Dart Group (DTG)


Dart: Silent activist says much about airline

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Activist investor Crystal Amber claims to have uncovered hidden value in Dart. Its filings tell all.

A few us are speculating about the identity of the activist investor at Dart’s annual general meeting.

Prompted by Dart’s chairman Philip Meeson during the meeting, the activist’s only words were “I have come to learn”, which doesn’t give us much to go on.

Value investor Maynard Payton suggests he was from Crystal Amber, an activist fund formed in 2008 that has Woodford Funds and its famous fund manager Neil Woodford’s previous employer Invesco Perpetual as major shareholders.

The activist fund, has recently acquired a 1% stake in Dart and says it often attends the AGMs of investees.

Activist investors usually buy stakes in companies and agitate for change. Dart has been doing so well, it’s difficult to imagine what Crystal Amber might want to change, although its investment strategy contains some clues. Amongst other things:

Where a different ownership structure would enhance value, the Company will seek to initiate changes to capture such value.

Dart is controlled by its chairman who owns 38% of the shares, although I’m unsure how an activist investor would go about encouraging him to sell, or that it would be good for the company. Meeson has been an excellent steward so far but a reduction in his stake would make the shares more attractive to institutional shareholders.

The Company may also seek to introduce measures to modify existing capital structures and introduce greater leverage and/or seek divestiture of certain businesses of the investee company.

Dart may have surplus cash, though not for long. If Crystal Amber’s intention is to persuade Dart to borrow, which increases shareholder returns in good times (and decreases them in bad times), the company is doing that anyway to fund 27 new planes.

As-well as Jet2, Dart’s high flying airline, and Jet2holidays, Dart’s newer and rapidly growing package holiday business, Dart also owns Fowler Welch, which hauls produce for supermarkets by road. Fowler Welch is part of the activist’s plan. This quote is from the “thesis” on Dart, published in Crystal Amber’s full-year results on Tuesday.

In the past, the tangible nature of distribution assets [Fowler Welch] contributed to the balance sheet strength of Dart during the growth of the airline, a business not normally liked by lenders. In our opinion, the distribution business could now benefit from the increased scale that another trade owner could bring.

Crystal Amber would have Dart dispose of this more pedestrian businesses in the expectation that the airline would be more profitable and attractive to investors on its own.

I would oppose the first two bits of activism, I prefer the executives of companies I include in the Share Sleuth portfolio to have large stakes, those that don’t often take big risks with other people’s money. I also think airlines are financially complex businesses and the cash cushion reassures me. The third, I’m more ambivalent about. Due to the growth of Jet2, Fowler Welch’s significance is diminishing anyway. Maybe it’s a distraction.

Crystal Amber is such an interesting fund, it invokes the Kay review as justification for its activism, there’s a danger I’ll turn this article into a profile, but it’s Dart I’m interest in now and Crystal Amber’s results also shed light on the importance of hedging to Dart:

The business model is distinct from other low cost airlines. Whereas most focus on purchasing new fuel efficient aircraft, Jet2 has bought inexpensive but fuel inefficient second hand planes. Many competitors fund their fleet with operating leases; for example all Monarch’s fleet is leased. In contrast, Jet2 has grown its 59 strong fleet mostly by purchase, and now owns 44 aircraft. The average age of Jet2’s fleet is nearly 22 years, versus Ryanair’s 5 years. Given its fuel inefficiency, Dart prudently starts each year with about 99 per cent of its requirements hedged. However, the fuel inefficiency of the fleet is a challenge when oil prices are high and a considerable tailwind at current prices. Dart’s balance sheet is strong, with net tangible assets of £150.4 million.

That makes Dart’s management team look pretty astute. They’ve grown a profitable airline and uniquely integrated package holiday business while flying into a headwind created by high fuel prices (even in 2015 because the company would have hedged at earlier higher prices). Now they’re set to reap the benefit of much lower fuel prices. Since the fuel price is a bigger cost for Dart than other airlines, it should benefit more.

Given the probability that oil prices will rise in future, investors also need to consider the sustainability of the bumper profits they expect over the next few years. As profitability escalates, I will be at pains to normalise (average it) in my calculations.

Presumably over the long-run Dart gains more from buying cheap second-hand planes than it loses by paying more for fuel.

Although it is buying new planes now, the model it’s buying is long in the tooth and will be replaced by a new, more efficient version soon.

Maybe that explains the big discounts Dart says it got from Boeing.

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Crystal Amber results out today:

On Dart:

"Dart Group plc ("Dart")

Dart is the parent group of leisure airline Jet2 and fresh produce distributor Fowler Welch.

On 19 November 2015, Dart reported strong increases in turnover and profits for the six months to 30 September 2015. During the period Dart announced orders for a total of 30 new Boeing 737-800NG aircraft. In our view this reflects confidence in the growth of the airline operation.

We would welcome further engagement with Dart's board and management to provide a deeper understanding of the business and its potential. We believe that a wider understanding of the business in the investment community would improve the shares' rating."

Presumably 'further engagement' means Crystal has since engaged with Dart following the silence at the AGM.

Thanks for the reminder Maynard.They only said they would welcome it! Not that they had actually achieved it yet...

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