Break-up candidate John Menzies in demand

Wounds from John Menzies' November profits warning are healing, and the Scotland-based firm's share price has since clawed back half its losses. Amid requests for the company to split itself in two, a trading update reveals that its aviation and distribution businesses are performing as expected, although concerns remain about a failure to win Spanish airport licences.

A seven-year deal to handle Norwegian Airshuttle in Oslo and Copenhagen supported 8% growth in aviation revenue at constant currency. Cargo handling volumes rose 10%, and further contract wins meant ground handling turns jumped by 16%, or 5% like-for-like.

However, to the City's surprise, Menzies didn't win any licences during Spanish airport operator Aena's tender process. Management reckons its unlikely to impact earnings, but Jon Lienard, an analyst at N+1 Singer, is worried as this was seen as a key element of Menzies' aviation development.

"This tender result suggests that all is not well at present," warns Lienard. "Existing business in Spain is small and should be ring fenced, but there is potentially a hole in the organic growth expectation in FY16 and beyond." Still, other opportunities are expected to become available in North America over the next year, which should appease shareholders.

That may not cut much ice with Lakestreet Capital Partners, however. The activist shareholder is piling on the pressure to break up the business, and Menzies says it remains "committed" to getting the best value for shareholders "and evaluates all options, including its corporate structure on a regular basis".

(click to enlarge)

If declining volumes in the print media industry continue to slow, Menzies' newspaper distribution business should benefit. A 1% slower decline will add around 10% to its discounted cash flow, according to Shore Capital analyst Martin Brown. Leads in the e-fulfilment market are also being pursued and more information is expected at its August interims.

"We believe Menzies will be a long term winner in the structural growth market of Global Ground Handling," says Brown. "Despite recent issues, the top-line has continued to grow, this underpins our belief in the long term merits of the Aviation Division. While Distribution continues its measured decline we await with interest more details on potential new revenue streams, these could have the potential to transform this divisions value."

The market took this trading update well, with the shares up 4% and back near the 200-day moving average. At 420p, they trade on a modest price/earnings ratio of 8.2 times for 2016 and yield over 4%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.