Just a quick note to say that the Morgans analyst report is the...

Just a quick note to say that the Morgans analyst report is the biggest error-riddled piece of trash you will ever come across. I am aware this has been raised with them by outside shareholders and by the company itself. Morgans accept many of the errors but have just decided they will wait until after results to correct.

At the outset the report has the FY20 cash position wrong (even though PTB have made it clear in an ASX release). It also forecasts no full year dividend for FY20 - even though PTB have clearly said there will be one.

The whole basis of his forecasts for FY21 and FY22 are comically wrong and based on comparative numbers/forecasts from the likes of American Airlines and Qantas and/or leasing companies that are exposed to wide-body airliners.

It seems the analyst is having his first outing outside of the oil and gas industry - no evidence he's ever analysed an industrial company previously.

Veritas have a much more accurate set of numbers out in the market at the moment in their analyst report. While I think that analyst is overly bullish (with a $1.80 target price) - I think his underlying numbers are more realistic.

On the dividend it's worth remembering that there is a high level of DRP take-up with this company - probably around 70%. So they can afford to pay out a large-ish dividend (i reckon it will be 2-2.5c) and still keep capital for re-investment/growth. This gets the franking credits out and lets those who want the cash keep it.

Here quick update note from Veritas yesterday (I don't think the graph is showing up but basically shows the figures explained in the text)....

Pacific Turbine Brisbane (PTB.ASX, share price $0.60) - Buy – Positive data points

Recent data shows that the number of private business flights in the US is recovering from -72% YoY in April to -17% YoY in July (Figure 1). This is a much bigger recovery than that seen for commercial airlines (e.g. American Airlines, United, Delta) with flights -81% YoY in June.

Figure 1. Growth in number of flights in the US (% change YoY)

Source: Argus Business Aviation data for private flights with July being an estimate and all other data actuals, TSA data for commercial scheduled flights.

The data is positive for PTB given that the US represents an estimated 44% of group EBITDA in FY21 and that turboprop aircraft (the engines of which can be maintained by PTB) comprise 32% of the private flights in the Argus data. PTB does not address the commercial scheduled segment which is suffering the most. It is also important to note that PTB’s revenue is predicted to be more robust than the flight data because our analysis suggests the company is gaining share.

Data from outside of the US looks even more positive. Business flight activity in the Oceania region (i.e. excluding scheduled commercial flights such as Qantas) was down only 10% YoY in June 2020 (source: https://www.avbuyer.com/articles/market-insight/business-aviation-market-overview-august-2020-112868) due largely to less severe COVID restrictions.

The main point is that whilst commercial airlines are suffering – the effects of COVID are less severe for PTB. PTB does not service the large turbofan engine types used by the major airlines. Demand in the private segment – which PTB does service - is much more robust. This is because the purpose of the turboprop flights is often unrelated to passenger travel. Turboprops are used for a variety of purposes including delivering mail, essential supplies, medicines and crop dusting – many of which are unlikely to be materially impacted by COVID.

We believe that PTB shares are trading at a discount to intrinsic value because of a general lack of market understanding about how COVID is impacting the business. Our analysis suggests that its diverse end market exposure leaves it much more resistant to COVID 19 than consensus is forecasting. Accordingly we expect the shares should re-rate when the company announces guidance for FY21 profit growth that is higher than consensus currently forecasts.

Our DCF derived fair value is $1.80 per share. Our fair value puts the shares on a P/E of 24x in FY21. Peers including Textron, AAR Corp, Signature Aviation, Singapore Technologies Engineering and AVIC trade on an average P/E of 31x in FY21. Our forecasts and latest thinking are included in our most recent report, attached.

James Tracey CFA

Director Industrial Research