Listed airline company Comair’s share price dropped by 2.5% to R5.50 on Tuesday despite a record first half performance in a tough market.
Comair, which flies under the British Airways (operated by Comair) and kulula.com brands, grew revenue and passenger volumes by 6% despite over-capacity in the local airline market and a volatile local economy.
Profit after tax increased from R199 million in the corresponding period to R203 million and earnings per share and headline earnings per share grew from 42.8c to 43.6c.
Non-airline businesses contributed 13% to profit from operations and the business showed strong operating cash flow of R517 million and R777 million cash at hand on December 31 2017.
Comair CEO Erik Venter told Moneyweb the group’s fleet renewal programme is paying off. Thanks to greater efficiency of the new aircraft Comair’s cost increased by only 5% despite an 11% increase in fuel cost during the period.
The domestic airline market is stagnant with a drop in fares offset by a 3% increase in volumes and no net growth. In this environment the more efficient fleet gave Comair a competitive edge and enabled it to grow passenger volumes by 6%. Venter says this was mostly at the cost of embattled national carrier South African Airways.
Venter says despite SAA’s route rationalisation programme the over-capacity in the local airline market persists as the domestic flights were merely shifted to SAA’s low-cost carrier Mango. Industry average load factor sits at 75%, which is below international averages of 85%.
The industry needs revenue growth of at least 10%, which is dependent on economic growth, Venter says.
He says while Comair is showing a profit in the current conditions, it will really extract the value of its new planes once economic growth sparks airline growth.
Comair’s non-airline businesses, including Food Directions, the SLOW lounges, the Comair Training Centre (CTC) and travel booking operations continue to grow and contributed 13% to profit from operations, Venter says.
The CTC is undergoing a significant expansion and now trains personnel for more than 30 airlines and air forces. “Comair has also acquired EPT Aviation Training and Global Training College to bolster our already formidable pilot training facility with enhanced capacity for cabin-crew, passenger handling and travel and tourism training,” Venter says. Comair also invested R70 million in a commercial industrial office park in Kempton Park to expand its Food Directions catering operation.
The award of R1.9 billion in favour of Comair in its claim for damages against SAA for uncompetitive conduct is still outstanding pending an appeal that could be heard in the next few months.
The application for leave to appeal filed by the Air Services Licensing Council against a finding of the North Gauteng High Court in favour of Comair on a licensing issue, has been dismissed.
Venter points out that Comair’s share price is currently at a price/earnings (PE) ratio of six, which he says makes it “the bargain of the century”.
He says Comair has been named among the top five JSE-listed companies in terms of growth in cumulative shareholder value over the last five years, equating to annual growth of 41.5% and total growth of 467%.
He says in the US aviation shares have become more attractive after Warren Buffet showed interest in the industry. There and in Europe airline companies trade at PE ratios of around 20.
Amelia Morgenrood, stockbroker at PSG Faerie Glen, agrees with Venter that Comair‘s shares are cheap and offer “fantastic value for money”.
She says while a PE of six is low, 20 might be overly optimistic for a South African airline company that has to navigate the effect of the oil price as well as currency volatility on its fuel cost.
She says Comair is being managed extremely well and deserves a higher valuation than the current PE of six. Investors are however traditionally wary of airlines as they generally battle to make money.
Smaller companies are also dependent on domestic investors, since international investors focus on the JSE’s top 40 companies. Domestic investors are however impatient with the slow performance of the JSE over the past few years and are increasingly moving investments out of South Africa, she says.
The first of eight Boeing B737-800 MAX 8 aircraft will be delivered to Comair in 2019, constituting the next phase of the group’s fleet renewal strategy.