Avia Solutions Group Poland, Aviation support services Reuters: ASGG.WA Bloomberg: ASG PW 1 April 2011 Boarding completed Recommendation BUY Portfolio weighting – Recommendation BUY. 12M Target Price PLN 90 Avia Solutions Group (ASG) is a group of companies engaged in Price (PLN, 31 March 2011) 55.00 aviation-related services for airlines and travel operators. It provides Target price (PLN, 12-month) 90.00 integrated aircraft maintenance, ground handling, crew training, charter and other services. ASG was mainly focused on the Baltic and CIS Market cap. (PLN m) 324.1 markets, however, the group plans to expand its European operations in Free float (%) 20.3 2011. In the long term, Eastern Europe and the CIS should catch up with Number of shares (m) 5.9 the Western air traffic standards, likely yielding a very strong foundation Average daily turnover 1M (shares) 7.4k for ASG’s long-term prosperity. In the short term, we expect the EURPLN 4.02 company’s figures to be strengthened through the expansion of its USDPLN 2.85 Maintenance, Repair and Overhaul (MRO) capabilities for new aircraft. The establishment of new ground handling bases at Polish airports and the delivery of refuelling services, with first new contracts already 57.0 Price WIG Rebased signed, will boost ASG’s results from 2011 onward. We expect intensive Buy Hold 56.0 investments and foreign expansion will contribute to a more than doubling of 2010’s net profit for a 2012 result of EUR 11m. We are 55.0 initiating coverage of ASG with a BUY recommendation and a 12-month 54.0 Target Price of EUR 22.3 (PLN 90), which implies a 64% growth potential. 53.0 ASG is composed of four business segments that offer airlines and travel 52.0 operators an extensive range of services. The group is the largest fuel provider, with 51.0 a 90% market share, and the second-largest ground service provider, with a 40% market share at Vilnius airport. ASG also provides airlines with MRO (Maintenance, 50.0 Repair and Overhaul) services at its hangar in Vilnius and line stations in Italy, the UK, Mar-11 Turkey, Russia, Kazakhstan and Tajikistan. Currently, the company has its eyes on the Polish market and has also expressed its intentions to expand in the CIS The chart measures performance against the WIG index. On region. 3/31/2011, the WIG index closed at 48,730. Each ASG business line is developing on its own, but taken together they create solid synergy effects and cross-selling opportunities. Cost control and the delivery of superior quality are the key strategies for all segments. Consequently, all of the companies in the group have access to cheaper services and can offer a good price-to- Main shareholders % of votes quality ratio. The location of ASG bases gives the company access to both Eastern ZIA Valda Cyprus 32.9% European markets and CIS countries. Indeco: Investment and Development 21.9% We expect ASG to more than double its 2010 net profit to EUR 11m in 2012. The Harberin 18.3% entire CIS and Eastern Europe regions promises a tremendous upside in air traffic to ING pension fund 6.6% match the standards of Western countries, which will create huge opportunities for all market participants. Additionally, the recent trend of an increasing outsourcing activity observed among airlines promises a lucrative future for service companies such as ASG. A small company like ASG, operating in a multibillion market, has an enormous upside potential if any of its business lines prove to be successful. Company description Based on our DCF valuation, we are setting a 12M TP at EUR 22.3 (PLN 90). A Avia Solutions Group is a group of companies engaged in comparison with both Polish and foreign peer groups yields per share valuation in the the aviation services market in the field of repair, ground range of PLN 73–99, with the average valuation settling at PLN 86. Having that said, handling, charter operations and crew training. we are initiating coverage of ASG with a BUY recommendation. Avia Solutions Group: Financial summary EUR in millions, unless otherwise stated 2008 a 2009 2010 2011E 2012E 2013E Revenues 30.3 67.6 90.1 120.9 157.6 184.5 EBITDA 1.3 3.7 8.7 13.0 16.4 19.7 Research team: EBIT 0.4 2.3 7.2 11.4 13.5 16.1 Net profit (0.1) 1.3 5.4 9.1 11.1 13.4 Zbigniew Porczyk P/E (x) n.a. 45.2 11.3 8.5 7.3 6.0 +48 22 534 16 10 [email protected] EV/EBITDA (x) 52.1 17.5 5.5 5.2 4.2 3.5 Source: Company data, DM BZ WBK estimates, 2011 multiples based on average number of shares DISCLAIMER: Disclosure statements provided on the last page of this report are an integral part of this document. Avia Solutions Group 1 April 2011 Table of contents TABLE OF CONTENTS....................................................................................................2 INVESTMENT SUMMARY................................................................................................3 VALUATION .....................................................................................................................5 TESTING AVIA SOLUTIONS GROUP SENSITIVITY ....................................................10 COMPANY PROFILE .....................................................................................................11 AVIATION MARKET.......................................................................................................17 MRO MARKET................................................................................................................26 ASG FINANCIALS..........................................................................................................30 VALUATION DRIVERS VERSUS RISK FACTORS .......................................................39 FINANCIAL STATEMENTS AND FORECASTS ............................................................41 2 Avia Solutions Group 1 April 2011 Investment summary Avia Solutions Group (ASG) is a group of companies engaged in aviation-related services ASG – a successful group of companies for airlines and travel operators offering integrated aircraft maintenance, ground handling, engaged in aviation- crew training, charter and other services. The group operates in four business segments: related services aircraft maintenance, repair and overhaul (MRO) – represented by FL Technics, aircraft ground handling and fuelling – represented by Baltic Ground Services, charter operations – represented by Small Planet Airlines, pilot and crew training – represented by Baltic Aviation Academy. ASG is the market leader in refueling at the Vilnius airport, the second biggest player in ground handling services in Vilnius, one of the leading and fastest growing MRO providers in Eastern Europe with 7.6k sq.m. of hangars in Vilnius, 13.7k sq.m. of total workshop space and eight foreign line stations (Italy, UK, Turkey, Lithuania, Russia, Kazakhstan and Tajikistan). The group acts as a provider of all-aviation-services and thus generates big cross-selling opportunities. Moreover, being cost-effective, all subsidiaries have a competitive edge over its competitors through access to cheaper services. FL Technics – a MRO FL Technics is a MRO company providing integrated aircraft maintenance and repair company acting as a solutions and services. The major areas of FLT’s operations are: heavy maintenance, one-stop-shop for components maintenance, line maintenance, engineering, spare parts, and technical technical support training. The company has been serving Boeing 737 Classic so far and expanded its maintenance capability list by adding Boeing 737 New Generation line and base maintenance in March and June 2010. However, FLT acquired the final license for Airbus 320 family at the beginning of 2011 and the full effects of this new capacity list expansion could be visible in financial reports from 2012 on. The company is acting as a one-stop- shop for technical support, which offers significant cross-selling opportunities. However, the company’s biggest asset is its strategic geographical location and efficient cost structure . Baltic Ground Services Baltic Ground Services conducts such operations as check-in, baggage delivery, aircraft – a ground handling preparation and refueling. BGS is the market leader in refueling services at the Vilnius services company operating at the Vilnius airport (90% market share) and the second most important ground handling provider airport, wishing to enter in Vilnius (40% market share). BGS derives most of its revenues from refueling services but the Polish market makes the highest profit on ground handling services. The company is to enter the Polish market (Warsaw, Krakow, Katowice, Wroclaw, Gdansk, and Poznan). Currently, the company is establishing bases at Warsaw and Krakow airports and has already signed two contracts for ground handling services in Warsaw. Small Planet Airlines are charter airlines operating in four markets: Lithuania, Estonia, Small Planet Airlines – charter airlines Poland, and Italy. The company has an 80% market share in Lithuania and currently it has operating in Lithuania, a fleet of 7 aircraft (Boeings 737-300 & 757-200). SPA travels to 75 destinations and in Estonia, Poland, and 2009 it transported ca. 0.4m passengers. The company is an important component of the Italy group as it creates synergy effects for the whole group and may serve as the first client on new markets for its sister companies. Baltic Aviation Academy performs aviation training courses and provides professional flight personnel solutions for airlines. The company operates one FFS in Vilnius Baltic Aviation Academy – an aviation