Menzies finding it difficult to take off
John Menzies (LSE: MZNS) is focused on aviation services since it sold its distribution business. However, the remaining business has its problems and a trading statement last month led to downgrades ahead of its interims on 13 August.
Cargo traffic has been hit by worries about global trade. EMEA appears to be weak, while North America is holding up better. The interims will provide further information about trading in the different geographic regions.
Some airlines have had their financial problems and Boeing is not in a good place following plane crashes. That could hamper any improvement in sentiment in the second half.
There could be news in the results announcement about the efficiency improvements that the management is trying to achieve in order to offset trading problems. The target is annualised savings of £10m, although they will benefit 2020.
Positive trading news would help, but short-term visibility is poor. Volumes are important because of the operational gearing of the business.
On the positive side, Menzies has managed to renew contracts and win new business in the first half.
The total dividend is expected to be maintained at 20.5p a share, providing a yield of nearly 5%. Any reduction in the dividend is likely to be taken as a negative.
Net debt is expected to be £384m at the end of 2019 and there could be considerations about cutting the dividend so this cash pile can be reduced more quickly. However, around 50% of this debt is operating leases, which were not included in debt prior to the recent accounting changes.
Cash generation can cover capital investment and the dividend over the next three years and enable a reduction in overall debt.
The pension deficit has fallen and will not be significant in a couple of years.
This year’s earnings forecast has already been cut by 9%. Shore Capital believes that earnings per share will decline from 37.6p to 34p, which is barely much more than the 2017 figure.
However, accounting regulation changes mean that the comparisons are based on previous regulations that increase profit and it is assumed that they will not be restated. The underlying performance is flat.
At 419p, the shares are trading on just over 12 times. There could be a recovery in profit next year, but it is difficult to be confident.
Menzies needs a more settled and confident outlook for global trade before the share price enjoys a consistent recovery. The share price has fallen by around two-fifths since its high point two years ago. Longer-term, the outlook for aviation remains positive despite the environmental concerns.
By: Andrew Hore