This airline business ticks a number of value boxes.
Here's a small cap, almost a pyad share, Dart Group (LSE: DTG). The usual fundies are:
| Share price | 53p |
| 52 week high/low | 68p/24p |
| Market cap | £73m |
| Eps 31/03/09 | 16.9p |
| Forecast eps 31/03/10 | 9.7p |
| Forecast eps 31/03/11 | 9.1p |
| Forecast P/E 31/03/10 | 5.5 |
| Forecast P/E 31/03/11 | 5.8 |
| Dividend 31/03/09 | 0.71p |
| Forecast dividend 31/03/10 | 1.07p |
| Forecast 31/03/11 | 1.10p |
| Forecast yield 31/03/10 | 2.0% |
| Forecast yield 31/03/11 | 2.1% |
| Net tangible assets ps 30/09/09 | 75.4p |
| Price/tangible book | 0.7 |
| Net cash 30/09/09 | £16.1m |
| Directors own | 40% |
| Other majors | 19% |
It ticks three of the pyad boxes, the exception being yield which is very low. Other downside factors which increase risk include the fact that Dart is an AIM-traded company and the spread is large at around 3p, a common and unwelcome feature of many small caps. That figure is nearly 6% of the offer price. For comparison, very big caps trade at well under 0.1%.
Another negative feature here is the falling eps from the actual 2009 normalised figure of 16.9p, dropping sharply to the 2010 forecast of 9.7p and then again slightly for 2011. Such a pattern is not a desirable feature of a value play, given that it is eps which in most cases will out a share like this over time. But that has been recognised in the very low P/E awarded by the market to this company.
Well under book
The most attractive value characteristic of all is that it is trading well under tangible book, my favourite value criterion, followed closely by that large lump of net cash. Lovely stuff cash I always think. Ultimately it's why we invest at all, a great contrast to its evil twin, debt.
Without these two classic value features of trading below tangible book plus net cash, I would not have given this share a second glance. The low P/E alone would not make it appealing with that falling eps profile without even a decent yield sweetener.
But what's in those tangible assets? At the half-year balance sheet of 30 September 2009, the net tangible assets were about £106m. This breaks down to non-current assets of £188m less non-current liabilities of £34m making £154m. Then there are net current liabilities, after deducting net assets, of £48m.
The non-current assets consist primarily of aircraft and other plant. Only a small proportion is freehold property so I doubt there is anything hidden and waiting to be exploited there. Not ideal for an asset play.
Having such substantial net current liabilities rather than net current assets is also less than ideal. On the face of it the principal reason for this is the excessively large liability of trade payables, £114m, which swamps the current assets. Closer examination though reveals that this is not all amounts owed to suppliers, which could be an indication of serious problems at such a level, but in fact by far the largest element of Trade payables is Deferred income.
Dejargonising
I'll need to stick my accountant's hat on and swallow a dejargonising pill to explain that. One requirement of calculating the profit accrued for a period is the matching of income and expenses to that period and excluding those that are outside it. The latter are instead brought into the period to which they do refer.
In Dart's case, one division of its business is an airline and holiday operation where customers have to pay in advance but the actual sale is recognised in an accounting period by date of departure, not date of payment. So at any accounting date, there will always be some people who have paid for travel to be supplied in a future period, when the sale will be recorded, and this total is the deferred income. Although it is a liability because the company owes its services to those customers, it is rather different to the kind of trade liability where cash has to be found to pay suppliers. Once you realise this, the trade payables figure is nowhere near as bad as it looks superficially.
They didn't publish the breakdown in the interim figures at 30 September but at the 31 March year end, of the trade payables total of £140m, £95m was deferred income, illustrating my point. I have assumed that some similar proportion applies to the £114m figure at 30 September. So the net current liabilities are not as onerous as might appear, if you don't do the analysis.
Good for cash
These advance payments are pretty good for cash flow too with the airline customers financing the business rather than a bank. The cash balance increased in the year to 31 March 2009 and then again in the six months to 30 September to £16m.
On balance this share is riskier than the full pyad job but definitely has some value going for it. Would have been better if there was a rising eps picture but that's not there at present on the forecasts. So not a farm bet then but it may interest some portfolio players.
Finally, last and least, the company's business which splits into two divisions, the airline, Jet2.com and a food transport operation. Airlines are always a high risk game and the company does have a patchy record overall.
More from Stephen Bland:
