Aviation is a growing industry, but I’ve always steered clear of investing in airlines due to the high-risk nature of a business that has no real control over its costs and little flexibility in setting prices. The demise of Thomas Cook is a sad, timely reminder of the dangers.
Could a company like Stobart Group (LSE: STOB) be a way into the sector without taking such risks? Shares in Stobart (it’s the one that owns Southend Airport, not the trucking firm) have lost almost half their value over the past 12 months, as the firm has been through a traumatic period.
Stobart also did something that often sends shareholders rushing for the exits, when it slashed its dividend last year. And, it is cutting the dividend further in the current year, as it sees more demand for cash and better reinvestment opportunities in an expansion programme.
I think that’s exactly the right thing to do. Last year’s dividend was partly funded by debt, taking net debt up to £83.1m, so it wasn’t sustainable at such levels. It’s also nice to see a company that isn’t stubbornly holding on to its dividend until the very last minute, as so many have done to their shareholders’ ultimate cost.
A first-half update on Wednesday reported a 42% rise in passenger numbers at Southend Airport, boosted by the commencement of Ryanair flights in April, the start of Loganair flights in May, and further growth of easyJet‘s schedule. The expansion of rail services from Liverpool Street, coupled with WizzAir‘s move to reach three new destinations starting November, add to my feeling that we could be at the start of a profitable growth phase for Stobart.
The shares are very hard to value, but I think I’m seeing a tempting growth investment opportunity that deserves closer examination.
The other one
While I’m at it, I thought I’d take a look at the other Stobart, the trucking one with the famous green livery, Eddie Stobart Logistics (LSE: ESL).
ESL (as I’ll call it here to avoid confusion) has had its shares suspended since 23 August after a £2m accounting error in its 2018 accounts was revealed, providing a fresh blow to Neil Woodford. Woodford, whose Equity Income Fund remains suspended after further confirmation was released this week, owns around 23% of ESL’s shares.
The firm has since told us that full-year operating profit will be significantly below its previous expectations, that it is in talks with lenders, and is looking at plans for a new equity issue. The dividend for 2019, which had been predicted to yield 9.3%, has been scrapped.
Too cheap now?
The shares had a price-to-earnings ratio of only around five, though I expect the share price to drop further when trading restarts. Could we be looking at a recovery prospect at a bargain price? Several major investors seem to think so, with DBAY Advisors the first to show its hand with a takeover approach.
The ex-CEO of Stobart Group (the airport one, not the trucking one) Andrew Tinkler has also made an approach, though there’s no guarantee that anything will come of either. But I think ESL is definitely one to watch, and will be interest in whatever the short-term throws up.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Wizz Air Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019