Why I'm a sucker for specialists

Air charter broker Air Partner may be following the example of Clarksons, the shipbroker that became a global shipping services company.

Buried deep within Air Partner's annual report, the company acknowledges a degree of "controlled disruption" as it grows. Change, is of course, inevitable but radical change is unsettling for long-term investors because it makes companies less predictable. The case for investing in Air Partner, an established profitable company trading on an attractive valuation, depends on the extent of the disruption and the level of control.

Air Partner principally brokers charter agreements between plane operators and customers who hire the planes for a single flight or much more involved itineraries. Using natty flow-charts, the annual report describes its role jetting executives on a roadshow to generate interest in the flotation of a large company on the New York Stock Exchange, and how it transported the "world's largest spare part", a cowl for an Airbus, from Miami to Heathrow in an Antonov - AN124, the only plane big enough.

Typically these assignments involve more than finding a suitable plane and negotiating an agreement. Special cargoes, be they people or freight, need special treatment and Air Partner has people at airports and its operations centre to make sure airport slots are booked, onboard facilities meet customer requirements, and freight gets loaded correctly.

A strength and a weakness

The ad-hoc nature of the business is a strength because only brokers using many operators - Air Partner says it deals with the majority - can provide the best plane for the job, often at short notice. Other competitors, operators that hire out their own planes, for example, are limited to what's available from their fleets.

It's also a weakness. Though football teams on tour might keep flying if economic conditions worsen, other corporate customers fly less. Business booms when governments and aid agencies fly personnel and supplies to war zones and natural disasters, and contracts during times of stability and austerity.

Such weaknesses are ephemeral, and historically, they haven't reduced profitability to levels that would bring into question the long-term viability of the business.

The first advertisement Google throws at me when I search for "aircraft charter" presents a potentially more troubling challenge. It's for Stratajet, a website that promises live prices and instant booking: "No broker, no quotation, no waiting." Also deep in its annual report, Air Partner acknowledges that new technology platforms are vying to usurp the brokers.

As yet, Air Partner says none of the pretenders have delivered a profitable business model. Ad-hoc and bespoke work, it says, requires the experience of specialist brokers.

Inoculated against competition

I'm a sucker for specialists. Their reputations for uniquely serving a subset of the market inoculates them against competition. Air Partner fits the bill. It's been broking charters for over 50 years, more than any other rival, it says.

A table published in its previous annual report revealed it as the second-biggest of four competing brokerage firms, the other three being privately held companies. It claims to have world class processes wrapped up in a "Customer First" strategy that should deepen relationships. It places great emphasis on training, supporting and rewarding employees.

Specialist firms are often confident. They don't need to hide competitive advantages because they are afraid rivals might copy them. They may even flaunt what makes them special to deter others from competing. To grow, a specialist company need do little more than satisfy customers and gradually expand its specialism.

Most of the points in Air Partner's six-point strategy accord with the specialist vision. The sixth point, which promises to extend the company's offer, seems out of place though.

Judging by the acquisition of Baines Simmons last year, extending the offer means diversifying, which is the opposite of specialisation. Baines Simmons does not broker charters.

Unlike another recent acquisition, Cabot Aviation, it does not broker planes either. It is not directly involved in the supply of planes at all, although it may be called upon to survey their airworthiness.

Baines Simmons supplies training and consultancy in regulation, compliance and safety to airlines, tour operators, air forces, and aviation authorities. It also conducts airworthiness surveys for the Isle of Man Aircraft Registry, the largest corporate aircraft register in Europe.

Though there are, apparently, synergies, Air Partner is just as interested in Baines Simmons because it serves an aviation market that may grow rapidly. Paragraphs of the annual report tell of initiatives that will increase regulation that Baines Simmons is helping to shape - and I wonder if Air Partner's interest in other aviation businesses belies uncertainty about the solidity of Air Partner's speciality.

The company's ambition is to be a global aircraft services group, not just a leading charter broker, perhaps in the mould of shipping services group Clarksons, originally mainly a shipbroker.

Long-term picture is clouded

This vision may excite investors, and acquisitions may increase profit, helping trigger targets in chief executive Mark Briffa's substantial bonus and incentive schemes.

The long-term picture is clouded though. The possibility of new competition from online brokers makes me wonder whether the company is being driven to diversify by the prospect of lower profitability in broking.

The acquisition of Baines Simmons, which cost more than Air Partner made in profit in the year to January 2016, could be the first of many. It remains to be seen how judicious the company is when buying companies, and whether the resulting combination adds up to more than the sum of its parts.

About 4% of the model Share Sleuth portfolio is invested in Air Partner. The year to January 2016 was a good one, so it would be incautious to use the profitability the company achieved as the sole basis of valuation. Although Baines Simmons and other diversifications may add less variable streams of profit, the broking business is much bigger and remains unpredictable. Even after recomputing the earnings yield using the firm's average return on capital, the shares are good value as long as Air Partner grows. A share price of 425p values the enterprise at about £46 million or 12 times adjusted profit. The earnings yield is about 8%.

I won't be adding more shares though. Not, at least, until the AGM later this month when I may get further insight into the likely extent of disruption in future, and management's level of self-control.

The winds of change have ruffled me slightly.

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard

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.