Gama Aviation (GMAA)

Finally taking off.....or yet another emergency landing?

I’m grateful to Alex, a fellow investor based in London, for introducing me to Gama Aviation.

This will be my last post before the holidays. Hopefully it’s a great stocking filler - a present from Santa, rather than the sack of coal! Thanks again for following along and I wish you all a happy and healthy new year.

(Two points to note: (1) all figures are adjusted to exclude the recently sold US business and (2) Gama Aviation reports in dollars and so I’ve used the conversion 1 GBP = 1.25 USD)

Gama Aviation is a UK AIM listed company that provides private jet and specialist helicopter services to governments, businesses, and individuals. It has a poor track record as a public company after listing through a reverse takeover in 2015. But I think an inflection point is coming. A failed growth strategy has been reversed and more recently a major asset sale has transformed the balance sheet.

In his thought provoking book, How do you Know? A Guide to Clear to Thinking About Wall Street, Investing & Life, Christopher Mayer advocated adding the year when writing about a company i.e. Gama Aviation [2023]. This addition helps capture a point in time as companies continually adapt and evolve.

This idea is particularly helpful for Gama Aviation, which underwent a major strategic review in May 2020. To highlight the change, I’ll use Christopher Mayer’s suggested nomenclature:

Gama Aviation [2019]. Management’s strategy is to grow by ”consolidating a fragmented” global private jet market with a sole focus on “increasing depth, breadth and scale”. Debt financing is widely used to fund acquisitions, which weakened the balance sheet. Financial results are difficult to interpret due to multiple acquisition adjustments. Profitability is erratic and unreliable.

Gama Aviation [2023]. A new strategy delivering “Focused, demand-led growth” with “considerable scope for…..margin improvement……in areas where the Group has full control and established competitive advantages.” Sale of non-core assets, thereby strengthening the balance sheet. Reduced capital spending and any excess being returned to shareholders. Lower adjustments and growing profitability.

The aforementioned strategic review resulted in three new divisions, which together earned sales of $167 million in FY 2022. This was divided between Business Aviation (64%), Special Missions (33%), and Technology & Outsourcing (3%).

Business Aviation is essentially the rump remaining from the previously failed growth strategy. Sales are split between air elements, such as aircraft management and chartering, and ground based activities such as maintenance and Fixed Base Operations (FBO), which covers parking, refuelling, towing, passenger handing etc.

Geographically, sales are concentrated in Europe (mainly the UK) and the UAE. Where Gama Aviation owns private jet terminals and maintenance hangers located in Bournemouth, Jersey, Glasgow, Aberdeen, and Sharjah (in the UAE).

Special Missions is the other large division. For those who were thinking James Bond spy thrillers (me included), the rather sensationally named Special Missions is not a secret government organisation! Instead, this division provides aviation services to the UK’s military and ambulance services.

Gama Aviation’s relationship with the Scottish Ambulance Service goes back three decades to 1993. Since then, it has operated two fixed wing aircraft and two helicopters that move patients between Scottish hospitals. In the last few years, the scope expanded to include the more complex and time-critical Helicopter Emergency Medical Services (HEMS) - I recommend checking out this rather cheesy UK TV documentary to learn more.

Special Missions also has a contract with the UK military. In 2014, Gama Aviation partnered with Atkins (a military consultancy owned by the Snc-Lavalin Group) to provide helicopter assessments for the Army and Royal Air Force. These Military Aviation Reviews (MARs) are an independent check on the essential maintenance required for a helicopters to deploy on operations.

Before I get too enthusiastic and start bombarding you with more pictures, I’d better introduce the management team. The two founders, Marwan Khalek (CEO) and Stephen Wright (Chief Compliance Officer) have been at the helm for over four decades, after founding Gama Aviation in 1983. Throughout, Marwan Khalek has retained a large ownership stake and today still owns ~22% of all shares outstanding.

Unusually, the largest shareholder is a Hong Kong based public company called CK Hutchinson that owns just under ~30% of all shares outstanding. This large stake was bought for over £2 per share through an equity placing in 2018. At the time, CK Hutchinson were allocated a board position, appointing Chi Keung as their representative.

Intriguingly, Chi Keung was then appointed Chairman in 2019. A post he held throughout the strategic review, before stepping down to become a Non-Exec Director last year. Only the two founders have remained in-post throughout, with a new Chairman and CFO recently appointed.

At 95p per share (or ~$1.2), the current Market Capitalisation is ~$75 million.

Using the last accounts, ending 30 June 2023, Net Debt (including leases) was ~$65 million, giving the entire company an Enterprise Value of ~$140 million. Yet, if we include the net proceeds of ~$100 million from the recently completed sale of the US MRO business. Instead of Net Debt, Gama Aviation has Net Cash of ~$55 million (including leases) - giving the RemainCo an Enterprise Value of ~$20 million. Quite a difference!

What’s also worth considering is the imminent return to shareholders of at least 55p per share (a total of ~$45 million). Tangible evidence that management’s previous growth strategy is over.

Quite honestly, I’m flabbergasted by the RemainCo’s incredibly low valuation. As I already mentioned, this is a business that in FY 2022 had sales of ~$167 million! Furthermore, I’m expecting the new strategy to deliver growing Operating Margins that will eventually reach ~10%. An assumption that values the entire company at less than 2 times Operating Profit - an exceptionally cheap price!

Adrian, let’s be serious, this is a company that historically has barely earned Operating Margins over 5%. What’s with your widely optimistic 10% number!?

Too true. Historical Operating Margins have been much lower. However, I think there’s an obvious path towards ~10%, and to understand this, we must consider each division in turn.

Special Missions is simple because it’s already earning a ~10% Operating margin and has been highly profitable since 2020. It’s also growing, with two large new contracts starting in January 2024:

• A 7-year HEMS contract with the Wales Air Ambulance service with a total contract value of ~£65 million (~$80mm). A fleet of four helicopters will operate from Cardiff, Caernarfon, Welshpool and Dafen providing coverage across Wales. 

• A 5-year contract supporting offshore Oil and Gas operators in the North Sea. A 50/50 Joint Venture with Bond Helicopters, reportedly worth ~£130 million (~$160mm).

Business Aviation is harder to predict - recent results look pretty dreadful and the division has not earned a profit since 2020. Yet, I think the period before the strategic review gives us a good idea of the margin profile.

Over the five years prior to 2020, Business Aviation was split out between Air (management/chartering) and Ground (maintenance/FBO). Air operations earned the majority of revenue, but profitability was unreliable due to the very low margin. In fact, Air operations targeted a meagre 5% Operating Margin, and earned on average only ~1%. Ground activities on the other hand, were much more profitable, targeting 20% Operating Margins, and achieving an average of ~15% over this period.

I’m obviously oversimplifying. But to grow the overall Operating Margins, management can maintain the higher margin Ground activities, whilst reducing lower margin Air operations. Thankfully, this seems to chime with recent actions - with almost all capital expenditure going towards physical infrastructure for ground based activities at Sharjah and Jersey airports.

I’ve reached out to management but the company has thus far been unresponsive. Yet, in all honestly it’s their actions I’ll be watching closely, especially with regard to Business Aviation. As lower margin sales reduce and Special Missions continues to grow, I expect the mix to improve, and Operating Margins to approach ~10%.

Ultimately, given the low price and the strong balance sheet, I think this is one of the best investment setups I’ve seen for a long time. As such, I’m really looking forward to following the company’s recovery into 2024 and beyond.

Disclaimer. This article is for informational purposes only, and should not be seen as investment advice. Please do your own research before investing in any company mentioned.