Some takeaways from the Annual Report: (i) The $2m pretax...

Some takeaways from the Annual Report:

(i) The $2m pretax earnings for PTB Brisbane's first half was no "one-off", as it was repeated in the second half. Sourcing parts from PTB USA has significantly lowered Brisbane's costs, and $4m p.a. appears to be the base going forward. This is underwritten by the signing of a new contract with their largest client, with more engines contracted at significantly higher rates.

(ii) The CEO Steve Smith has now stated that the primary growth strategy for the Group is the development of the engine business in the US. This is different to last year when they were indicating that the Leasing division was going to be the main growth driver. He reinforces the point by stating elsewhere in the report that the US "has the potential to provide a significant boost to the overall results".

(iii) For Leasing, a number of deals are currently being negotiated and we can "expect to make announcements regarding these in the near future". "A number" would mean more than two deals; the first deal to be signed already involves 4 aircraft.

(iv) The Japanese finance for the test cell is at a very low 3 per cent, indicating that the lending rate when applied to the Leasing division would be similar. This is significant, as the long term goal is to grow the fleet to over 100 planes.

(v) The test cell should be operational by December. It will cost approx. $3m, with annual operating cost savings perhaps in the order of $0.5m. They say the test cell will open up "a number of new opportunities" as well (I'm guessing testing of 3rd party engines).

(vi) Hugh Jones has now moved to near the top of the shareholder register. He has deep pockets, having been very successful in running his listed aviation company out of New Zealand. Jones was originally involved in setting up PTB.

(vii) The CEO (not known for his hubris) emphasises the consistency of the expected profit growth going forward. I believe this statement should not be underrated. Not only has the consistency been demonstrated over the last four years ($2.0m, $2.6m, $2.9m, and now $3.2m after tax i.e 12% compound earnings growth), but this has the effect of tightening the discount rate that should apply when valuing the company forward.

Valuation: I think PTB is very cheap on all valuation measures, and would conservatively expect a compound growth rate of 25% p.a. in the share price over the next two years.

At 60c, P/E of ~12x current earnings appears to be fair. But it discounts the obvious growth imminent across the Group, given all the indications.

Even if only 10 aircraft were to be added to Leasing over the next 2 years, I estimate the pre-tax earnings per division by FY2020 to be as follows:

PTB Brisbane: $5m (from $4m currently + test cell savings + modest growth in EMP numbers)
PT USA: $1m (from current breakeven)
Leasing: $1.5m (from current normalised $0.7m + 10 additional planes @ ~$80k pre-tax/lease)
IAP: $2m (from 3 year average $1.5m + additional work across Group)
Overheads: - $2m (assume creeping up by $0.2m p.a.)

(a) So, on a P/E basis, $7.5m vs. current $4.4m pre-tax => 7.8 cps based on current 69.2m shares x P/E of 12 => 93c share price.

[There will be more shares on issue in a couple of years due to heavy take up of the DRP, but this is offset by the 10c dividend payout over that period.]

(b) Valuing on a ROE basis, and assuming 64c NTA, 7.8c eps = 12% ROE which, assuming the current macro low interest rate environment still applies + demonstrated consistency and certainty of Group base earnings, 12% ROE should mean an approx. 1.5x multiple over book value => 96c.

(c) Based on yield, a consistent 5c dividend (payout ratio 64% on 2020 earnings) from a small mkt. cap company => 6% ff yield is a fair assumption, giving a share price of 83c.

(d) The stock is currently trading at the bottom of the 3-year share price uptrend. Assuming a continuation of this uptrend, the channel Lo projected at Sept. 2020 is ~70c, and the Hi is ~$1.00, giving an average of 85c.

If I'm right in all my assumptions (and giving an equal weighting to these rule of thumb valuations) this gives an expected 2020 share price of 86c. Coupled with 10c paid in dividends, a purchase at 60c today may well net a compound pre-tax return of the order of 25% p.a.