Ann: Change in substantial holding, page-11

I understand the biggest aircraft lease client is FlyPelican based in Newcastle (a former PBT subsidiary which was sold off about 10 years ago). It has a fleet of 5 aircraft and has been flying regularly enough (though less than they were). Should be back to full schedule in the next 2-3 months.

The rental engines are spread all over the place. Although I note that the rental side of things in itself is no longer as significant to the company as it once was. I'm not sure write downs would be necessary for what is likely a temporary situation and wouldn't matter much either way to the company anyway given the fact it has it's debt facilities all nicely locked down now for a while.

Maldives is clearly an issue. The modelling from the Maldives itself indicates they will let tourists back in during October (the midpoint of various scenarios). Noting that May-September is the low season for Maldives in any event.

None of the planes that the IAP business service appear particularly affected.

There is no indications that the US customer base (govt, agriculture, freight, small passenger, private) is particularly affected.

If you assume that the Maldives and tourist revenue goes to absolute zero for 6 months then that will cost PBT about $4m in my view. This is based on lost revenue of $10m @ gross margin of 40%. (Noting that you can still see the Trans-Maldivian Airlines (TMA) planes flying around here and there even now despite Maldives total lockdown). This assumes the company can't or doesn't want to cut costs at all in response to a temporary halt. It also assumes that the TMA contract is at the usual run-rate gross margin whereas it is probably less. It also doesn't factor in that the next 6 months would typically earn less than the yearly run rate for TMA in any event given it is Maldives low season.

The legacy business was on track for a massive year this year until Covid - unsurprising given it was the first time the 30 new TMA engines and the test cell, finished last year, really started to contribute together. They were at $4.7m PBT at end of Feb and conservatively on track to hit $7m PBT for the year. I think that's a run rate they can hit again within 6-12 months. Add to that maybe $6m in PBT from the new US business and you have them at a $13m PTB run rate overall.

Covid clearly means they will be less profitable over the next 6 months (but still profitable importantly - so they maintain a good balance sheet). So you are now paying 45c for a strong growing business with excellent blue sky potential in the US which can clearly ride out the storm and will be earning 7-7.5cps NPAT run rate by the end of the year. Management with serious skin in the game. Potential corporate interest. Brisbane and Sydney property on the books for $6.6m which is worth over $10m.

As with every stock there are risks - the shutdown drags on for the Maldives and tourism generally or TMA goes bankrupt - I don't think this would affect the balance sheet too badly but would clearly lengthen the revenue down-time. This would mostly be due to the fact Bain Capital have geared TMA up too much. In 12 months time there will be a fleet of 50 sea-planes servicing the Maldives under some corporate structure whether it be TMA or a new one. We would have to win the work under a new owner though obviously.

The share price might well keep going lower as there is clearly one or two determined sellers but it's the best risk/reward opportunity i've seen on the ASX for ages.

The large volume that went through mid-week was me buying the last shares on offer from an 'institutional' seller via Morgans (1.089m shares). Obviously the same person or another seller is continuing to hammer it via another broker since then though.

PS: On the balance sheet strength it's worth noting that since 31 December they have paid out a dividend of $1.9m but the following has added to the cash position of $8.5m at that stage:

$2m raised in the rights issue which was for working capital (ie not spend on Prime Turbines).
$2m was raised for transaction costs but $600k had already been spend by 31 December and they look on track to come in well under that $2m budget (ie they only spent another $300k in Jan/Feb) - so that could free up another $1m.
$3.8m (now $3.6m given XE changes) from the Test Cell sale
Any operational cashflow arising from Jan-Mar trading (which is ahead of budget).

Also on the balance sheet they have the Brisbane and Sydney properties and they are owed $1.8m (secured by shares) by the CEO.

In my view plane parts tend to hold their value reasonably well (at least in comparison to the inventory in other industries) so the levels of debt are very conservative from my perspective (especially given $12m of it is the interest free vendor loan from Prime).

Righto - clearly i'm talking my book here but what else am I going to do? Clearly short term risks but the market will come for this stock again like they finally started to in the 2nd half of last year once things settle down - only this time the actual and potential growth of this company will have moved further ahead.