Overview of Operations
Stobart Group is a UK based infrastructure and support service business operating in the biomass energy, aviation and railway maintenance sectors. It also holds investments in a property and logistics portfolio. Objectives are to develop and expand beyond the core logistics business, through penetration of the biomass market, as well as creating opportunities to drive value, with a strategic focus on growth areas such as aviation.
Stobart’s development strategy can be summarised as a combination of driving shareholder value through three growth divisions (Energy, Aviation & Rail) whilst realising asset value gains, with an exit of the Infrastructure and Investment divisions. FY16 results highlighted that Energy (25% of group EBITDA) is on track to supply over 2m tonnes p.a. by FY19, a result of additional future biomass contracts secured. Realising asset value from property investments continue to be a focal point, evidenced by a £9.1m valuation uplift from the Speke site (47 acres of investment property) in Liverpool. These assets were subsequently sold in June, with c£11.8m net profit to be realised in FY17. Targets encompass an FY19 timeline and management remain confident to be on track.
Key highlights from FY16 include securing additional Biomass contracts - 1.4m tonnes come on stream between Dec-16 and May-18, with an average contract length of 15 years. Aviation continues to make progress, with revenue per passenger increasing by 15%. Property revaluation gains and associated cash realisation (>£24m) from disposals of such assets have funded the £19.7m returned to shareholders. Our expectation of continued material upside from property revaluation in FY17, alongside a ramp up in operating activities, leaves us positive on Stobart’s outlook.
Valuation
We have derived a target of 145p. This estimate represents a c11% upside potential from the latest price of 130.25p. Valuation of the group is complicated by the fact that there are no listed companies that are directly comparable. The diverse nature of operations means it is difficult to compare earnings multiples for particular segments and that a sum of the parts, which considers earnings (EBITDA) multiples for each of Stobart’s growth segments (Energy, Aviation & Rail) is likely the most appropriate valuation methodology.
Trailing valuation multiples might be considered as an alternative assessment of valuation. On this basis, the company trades on 48x TTM earnings, a considerable premium (200%) to the Sector (Energy) and Industry (Renewable Energy Equipment & Services) which both trade on 16x earnings. The group’s ability to generate significant (sometimes unanticipated) shareholder returns through asset divestments clearly supports the story further, suggesting holding the stock, despite a somewhat high valuation. Looking at consensus earnings forecasts, as a better indicator of future prospects, Stobart trades on c30x FY17e PE. The dividend yield of c5-6% screens well across the sector and we expect the 6p dividend to be maintained in FY17, continuing the trend of previous years.
Overview of operating divisions
• Stobart Energy supplies sustainable biomass for the generation of renewable energy, where customers are typically utilities providers (e.g. electricity generators). Biomass is viewed as a cleaner alternative to fossil fuels (e.g. coal) and according to data from consultancy PwC, the carbon footprint is reduced by 86% when burning wood pellets rather than coal. Despite a government drive to increase renewable energy sources, risks for biomass exist given that government incentives can change, and that biomass is considerably more expensive than fossil fuels. In FY16, Energy contributed £9.1m to group EBITDA (c25% of group total) and strategic objectives are for 2m tonnes p.a. to be supplied by FY19. At £10m underlying EBITDA per tonne, this would imply £20m EBITDA in total, more than two times the annual EBITDA currently. FY16 EBITDA per tonne increased 17% y/y (vs -7% in FY15), supported by favourable currency driven raw material price changes.
• Stobart Aviation operates two commercial airports (Southend and Carlisle) and includes a 45% JV investment in Stobart Air. Over 900k passengers used Southend in FY16, where Easyjet and Flybe are the key airlines operating. In FY16, Aviation contributed £2.3m to group EBITDA (c6% of group) and management targets 2.5m passengers p.a. by FY19 (vs. total capacity of 5m) at a per passenger EBITDA of £8, implying a total EBITDA of £20m.
• Stobart Rail provides services ranging across rail network maintenance, repairs and improvement. Rail infrastructure spending is a key driver here, and Stobart is clearly exposed to Network Rail’s infrastructure spending plans in the region of £4bn in the coming years. The spending plans for HS2 are also a clear positive. In FY16, Rail contributed £3.4m to group EBITDA (c9% of group total) and saw external revenue growth of 37% y/y (vs. a decline of 4% in FY15 due to lower than expected expenditure by Network Rail). Management targets total revenue growth of 20% p.a. by FY19 (Rail in aggregate was up 65% in FY16).
• Stobart Infrastructure complements the other four operating divisions, but perhaps most interesting are the activities relating to development and realisation of land and building assets. At FY16, Infrastructure assets had a book value of £134m. We expect achieved sale prices to be in excess of these valuations based on the value realised from recent disposals.
• Stobart Investments holds non-controlling interests in Eddie Stobart Logistics (49% stake) and Propius (aircraft leasing, 33% stake) and this made up c31% of group EBITDA in FY16. ESL achieved underlying revenue growth of +3.2% and EBITDA growth of +5.3%. ESL alone generate £21m of surplus cash which was used to repay group debt. Propius generated a special dividend of £4.3m during the year as a result of two aircraft sales.
FY16 Financial performance
• FY16 Group Revenue from continuing operations saw growth of +8.6% to £126.7m (+18% in FY15), largely a function of increased revenue per tonne in the Energy division (69% of group revenues; divisional growth of +7%, albeit slowing on the +17% in FY15). Compared with consensus, FY16 revenue was in line with mean estimates (2 analysts covering the stock).
• External revenue in Rail (43% of group) saw growth of +37% to £28.8m (compared with +4% in FY15), highlighting the results of management’s efforts in attracting third party customer use of Stobart Rail.
• Aviation (largely Southend Airport operations) achieved underlying profit growth of +59.8%, despite a decline in overall passenger numbers of 17%. Underlying improvement was a function of increased revenue per passenger (+15% y/y in FY16 vs. +3% y/y in FY15) and a 5pt uptick in load factors y/y.
• Underlying Group EBITDA saw growth of +69.8% (vs a 22% decline in FY15), with u/l EBITDA growth across all operating segments, most notably Infrastructure (+159.4%), supported by a £9.1m upward revision in property valuation of the Speke facility in Liverpool. This was also the most significant contribution (c49%) to underlying group profit before tax which increased +98.0% to £18.4m. The Investments division saw u/l EBITDA growth of +64.1%, supported by asset disposals during the period, notably the UK Stobart Automotive business which generated a $4.3m cash dividend through the sale of two old aircrafts.
• Per share metrics - during the year £19.7m was returned to shareholders via dividends - dividends per share remained flat (DPS 6.0p, yield 4.7%) while earnings per share from underlying continuing operations increased 90%.
• Group EBITDA margin improved 8.6pts from 15.1% in FY15 to 23.7% in FY16, largely a function of the property gains realised in Infrastructure (c35% of FY16 group EBITDA) which contributed c5pts to the group margin uplift. In addition, there was a 100bps margin uplift in the Energy division. Margin here improved from 11.4% in FY15 to 12.4% in FY16, and the division alone accounts for 30% of FY16 group EBITDA.
Outlook & guidance
At FY16 results, management highlighted that the Energy and Aviation divisions are finishing preparations for a period of rapid growth, and FY19 guidance was reiterated for both divisions. In Energy (c50% of group revenues; 25% of EBITDA) the target for 2m tonnes of biomass supply at average EBITDA of £10 per tonne remains unchanged, and implies a contribution of £20m of EBITDA, suggesting an EBITDA CAGR of 30% between FY16 and FY19. In Aviation (c16% of Revenues; c6% of EBITDA), the forecast of 2.5m passengers at an EBITDA of £8 per passenger remains unchanged an implies £20m of EBITDA in FY19 (>100% EBITDA CAGR over the 3 years). In aggregate, Energy and Aviation could contribute £40m of EBITDA in FY19, in comparison with 11.4m in FY16, implying c17% EBITDA CAGR in total. Early signs on delivery of these targets are promising, but more evidence will be required to drive a rerating in the stock.