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BBA Aviation loses altitude as it cautions on soft US market

Results missed estimates by a tad. The best performing division seemed to be the Engine Repair & Overhaul business, which it has put up for sale
Delta aircraft
The Flight Support division contributed 87% of underlying operating profits from the businesses BBA intends to retain

Cautious words about a softer-than-expected US business & general aviation (B&GA) had shares in BBA Aviation PLC (LON:BBA) experience some turbulence.

The shares plunged 13.7% to 302p following half-year results that saw underlying earnings (EBITDA) from continuing operations edge up to US$204.9mln from US$204.6mln in the first half of 2017.

READ: BBA Aviation expands fuel services business with EPIC acquisition

Adjusted profit before tax from continuing operations rose 7% to US$140.2mln from US$134.1mln the year before.

Factoring in a paper-based write-down of US$43.5mln in the value of the goodwill (brand value) of acquired business as well as other one-off items, profit before tax slipped to US$76.2mln from US$85.8mln the year before.

The Flight Support division contributed 87% of underlying operating profit and saw organic revenue growth (year-on-year) of 5.0%, despite the US BG&A business seeing 3% growth that was less than the market had been expecting.

READ: BBA Aviation's Signature service outperforms market in first quarter

The Aftermarket Services division (13% of underlying operating profit) saw operating profits grow 8.6% year-on-year to US$23.9mln, driven by licensing wins by its Ontic business.

The Engine Repair and Overhaul (ERO) business has been classified as a discontinued operation and is up for sale.

“We now consider the sale of the business to be highly probable, albeit there is no certainty that an acceptable transaction will result,” the company revealed.

Excluding the Middle East operations, ERO saw underlying profits grow 39% from the year before to US$3.8mln.

“Against the background of a softer US B&GA market that grew 2.3% during the first five months of the year, we delivered continued market out-performance and made progress in driving the benefits of Signature's unique global network of FBOs [fixed based operations],” said Mark Johnstone, the chief executive of BBA.

“In Aftermarket Services, Ontic had a solid first half against a strong prior year comparative and is expected to perform in line with expectations for the full year. It has a growing portfolio of IP [intellectual property] protected licences and continues to have a strong pipeline of growth opportunities as we look to leverage data analytics and expand on more platforms.

“In summary, the continuing group is focused on high ROIC [return on invested capital] and strongly cash generative market-leading businesses and has a good pipeline of investment opportunities. The board is confident of modest growth in 2018, through continued out-performance against a softer US B&GA market backdrop,” Johnstone added.

Broker Liberum said there was a good chance consensus estimates would be revised lower, given soft US business jet flying activities.

“Although we do not view BBA Aviation as an infrastructure play, we believe that it is a not uncommon view in the market. The group’s rating could come under pressure in a rising interest rate environment, which is traditionally poor for stocks considered to be bond proxies. Set against that, if the recent weakness of sterling against the US dollar continues, it would be positive for the group as a US dollar earner,” Liberum observed.

The broker rates the shares a hold and has a 350p target price based on a discounted cash-flow model.

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