After years of flying beneath investors' radar, shares of Canadian Helicopters Group Inc. are beginning to attract attention.
The stock has gained altitude following the Montreal-based company's $120-million deal last week to buy Helicopters (N.Z.) Ltd., a helicopter operator based in Nelson, New Zealand. The transaction, which will be financed with cash and bank loans, creates a global firm with a fleet of 160 owned and leased aircraft.
Canadian Helicopters' class A shares, which are up 43 per cent over the past year, hit a 52-week intraday high of $23.25 on Monday on the Toronto Stock Exchange. It closed Thursday at $23.20 a share.
Despite the stock's runup, Canada's largest helicopter services company is still seen by some as a compelling value play, with both growth potential and a strong balance sheet. Trading at a mere seven times forward earnings, the stock appears inexpensive versus its peers.
"It's a cool story, but not very well known," said Jason Gibbs, a portfolio manager with Goodman & Co. Ltd., which has owned the stock in its Dynamic equity income funds since Canadian Helicopters went public in 2005. Goodman, with a 16 per cent interest, is the company's second-largest shareholder, after the Quebec Solidarity Fund, which owns 21 per cent.
Canadian Helicopters provides transportation services to various sectors, notably the energy and mining industries. It also repairs and maintains aircraft and operates flight training schools. Since 2008, it has won contracts from the U.S. military to ferry supplies and passengers in war-torn Afghanistan.
The company, which converted to a corporation from an income trust on Jan. 1, pays an annual dividend of $1.10 a share, which works out to a yield of nearly 5 per cent at current share prices. The dividend looks sustainable because the company's payout ratio -the percentage of earnings paid out to shareholders - is a "very low" 47 per cent, Mr. Gibbs said.
He likes the stock because of the firm's "phenomenal management team, which is very conservative." They have been disciplined in waiting for the right acquisition, and, in the case of the New Zealand deal, are buying "a great asset from a distressed seller," Mr. Gibbs said. Helicopters (N.Z.) was put up for sale after its parent, South Canterbury Finance, went into receivership last summer.
Canadian Helicopters executives say the acquisition, which is expected to close in the third quarter, will boost annual revenue to $233-million from $171-million, and operating earnings to $59-million from $38-million.
The merger is expected to reduce insurance costs and also alleviate the seasonality of Canadian Helicopters' revenues by adding a Southern Hemisphere component to the company's existing Northern Hemisphere business. Given that Helicopters (N.Z.) focuses on the Australian and Southeast Asian markets, the fourth and first quarters are its strongest earnings periods, while they are the weakest for the Canadian company.
More importantly, the acquisition reduces Canadian Helicopters' exposure to the Afghan contracts, which would otherwise have made up about 50 per cent of total 2012 revenue, said Desjardins Securities' Benoit Poirier, who has raised his one-year target to $32 a share from $22. "This will lower the exposure to about 38 per cent."
Canadian Helicopters' business can be hit hard by the loss of key customers. For instance, it stands to lose $30-million of annual revenue when its contract with Ontario air ambulance operator Ornge expires next year. (Ornge plans to operate its own fleet of helicopters.)
The ramp-up of operations in Afghanistan, along with the recovery in the mining and oil and gas sectors, has more than compensated for that loss and should continue to drive revenues for Canadian Helicopters, said Mr. Poirier, the only analyst covering the stock. "We know that the United States is starting to withdraw from Afghanistan, but …once the war is over, they still need helicopters to rebuild the region as part of the reconstruction efforts."
The firm should be able to quickly pay down the debt it has taken on for its new acquisition because it has been generating over $30-million in free cash flow annually since going public in 2005, the analyst said. "The stock is pretty cheap if you look at the peers trading closer to 14 or 15 times forward earnings." The peers include U.S. companies such as Bristow Group Inc., PHI Inc. and Air Methods Corp. as well as Canadian-based Discovery Air Inc.
Wil Wutherich, who runs Steadyhand Small Cap Equity fund, is a big fan of Canadian Helicopters. He bought the stock at $10 a share a couple of years ago, and it is now his fund's largest weighting at 10 per cent.
"It's a great free cash flow story" that will lead to more acquisitions, and enable the company to grow, Mr. Wutherich said. "Over the next few years, I would not be surprised to see them do more [in terms of an acquisition]on the repair and overhaul side of the business."