If 2018 was partly a year of transition, then the coming 12 months should be about how quickly and how far John Menzies can travel as a pure aviation services business. The company offloaded its media distribution arm in September as part of a separation that some investors have been agitating about for years.
Menzies traces its origins to a 19th-century Edinburgh bookshop and has gone through various changes including as a high street retailer. Although its headquarters remain in the Scottish capital, it employs more than 33,000 people in dozens of countries. It provides services including refuelling, de-icing and aircraft movements as well as cleaning, freight handling and the operation of airport lounges.
A vocal minority on the shareholder register had long thought there was more to be gained by splitting the company. The legacy distribution business has been managing the decline in circulations of newspapers and magazines and was operating profitably.
However, Dermot Smurfit, the Irish packaging industry tycoon, came in as chairman in 2016 and set about delivering the break-up. While it may have taken longer than some people might have liked, the completion of the distribution sale left Menzies free to concentrate on the fast-growing and fragmented aviation sector.
Investors appear to be cautious as the share price has slipped from 586p in September to less than 500p at times in recent months. A rally this month meant that the shares changed hands at more than 520p and confirmation yesterday that trading will hit forecasts sent them as high as 541p.
The global aviation market is forecast to grow more than 40 per cent to be worth $73 billion by 2022. Menzies’ aviation turnover was £1.3 billion in 2017 and is on track to have risen last year. The directors have set a target of annual average revenue growth of 8 per cent over the next three years.
John Geddes, the corporate affairs director, said: “The growth dynamics in Asia-Pacific are massive even without China so we have an eye on that area. But there is also still massive growth in North America and Europe.” The management team is also pursuing deals around the world. The £153 million acquisition in 2017 of Asig expanded the company’s refuelling capability. While synergy savings have come from that purchase, Mr Geddes expects further service cross-selling benefits in the next couple of years.
Yesterday it received clearance from the Competition and Markets Authority for its purchase of Airline Services, the de-icing specialist. The transaction adds about 60 airline customers in 12 British airports that will enable Menzies to move into Liverpool, Birmingham, Newcastle and Exeter for the first time.
Mr Geddes confirmed other deals are under consideration and said: “It is about doing the right things at the right time. We are never short of opportunities but it is not a build-it-and-they-will-come business. It is making sure there are synergies or it can bolt on to something we have already got.”
Menzies invests heavily in staff training and plans to continue to do so, because an error while moving a hydraulic platform up to an aircraft could cause hundreds of thousands of pounds of damage. There will also be further spending on new technology this year including trials of remote monitoring of equipment to ensure it is being serviced regularly and used correctly.
Mr Geddes believes the industry is taking early steps in the efficiencies that digital technology can bring and expects further applications to emerge.
ADVICE Hold
WHY Menzies looks set for growth but uncertainty over how Brexit will affect aviation may act as a drag on shares
Tritax Big Box
Not every British business hates and fears Amazon. Tritax Big Box, the £2 billion investment trust that owns giant warehouses, revealed yesterday that the online retailing colossus had become its biggest customer, accounting for almost 14 per cent of rental income.
Two years ago it was Tesco, which accounted for just under 7 per cent. It’s a lesson in the growth of online at the expense of traditional retailing. Tritax owns just the kind of vast modern buildings perfect for the heavy robotics investment needed to fulfil purchases made by smartphone. Once tenants have invested in all this, they are unlikely to move.
Tritax says it doesn’t own a single square foot of unlet space. Its 39 tenants, which also include DHL, Unilever, Kellogg’s and Ocado, are contracted to pay it annual rent of £161.1 million. Independent valuers have lifted their estimate of the value of its 54 warehouses plus development land by 4.7 per cent in the year to December 2018.
Analysts reckon this feeds through into a net asset value per share figure of 151p, though they will have to wait until March for the official figure. The shares closed at 139p, pricing the company at a 7.9 per cent discount to net assets. This looks relatively good value. Until the Brexit referendum, they traded at a premium to net assets. But Tritax is primarily seen as a yield stock. On this basis, it still looks relatively attractive. The targeted dividend for 2018 of 6.7p translates into a yield of 4.8 per cent. And with most tenants being blue chip and locked into upward-only rent reviews, there’s every chance income can be grown.
There are risks. A no-deal Brexit would be enormously taxing for tenants, though they are hiring extra warehouse space to be able to stockpile. Tritax is also taking more risk, recently receiving shareholder permission to push into more speculative land buying. It is beefed up with £834 million of debt, which spices up returns in good times, but would magnify problems in bad times. One other danger is political. There is growing pressure to push up taxes for online retailers such as Amazon. Ultimately some of that extra pain is likely to be shared with their landlords.
ADVICE Buy
WHY Big modern warehouses with big sticky tenants