for mining workers. The regional airline, Reginal Express Holdings (REX), is another with leverage to mining sector conditions and their effect on broader travel demand in regional economies.

Each stock has rallied this year amid signs of further improvement in the resources sector. Alliance has a total shareholder return (including dividends) of 46 per cent over 12 months. Rex has returned 38 per cent. Both stocks can go higher in the next 12 to 18 months.

Alliance typified the rise and fall of emerging mining services companies. The Queensland-based company raised $74 million through an initial public offering (IPO) and listed on ASX in December 2011 near the peak of the mining investment boom.

Alliance’s $1.60 issued shares traded above $2.30 in April 2012. It was a good story: more mining activity meant higher demand for mining workers and extra travel. Alliance’s role as an aviation mining specialist meant its IPO was ideally timed (from the vendor’s perspective).

Like most mining services stocks, Alliance tumbled in 2013 as commodity prices sank and the resources investment boom slowed. The stock hit 46 cents in late 2014 after profit downgrades and amid fears of sharply lower demand for mining aviation services. 

The market gave up on Alliance for the next 18 months, its shares tracking sideways until mid-July 2016. Canny technical analysts would have noticed the breakout in Alliance’s share price after a long period of consolidation and subsequent highs. It was an almost text-book pattern.

Alliance has since rallied to $1.19 – still below the issue price but a terrific buy for those who got in at the bottom and could look past mining services gloom. 

Chart 1: Alliance Aviation Services
Source: The Bull 

Alliance this month reported 45 per cent growth in after-tax net profit to $19.6 million for FY17. Strong growth in charter services drove revenue 11 per cent higher. A 10 per cent increase in total flight hours was another highlight.

I was surprised by the growth in Alliance’s tourism aviation services, now the company’s largest sector exposure at 32 per cent. Alliance has done an excellent job of diversifying its client base and industry focus amid the mining downturn.

Another 25 per cent of revenue is exposed to the iron ore sector. Higher iron ore prices should drive greater demand for workers in the sector and aviation transport.

Alliance is “positive” on the FY18 outlook. The company sees the “resource sector continuing to improve” and continues to diversify its earnings geographically and by sector. An expected refinancing of core debt in the first half of FY18 is another plus. 

Share valuation service, Skaffold, values Alliance currently at $1.37. Skaffold forecasts rises to $1.57 in 2018, $1.63 in 2019 and $1.77 in 2020. At the current price, Alliance trades on a forecast price-earnings (PE) multiple of about 7 times and should yield almost 4 per cent. 

Alliance needs to increase it return on equity (ROE) above 15 per cent (currently about 13 per cent) and keep lifting it over the next few years. Improving margins on fleet revenue are a good sign but Alliance will need to work its asset base harder to drive another re-rating. 

Alliance can do better than the market expects in the next few years, although much depends on the mining sector. My sense as a semi-regular visitor to mining areas, and from weekly anecdotal reports, is that mining services conditions have bottomed and are slowing improving. That’s good news for regional aviation demand. 

After battling terrible conditions, Alliance should have some tailwinds in the next few years and benefit from a few more fluorescent-shirted workers at airports who live a FIFO lifestyle. 

As a $141-million microcap, Alliance suits investors comfortable with higher risk. Mining services stocks can be highly volatile and do not suit inexperienced or risk-averse investors.

>> BACK TO THE NEWSLETTER: Click here to read other articles from this week's newsletter

• Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider its appropriateness, regarding your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at August 17, 2017.


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