As the markets continues to march higher, I keep looking for companies that have fallen off the radar. I stumbled upon HNZ group (HNZ-A.to) running for a screen with negative 52 week return and some basic profitability metrics (high ROE, decent margins, etc.).
Company description (from their website)
HNZ Group Inc., formerly Canadian Helicopters Group Inc., is an international provider of helicopter transportation and related support services with operations in Canada, Australia, New Zealand and regions of Southeast Asia. The Company operates in three segments: helicopter transportation services, helicopter repair and maintenance business, and flight training. It provides helicopter services to a range of utility and special operations, including both offshore and onshore oil and gas, marine pilot transfer, mining, and provides military support in Afghanistan. Charter operations are provided under two brands: Helicopters New Zealand (HNZ) and Canadian Helicopters Limited (CHL). It provides third party repair and maintenance services in Canada and in the United States and operates two flight schools in Canada.
The company has over 800 employees and 130 aircraft.
Looks pretty good. Nothing super smooth, but certainly nothing that would scare me away at first glance. Margins have come down a bit from their peak in late 2011 and so has revenue. Something to watch, especially since it’s coupled with increased CCC, which could indicate increasing pressure on ROIC on a marginal basis. What’s nice is to see the revenue and margin growth through the recession.
One thing that is really important with a company that has the majority of its assets in PPE is to look at how it is managed. 2 ways to do this are to monitor turnover and the relationship between depreciation and capex.
The drop in fixed asset turn in late 2011, relates to the acquisition of Helicopters (N.Z.) Limited. You can see the integration of all the equipment was not seamless and on an incremental basis it was a poorer performer than the previous core business. That doesn’t necessarily mean it’s bad, but not as high of turnover. FWIW, the acquisition was not outrageous at the time, but hindsight shows the purchase price was at the very least high.
You can see that capex has been increasing since the acquisition. There are likely a couple of reasons for this (other than the obvious – to purchase more PPE). The assets of the acquired company where in worse shape than previously expected requiring more maintenance capex, the company is looking to expand/diversify requiring growth capex or the company’s fleet is aging requiring more maintenance capex.
Either way, it looks like capex will exceed depreciation. Something that will weigh on my decision. Something that I should mention is how seasonal the business is. Working capital requirements vary dramatically over a calendar year.
Though some customers were mentioned previously, it wasn’t clear how much concentration there is.
The VFR (Visual Flight Rules) type of helicopter services primarily consists of lighter copters with 3-6 passengers. End Users consist of mining, utilities, offshore oil and gas and some government services. This part of the business has low barriers to entry and operates under short term contracts, hourly, daily or monthly rates.
The IFR (Instrumental Flight Rules) type of service consists of the larger copters with 25 or so passangers. This part has longer term contracts (3-5 yr) committed to specific aircraft and has a higher barrier to entry.
The company has some pretty high customer concentration, with USTRANSCOM (United States Transportation Command) making up 37% of revenues. This relates to services performed for the war in Afghanistan. I will let the reader draw their own conclusion regarding the future of American presence in Afghanistan. Obviously, if this contract ends (which it could in a year or so) it would be devastating to the company. With such high amounts of PPE sitting idle, utilization (and profitability) would drop.
Current valuation is 5.8x EV/EBIT, 1.1x book and 1.4x tangible book. Pretty cheap. What worries me is the slow decline in margins and the customer risk.
I am passing on HNZ due to the large customer concentration risk mentioned and given that the other end users are quite sensitive to large capital expenditures relating to base metals and oil and gas. I would purchase if the contract loss was completely priced into the company or the risk of losing the contract was off the table.
Disclosure: The author has no position in the company mentioned.