ATSG - Air Transport Services

[Hielko]

I agree that a key issue is the difference between GAAP D&A, and economic D&A, but I personally can't figure it out. What is really the value of their air fleet? I could of course simple trust the numbers from the latest impairment test, but if I want to check it using other sources I'm out of luck... and even if you have more detailed info it would probably still hard to make a good evaluation as a non-expert in the airplane business. I image that two planes that look comparable might actually have a significantly different value if one plane has been used for short haul flights and the other for long distance transport (# of pressurization cycles determine lifetime of the air frame).

 

 

Basically: I can see how ATSG can potentially be a good investment, but I just don't understand what they own enough for me to make an investment.

 

I think by the way that EBITDA is a bit of an irrelevant metric by the way to be honest: a company that just renewed it's fleet is obviously way more valuable than one that's nearing the end of it's life while both companies could easily produce the same EBITDA. And a company that owns assets with a shorter economic life is going to have a lot of D&A, and also a lot of capex spending to replace those assets, but that's also not something that you would see in the EBITDA number.

[Packer16]

You are correct EBITDA is meaningless for short-term assets but firms that have long-term assets it becomes more relevant.  The extreme case is buildings where they can be depreciated but they will still be there at the end.

 

Packer

[Packer16]

I was able to find scrap values for 767s and it was about $7 million in 2009.  Since then metals prices have risen so $7 million is probably a conservative scrap number.  So with 37 planes that is a total scrap/salvage value of $270 million.  That is about a $17 million add back to D&A per year (assuming a 10 year remaining Life) for the terminal scrap prices.  I confirmed with the co that D is based upon no salvage value.  So even using full depreciation FCF yield is in the low 20%.

 

Packer

[writser]

Packer, where did you get that estimate? I'm no expert on airplanes but it seems a bit high. Then again, these planes were extensively refitted, maybe those components (landing gear, avionics) are worth a lot more than the hull itself.

[Myth465]

Packer is doing all the hard work.

 

Packer I saw in a post you like the leasing sector. What do you think is the best value there, and why. I am familiar with ATSG and SSW, and aware of Air Castle via Kuppy.

[Packer16]

You guys did the hard work of bringing it to everyone's attention.  I just copied your idea and did a little digging.  In addition, management has been very responsive to my e-mails about questions.  A big plus in my mind.  The scrap estimate was from a broker article in 2009, here it is:

 

http://www.flightglobal.com/news/articles/special-report-values-in-pieces-339882/

 

I think current pricing for 767s is closer to $10 million.

 

The cheapest leasing assets are ATSG (FCF yield in low/mid 20s% or maybe higher if planes last longer than depreciation), AIQ (MRI equipment - 60% FCF yield), AYR/ACY (mid 20%s) and GASS/SWS (upper 10%/lower 20%s FCF yield).  The ones with high FCF yields and low EV/EBITDA are ATSG (3.5x EBITDA) and AIQ (3.4x EBITDA) (these are my pics).  The reason is there is upside as independent firms (via FCF) and as an acquisition target (via EBITDA multiple).  See AIQ thread for AIQ rationale.

 

Packer

 

[rogermunibond]

Wondering out loud here, but buying three 757 combis versus share buy backs below $4. maybe it was something required by US TRANSCOM, dunno.

 

I've got to think that the ROI might be higher on buybacks though

 

http://www.aircargoworld.com/Air-Cargo-News/2012/12/atsg-uprates-combis/2111479

[no_free_lunch]

I came across this one as I was looking into Air Castle.  I have to say that this one seems more promising.  Lots of great info on the thread so thanks to everyone for contributing.

 

In regards to the D/A, I found this table in the 2011 annual report.  This basically just provides more evidence behind the argument that the D/A is being overstated on an annualized basis.

 

Depreciation of property and equipment is provided on a straight-line basis over the lesser of the asset’s useful life or lease term. Depreciable lives are summarized as follows:

 

Boeing 727 and DC-8 aircraft and flight equipment  1 year

Boeing 767 and 757 aircraft and flight equipment    10 to 20 years

Support equipment    5 to 10 years

Vehicles and other equipment  3 to 8 years

 

Based on this the 727 and DC-8's should have near zero value on the balance sheet.  Any value that does exist should be gone in the next quarter or two.  The remaining fleet is being depreciated, as was noted by packer, based on the lesser of lease time or depreciation time.  Given that the numbers work out to the whole fleet depreciating in 8 years and that the 727/DC-8 are negligible this would imply that the bulk of the remaining fleet is being depreciated using the shorter lease times.  If that were not the case, I think the depreciation would line up closer to this 10-20 year depreciation life as the bulk of the PPE is in the 767/757's.

 

The pension benefit does need to be taken into account.  Hopefully the stock market takes off and that clears up the gap but I would probably assume $10-20M per year to shore it up.  If you look at the pension numbers there are $560M investments and benefits for 2013 will be $27M, ramping up to $40M per year in 2017-2021.  Compared to some pensions this really isn't unreasonable given the assets.  If the company contributed say $10M a year to the pension indefinitely, then in 5 years $30M would be drawn out of a $560M sum (assuming it doesn't grow) or a little over 5% per year.  Seems managable to me and there is a reasonable chance the economy improves enough to narrow the gap.  If the economy really stinks then the number could go up to $15 or $20M so it is up to you how conservative/aggressive you want to be.

 

The one item I see that does concern me is there is a substantial amount spent on "heavy maintenance" each year which is classified as capitialization.

 

Capital expenditures in 2011 included $184.3 million for the acquisition and modification of aircraft, $21.9 million for required heavy maintenance and $6.9 million for other equipment costs. Our capital expenditures in 2010 included $74.8 million for the acquisition and modification of aircraft, $29.9 million for required heavy maintenance and $6.0 million for other equipment costs. Our capital expenditures in 2009 included $69.6 million for the acquisition and modification of aircraft, $25.6 million for required heavy maintenance and $6.0 million for other equipment costs.

 

Since it is a capital expenditure this maintenance would show up on the balance sheet as part of PP&E and bypass the income statement correct?  If so, would it get captured by depreciation.  Do you guys see it as an issue?

 

Packer, you had made reference to an impairment test in 2011 which indicated that the fair value of the fleet was substantially above the book value.  I just can't find it online, do you have a reference?

[Packer16]

The reference to the impairment test is pg. 39 of ATSG's 10-K under the goodwill and intangible asset section.  At this point ATSG is the cheapest with mid 30s FCF yield and 3.8x EBITDA.  AYR has a FCF yield in the high 20s with a 5.6x EBITDA multiple.

 

Packer

[Packer16]

Great Q and nice guidance growth.  2013 EBITDA around $178 million with 8 to 10% growth from there that implies an EV/EBITDA of 3.7x even after the rally so far this year.

 

 

Packer

[rogermunibond]

At this point, should they start looking at share buybacks?  I'm guessing they announce something in the next few months so long as they don't see additional capex opportunities.  It's really time to reap.

[newbee]

In the conference Q/A, management stated that they want to pay down the aircraft debt in 2013 and may look in to other options starting in December 2013.  For now, buybacks are ruled out.

[Packer16]

Nice Q and nice guidance (assuming some idol planes).  If the planes are used then there is am additional 8% in EBITDA upside.  It looks like they have merged 2 subs to save costs and are ready for the next either upturn (buy planes that have leased customers) or flat/downturn (return cash flow to shareholders in 2014).

 

Packer

[Myth465]

Ya I expected an uptick, will listen to the call now, but the numbers look good.

I would like for them to return the 2 planes we are leasing when those contracts run out.

[rmitz]

Anyone hear anything?  There's a ton of volatility on ATSG, but this is a bit more than usual on no news.  I didn't see anything on EDGAR.

[Myth465]

Anyone hear anything?  There's a ton of volatility on ATSG, but this is a bit more than usual on no news.  I didn't see anything on EDGAR.

 

Very curious about this. ATSG is still my largest holding.

My guess is large contracts for the 3 planes which arent working were signed. Someone knows something, thats pretty big volume.

 

 

[Packer16]

An interesting quarter.  They reduced EBITDA guidance $20 million for 2013.  It is composed of $10 million in unexpected gov't inspection costs (???) and $10 million from overestimating synergies. Otherwise only $10 million of the EBITDA is recurring and they will obtain $20 million in EBITDA when the lease the 4 planes off lease by the end of the year.  If no other events occur, then they may have $1 to $1.50 per share of FCF in 2014.

 

I have held for only about 18 months so I am wondering for longer term owners have these types of preventable shortfalls occurred in the past or is this a one-time event? TIA.

 

Packer

[Myth465]

I sold today.

Off by 10% on Friday which I think was fair. I have held for the last 4-5 years.

 

These one time items are getting annoying and Hete pushed too hard and bought too many planes. ATSG inmo is dead money for the rest of the year but will have a good Q1 or Q2. I will buy back at some point, but wanted to raise cash and this was an easy option.

 

Management has always been quite good on the operations side, but the ACMI business for the last 3 quarters has been full of negative surprises, almost not worth it inmo. I prefer to just lease the planes. Also dont like the expansion without the clear plan of how to put those planes to work. We have millions of capex from 2011 and 2012 tied up in those planes. Management even said they bought some of them to block others, and here we are unable to get them working.

 

I thought they would have some contracts this quarter, but it keeps getting pushed back. Now we have the reoccurring one time ACMI charges, and a frothy market. Easy sale, but I will be watching.

[rogermunibond]

Imperial Capital initiates coverage on Air Transport Services Group (NASDAQ: ATSG) with a Outperform. PT $9.00.

 

Analyst Bob McAdoo comments, "ATSG shares are attractive, with our forecast FCF yield of over 16% and net debt only 2.2 times EBITDA. ATSG continues to generate profits and free cash flow despite having 6 of its 57 aircraft unassigned and generally available for growth. With 6 of its 57 aircraft idle, and its ROE at 13.7%, ATSG should be able to generate even greater returns should the economy strengthen and worldwide the demand for cargo services increase."

 

 

Myth - understand the frustration.  For those of us who were in this name prior to 2009, it's been a long ride, first with the DHL split/near death experience and then loading up in the sub $1 range. Agreed that Hete has overreached, would like perhaps less fleet investment and instead return cash to shareholders. Still holding. Good luck to you.

[Myth465]

I have always thought ATSG would do well.

My portfolio though has been a slave to it over the last 3 years, due to getting into it at a low price and increasing my position over time.

 

They could be a cash flow machine, but Hete overreached in an effort to grow and avoid paying taxes.

They will do fine, they have good management and a great board / large shareholders. $9 to $10 is where I think they belong, but grew tired of being wiped around due to it being such a large holding of mine.

 

I tried to time it / trade it and lost. Mr Market isnt as dumb as we make him out to be. I expected a further sell off due to Q3 not going as well either.

We shall see. I hope I get the chance to buy back in. I think they will get the planes leased, have a good integration, and will be throwing off quite a bit of cash around Q1.

[Myth465]

My guess is they have the planes leased.

Someone knows something...

[rogermunibond]

http://theloadstar.co.uk/star-air-may-be-the-next-maersk-unit-to-be-sold-as-ups-contract-is-up-for-grabs/

 

Sept 9 article but perhaps the UPS tender has something to do with the run up.

[rogermunibond]

http://finance.yahoo.com/news/atsg-acquires-equity-interest-west-211300927.html

 

Acquires equity stake in West Atlantic AB.  Solves the question of what to do with excess cash flow. One thing about Hete - man does he always have a use for cash flow, esp. uses that aren't buybacks.

[Packer16]

This looks like a small stake - the total equity of West Atlantic AB is $37m at book value.

 

Packer

[rogermunibond]

https://www.sec.gov/Archives/edgar/data/894081/000089408114000026/atsgbbt2014.htm

 

New presentation for the BBT Capital Markets conference.  Looks like they will be looking for growth opportunities with their FCF.  They talk about seeking highest risk adjusted returns for cash, but don't lay out any options.  My guess is that there's some dealmaking in the works.