Profits Take Flight at Nigeria’s Airline Services and Logistics Plc

Airlines generally make for lousy investments.

But the support companies that keep the planes flying and their customers comfortable are a very different story.

Here’s an introduction to one that looks set to deliver promising returns to Nigeria investors.

Photo by Bob Adams

Airlines generally make for lousy investments.

But the support companies that keep the planes flying and their customers comfortable are a very different story.

Due to long-term contracts, reduced exposure to variable costs like fuel, and less intense competition, the performance of such companies is relatively easy to forecast.

If people are flying, profits soar. If they’re staying home, earnings take a nosedive.

A high-flying caterer

Founded in 1996, Nigeria’s Airline Services and Logistics Plc (AIRSERVI) runs in-flight catering, restaurants and duty free shops at Nigeria’s two largest international airports – Murtala Muhammed in Lagos and Nnamdi Azikwe in Abuja. It bills itself as Africa’s largest independently owned airport logistics firm.

After listing on the Nigerian Stock Exchange in 2007, the company enjoyed a strong economic tailwind for several years, growing profits 444% between 2008 and 2012.

But the company encountered turbulence in 2013, when a new competitor, French multinational Servair, squeezed margins tighter than a Boeing 737’s middle seat.

Since then, however, growth appears to have returned to its previous trajectory. Earnings rose 24% last year and have nearly quadrupled in the first quarter of 2015.

Rwanda propels growth

A savvy deal struck by CEO Richard Akerele in faraway Rwanda appears to be propelling the uplifted performance.

Akerele, who happens to be Nigeria’s Honorary Consul to Rwanda, secured a 15-year exclusive concession to run in-flight catering at Rwanda’s increasingly busy Kigali Airport. The deal includes an optional 15-year extension.

The key word here is “exclusive.” No other in-flight caterer can operate out of Kigali during the agreement.

Terms of the deal also grant the company export processing zone status, which essentially means its operations in the country can be conducted tax-free.

The company is reportedly pursuing a similar deal in Sierra Leone, although I’m guessing the Ebola outbreak may have delayed finalization of the agreement.

Other expansion plans include catering deals with oil and gas companies working out of Port Harcourt, Nigeria, an upgraded processing facility in Abuja, and a new cold-storage operation in Lagos.

This growth doesn’t come cheap. Evidence of this comes in the form of an increased debt load, which has risen to 28% of total assets from a level of 12% one year ago. Finance charges in the first quarter of the year skyrocketed more than 500%.

But the company’s operations have been consistently cash-generative, so I expect the bank will take less of a bite from earnings in future quarters.

Lofty performance, down-to-earth valuation

The stock presently trades at a P/E ratio of just 5.6 and sports a dividend yield of 5.7%. Adding to the appeal, is a price to book multiple of just 0.58.

Note, however, that this is strictly a share for smaller investors. With a market capitalization of just north of $6 million and trade volumes that rarely exceed $10,000 per day, institutional investors will find it exceedingly difficult to build a meaningful stake.

But for smaller pockets, the stock’s potential is sky-high. If CEO Akerele continues to pilot this company as deftly as he has done in recent years, I expect investors will be delighted with their returns from the shares five years from now.

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