PTB Group - Servicing the aviation industry

PTB’s primary business is the maintenance, repair and overhaul (MRO) of PT6 turboprop aircraft engines. The company has enjoyed strong growth in recent years and after increasing by 38% over the past three years, operating profit jumped by 37% in the FY-H1 of 2018 from a year earlier. I recently caught up with CEO, Stephen Smith.

COMPANY DATA

Date of Report	ASX	Price	Price Target	Analyst Recommendation
09/04/19	PTB	$0.70	N/A	N/A

Date of Report 20/02/19	ASX ST1
Price $0.058	Price Target N/A
Analyst Recommendation N/A

Sector: Aerospace	52-Week Range: $0.515 - 0.74
Industry: Aerospace & Defense	Market Cap: $47.72 million

Source: Commsec

What do you do?

The PT6 engine has been in production by Pratt and Whitney since the early 1960’s. This turboprop engine, which has been continuously upgraded and enhanced, is the mainstay of the general aviation industry and is widely used in regional, commuter and agricultural aircrafts.

PTB operates a number of business units that ultimately drive maintenance, repair and full overhaul work through the company’s facilities. The largest business unit is Pacific Turbine Brisbane which operates a major service facility near Brisbane Airport. Other business units include Pacific Turbine USA, which buys used engines and spare parts and manages MRO for clients through third party facilities, Pacific Turbine Leasing, which owns aircrafts on lease to operators, and Sydney based International Air Parts, which trades jet engine and airframe parts.

The key value driver is the ability to efficiently acquire and manage its inventory of spare parts. Accordingly, each of the business units is a key element in ensuring that the company controls demand as tightly as possible. MRO agreements are typically for five years and are structured on a programmed model with regular monthly payments. The leasing business will generate a “banker’s” margin but is primarily designed to lock in MRO agreements through the long term supply of aircrafts. The US operation is designed to leverage existing industry service capacity to manage some of the MRO agreements with the company managing the supply of spare parts.

PTB has carved out a niche providing a high level of service and support to smaller aircraft operators who would otherwise be “second order” clients of the major MRO organisations. The company manages over 150 engines under MRO agreements with a diverse client base of regional, commuter and agricultural airline operators mostly located in the Indian and Pacific Islands although some are also located in New Zealand, The Philippines and the US as well as in Australia.

What is the business case?

Over 50,000 PT6 engines and its variants have been produced by Pratt and Whitney over the past 50 or so years of which the company estimates maybe 40,000 are still in operation. Pratt and Whitney have a small authorised global network of dealers and MRO suppliers, however, there is also a larger network of “gray” suppliers, including PTB, who also operate MRO facilities. Although they are not authorised by Pratt & Whitney, they are nonetheless highly regulated by aviation authorities and must be certified to the same level as if they were authorised. The main limitation is that they do not have access to new spare parts on the same favourable terms. However, there is a deep market for used and reconditioned parts, which is also highly regulated, and these “gray” businesses typically operate in this segment. Engines can and are rebuilt many times to original specifications and are certified for regular use. Accordingly, the MRO market for the PT6 engine is deep.

What are the growth opportunities?

The company’s growth profile is largely based on building volume. The two key elements in accelerating growth are the leasing and US business units. PTB has a funding relationship with a Japanese group which has the potential to enable the company to build a sizeable fleet over the medium to long term, with guaranteed MRO agreements attached. The US operation, which only operates a parts buying and warehouse facility, enables the company to access existing service capacity without having to invest large sum in its own facilities. Moreover, it relieves bottlenecks in the Australian business where the ability to scale is constrained by the availability of skilled tradespeople.

Financial overview

PTB achieved a 37% increase in operating profit, to $4.4 million in the six months up to 31 December 2018 compared with the same period in the prior year from a 26% increase in revenue. The gain was spread across all divisions although the smaller divisions achieved outsized gains as that they built scale and achieved significant lifts in activity off relatively low bases. The US business in particular broke through to a maiden profit contribution.

A key feature of the business is that all MRO contracts are written in USD and most parts are bought in USD. Accordingly, the AUD share of the cost base is relatively low. Whilst this matching of revenue and costs in USD mitigates most of the currency risk, foreign exchange gains or losses are a volatile element of the income statement. The currency impact on the 2019 interim result was a small profit compared with a small loss in the prior year result.

Whilst the fixed asset base is significant, receivables and inventories comprise nearly two-thirds of the total asset base of $79.7 million. Debt levels are relatively low at $16.8 million, 21% of total assets, and partially offset by cash balances of $4.2 million.

The company has recently announced a final fully franked dividend of 7.0 cents per share having paid a steady 5.0 cents per share, fully franked final dividend in each of the past four years.

What do I think?

In an investment market that’s increasingly dominated by technology, services and financial companies, PTB stands out as a well-managed industrial concern with strong profit growth over the past three years underpinned by a solid balance sheet.

I like that it is a globally competitive business with multiple strategies to drive growth around its central underlying capabilities. With strategies designed to lock in long term MRO contracts and with recurring income contributing about 80% of total revenue there seems to be few income side-risks. Most risk seems to be related to the trading side of the business and the ability to buy parts at the best prices and management of the inventory, both of which are core capabilities of the company.

Barriers to entry are high and the market is deep and relatively mature meaning that the competitive environment is relatively stable. This should mean there are few surprises on the horizon and that the company should be able to continue to deliver solid growth and sound investment returns.

Gordon Capital Disclaimer

This document is provided by Gordon Capital Pty Ltd (Gordon Capital) and InterPrac Financial Planning Pty Ltd (InterPrac). The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts.

Read the full disclaimers here >

Although every attempt has been made to verify the accuracy of information contained in this Report, Gordon Capital Pty Ltd (Gordon Capital) and InterPrac Financial Planning Pty Ltd (InterPrac) make no warranties about the accuracy or completeness of any advice or information. The officers, agents, related affiliates, related body corporate and employees of Gordon Capital and Interprac accept no liability for any loss or damage whatsoever arising from any investment decisions or use of the information or advice in this Report. All information and advice contained in the Report are subject to change without notice. All investment decisions are subject to risks. Past performance should not be taken as an indication of future performance. Any ‘forward looking statements’ contained in this Report are based on current expectations about future events. Words such as “anticipate”, “believe”, “expect”, “project”, “forecast”, “estimate”, “likely”, “intend”, “should”, “could”, “may”, “target”, “plan” may identify forward looking statements. Such forward looking statements are based on views held at the date of publication of this Report and are not guarantees as to future events. Forward looking statements are subject to risks, uncertainties and other factors beyond the control of Gordon or InterPrac. Therefore, actual results may differ from those referred to in such statements. DISCLOSURE: This publication has been prepared by Gordon Capital Pty Ltd, as Authorised Representative of InterPrac Financial Planning Pty Ltd, Australian Financial Services Licence No. 246638. The registered office of InterPrac Financial Planning Pty Ltd is Level 8, 525 Flinders St, Melbourne, VIC 3000.

Reach Markets Disclaimer

Reach Markets Pty Ltd (ABN 36 145 312 232) is a Corporate Authorised Representative of Reach Financial Group Pty Ltd (ABN 17 090 611 680) who holds Australian Financial Services Licence (AFSL) 333297. Please refer to our Financial Services Guide or you can request for a copy to be sent to you, by emailing [email protected].

Reach Markets Australia and its associates within the meaning of the Corporations Act may hold securities in the companies referred to in this publication. Reach Markets Australia does, and seeks to do, business with companies that are the subject of its research reports. Reach Markets Australia believes that the advice and information herein is accurate and reliable, but no warranties of accuracy, reliability or completeness are given (except insofar as liability under any statute cannot be excluded). No responsibility for any errors or omissions or any negligence is accepted by Reach Markets Australia or any of its directors, employees or agents. This publication must not be distributed to retail investors outside of Australia. It is recommended that you seek independent advice and read the relevant Product Disclosure Statement before making a decision in relation to any investment. Any advice contained in this communication is general and has not taken into account the investment objectives, financial situation and particular needs of any particular person.

Recommendation Rating Guide

Recommendation Rating Guide	Total Return Expectations on a 12-mth view
Speculative Buy	Greater than +30%
Buy	Greater than +10%
Neutral	Greater than 0%
Sell	Less than -10%

Reach Markets Disclaimer

Read our full disclaimer here >

This publication contains general securities advice. In preparing the advice, Reach Markets Australia has not taken into account the investment objectives, financial situation and particular needs of any particular person. Before making an investment decision on the basis of this advice, you need to consider, with or without the assistance of a securities adviser, whether the advice in this publication is appropriate in light of your particular investment needs, objectives and financial situation. Reach Markets Australia and its associates within the meaning of the Corporations Act may hold securities in the companies referred to in this publication. Reach Markets Australia does, and seeks to do, business with companies that are the subject of its research reports. Reach Markets Australia believes that the advice and information herein is accurate and reliable, but no warranties of accuracy, reliability or completeness are given (except insofar as liability under any statute cannot be excluded). No responsibility for any errors or omissions or any negligence is accepted by Reach Markets Australia or any of its directors, employees or agents. This publication must not be distributed to retail investors outside of Australia.

It is recommended that you seek independent advice and read the relevant Product Disclosure Statement before making a decision in relation to any investment. Any advice contained in this communication is general and has not taken into account the investment objectives, financial situation and particular needs of any particular person.

Banyan Tree Disclaimer

This document is provided by Banyan Tree Investment Group (ACN 611 390 615; AFSL 486279) (“Banyan Tree”).

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy, or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and Banyan Tree is not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Banyan Tree does, and seeks to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Banyan Tree, its associates, officers, directors, employees and agents. Except for any liability which cannot be excluded, Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Banyan Tree is not liable to recipients in any matters whatsoever otherwise recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Banyan Tree does not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Banyan Tree.

This document has been commissioned by Reach Markets Australia Pty Ltd and provided by Banyan Tree Investment Group (ACN 611 390 615; AFSL 486279) (“Banyan Tree”).

Reach Markets

PTB Group – Servicing the aviation industry