Analysts at Berenberg have kept their ‘buy’ recommendation on John Menzies PLC (LON:MNZS) despite the aviation services group’s profit warning.
In statement on Friday, Menzies revealed trading has been disappointing, with weak cargo volumes and flight schedule reductions, leading directors to say profits are “not expected to exceed last year”.
READ: John Menzies plummets as it warns profits squeezed by weak aviation market
In a note to clients on the same day, Berenberg said this view was echoed across the industry, with Lufthansa’s recent profit downgrade citing an near-halving of cargo margins and IATA reducing its full-year growth outlook for air freight to 0% in June.
“Clearly Menzies is not immune to these market issues and the degree of operational gearing in its cargo operations has had a material impact on earnings,” analysts said, with the continued flight schedule reductions and lower passenger capacity growth compounding headwinds for Menzies.
As a result, Berenberg’s forecasts for earnings per share were cut 15%, 6% and 3% for this year and the following two, reflecting an expected 2% decline in operating profit.
Remain confident
But analysts said they “remain confident in the long-term equity story” despite these headwinds, with the ‘buy’ rating reflecting the sizeable anticipated upside for the shares even though the price target was reduced to 700p.
“While clearly these headwinds are a negative, our investment thesis is based on the structural growth of the aviation industry, the continued trend to aviation services outsourcing and benefits of scale across stations and services.
“With long-term global aircraft growth of c3.5%, demand is underpinned. In addition to this, the increasing penetration of outsourcing will see market growth even faster for independent handlers like Menzies.”
With the company’s track record of sub-four-times post-acquisition synergy multiples, the analysts see Menzies’ aviation operations being “materially larger on a multi-year view”, with improving margins and return on capital employed.
Menzies shares plunged more than 20% below 360p in early trading on Friday but by the afternoon were down less than 11% at 407p.