John Menzies MNZS
February 23, 2021 - 8:17pm EST by
2021 2022
Price: 2.30 EPS .12 .34
Shares Out. (in M): 83 P/E 27 9
Market Cap (in $M): 261 P/FCF 27 9
Net Debt (in $M): 222 EBIT 50 82
TEV (in $M): 483 TEV/EBIT 10 6.0

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I recommend a long in John Menzies, a generally underfollowed UK small cap with attractive upside from a post-COVID travel rebound. 

The thesis is fairly simple. Menzies is one of the remaining travel names whose share price remains ~50-60% lower from pre-COVID levels. Ground handling itself is a reasonably attractive business. Menzies has survived the pandemic with sufficient liquidity and covenant headroom, no debt maturities until 2025, and hasn't had to raise any dilutive equity capital. The Company is poised to emerge from the crisis stronger given cost actions taken during the pandemic (headcount reductions, harmonizing employee pay and customer contracts across regions), competitor exits and distress, and airline customers accelerating their shift to outsourced providers during the pandemic.  
John Menzies is the world's second largest airport ground handler after Swissport, providing a range of logistics services to airlines and airports including: 
  1. Ground-handling (~60% of core revenues) - performing aircraft turns, handling baggage and managing passengers
  2. Fueling (~15% of core revenues) - provide into-plane fueling services for airlines and managing fuel farms for partners
  3. Cargo handling and cargo forwarding (~25% of core revenues) - receiving, storing, loading / unloading, and preparing cargo for transit
  4. They also operate executive lounge and offline services including aircraft washing, maintenance, baggage tracing services 
The business has undergone a series of transformations over the last couple of years prior to the pandemic, including the acquisition of ASIG from BBA Aviation / Signature in 2017 significantly expanding their footprint into airline fuel services, the divestiture of their legacy print media distribution business to private equity in 2018 (an unrelated declining business and historically an albatross on their trading multiple), the restructuring of their UK defined benefits scheme, and a refreshed Board and Management team after pressure from activist shareholders that brought an improved focus on costs and efficiencies (£10M savings program announced in 2019 with additional savings achieved during the pandemic). 
These favorable changes were overshadowed in 2019 by the grounding of the 737 Max and weak cargo volumes due to trade tensions (worst cargo year since 2009) and then yet again in 2020 with the pandemic's impact on travel. I think the business has been overlooked by investors in part due to its small foreign market cap and the serial turmoil from market conditions. 
Today, Menzies is a pure-play aviation services company with global scale that services 500 customers globally, handles 1.2M flights a year serving 200M+ passengers, and fuels 34B litres of fuel per year. Despite its UK domicile, the business serves customers in 220 airports across 37 countries with ~40% of revenues being derived from the Americas, ~45% from EMEA, and ~15% from the rest of the world. 
The outsourced ground and cargo handling industry is a $30B annual revenue industry with multiple small regional operators, a few larger pan-regional players (Sats, Aviapartners, Celebi) and a few global players of scale (Swissport, Menzies, WFS, and dNata). The global and pan-regional operators comprise ~20-25% of the industry and the industry remains highly fragmented and ripe for further consolidation (see airline catering services). Airlines choose service providers on the basis of price and reliability. Ground handling itself is a low margin business and success for the service providers are driven by economies of scale centered around specific hubs, where higher profitability accrues to operators who can gain the biggest share within a single airport. 
The industry has historically been characterized by attractive growth and I believe the industry is poised to return to pre-pandemic trends once the world receives its vaccines. Menzies has grown revenues organically at a ~5% CAGR from 2014 to 2019. Ground handlers have historically benefitted from a combination of 1) increasing GDP+ air travel demand and global passenger traffic and 2) continued growth in the outsourced share ground handling globally as airlines have found efficiencies by outsourcing non-core services to third-parties like Menzies. The outsourced share of the cargo handling market has grown from 48% in 2013 to 52% in 2018, while outsourced ground handling has grown from 37% share in 2013 to 41% in 2018. Share gains of the outsourced market have also benefited from the relative growth of ultra-low-cost-carriers who have a greater propensity to outsource.
The pressures on airlines from COVID should further accelerate the shift to outsourced providers coming out of the pandemic (see Qantas as a recent example:
In addition, Menzies has gained share during the pandemic from a "flight to quality" as demand increasingly shifts towards larger and better capitalized operators. During the pandemic, Menzies reported a significant number of net new wins (£27M of new commercial wins, one of the strongest results in years, in part due to the distress of competitors going out of business). Menzies has actually fared better than expected through the pandemic as cargo volumes have held up well (volumes only declined by 20%), their ground handling business gets paid on aircraft turns rather than directly by passenger volumes mitigating their downside, and fuel farm management is primarily a fee-for-service business. Menzies 2020 revenues were down 37% year-over-year (and would note this compares favorably to bankrupted Swissport who reported revenue declines of 50%). 
Management has survived the pandemic without having to raise dilutive equity capital. The company refinanced its debt stack and pushed out maturities until 2025, has £200M of available cash (well above the minimum liquidity threshold of £45M), and negotiated a revised covenant package with bank lenders through 2022 that should provide sufficient covenant headroom (with further scope for cost actions if revenues remain depressed). They are far from out of the woods but have managed effectively thus far. 
At the current price, the stock offers attractive upside. Assuming Menzies returns to 2019 revenue levels by 2025 of ~£1.3B (note that 2019 as a baseline itself was negatively impacted by Boeing 737 and disruptive cargo markets and Menzies has picked up new customers in the interim), normalized EBITDA margins of ~7% (~6% margins pre-COVID, pre IFRS 16, adjusting for cost savings), at a 7x EBITDA multiple I see scope for a share price of ~£7.00 in 4-5 years, versus £2.12 today, or ~3.3x multiple on capital. I believe there is some conservatism on multiple as HNA Group acquired their primary competitor Swissport from PAI Partners for 10x EBITDA in 2019 and acquired GateGroup for ~9x in 2016, and PAI Partners acquired Swissport from Ferrovial at 8x EBITDA in 2010. Regional competitors like Do & Co. (Germany) and SATs (Singapore) trade at ~13x 2019 EBITDA.  
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Vaccines, post-COVID normalization 

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