Tuesday, June 2, 2020

Magellan Arrow Space

Magellan Aerospace's stock price has gotten absolutely obliterated, down 71% from its 2-year high and down almost 60% since February. The company name says it all; who wants to bet on air travel at a time like this? Any manufacturer reliant on Boeing and Airbus that has fixed obligations coming up could be in serious trouble. But sometimes, babies get thrown out with the bathwater, and I believe this to be the case here.

The company's debt (including all lease obligations and pension deficits) adds up to almost $140 million, which on the surface seems daunting when the near-term income is so uncertain, so let's take a closer look at when these are due:

Much of the debt is spread out and not due for many years. The $42 million due within a year is the most daunting obligation here, but $40 million of that is part of a trade receivables securitization program. The receivables balance was $214 million as of March 31st. You might think a lot of that is iffy if it's all due from Boeing or something like that, but Magellan only counted on Boeing for 16% of its 2019 revenue. Airbus represented 23% of revenue. The rest is spread out among military and other more reliable customers that are unlikely to be as affected. The ultimate customers for some of Magellan's parts are often national governments, which are unlikely to halt payments.

Finally, about $60 million of the debt represents lease liabilities that cost about $6 million per year. Within the context of the company's $32 million cash balance and $380 million working capital, these seem like manageable amounts.

Insiders seem to feel as though the company's obligations are well in hand as well, as Magellan recently paid out its quarterly dividend as usual, representing an annual yield of 7% at today's price. While the company's share count has not budged in years, last week the company initiated a normal course issuer bid, which gives it the ability to buy back 5% of the company's shares over the next year.

Now that you may be convinced MAL will be able to survive this downturn, let's take a look at the company's valuation. MAL has an enterprise value of $460 million and has average annual operating income of $105 million over the last two years. The company's ROE is consistently well into the double-digits, and yet the company currently trades for less than half of its tangible book value. Even if you make some really conservative assumptions about what happens to their commercial air travel customers over the next few years, it's difficult not to see good value here over the long term. The company is controlled by its chairman (billionaire investor N. Murray Edwards), who owns 74% of the company's shares. Often, control of a public company can be a bad thing, as this allows a manager to loot a company at the expense of minority shareholders. In this case, however, the chairman does not appear involved in the day to day operations of the company. He's not here to rob the place.

In fact, perhaps just the opposite. A strong shareholder can ensure management does not capture the board in order to dramatically increase agency costs. There is evidence that's exactly what's happening, as management compensation is remarkably reasonable for a company with this historical level of success. The company's CEO had total compensation of $680,000 last year. You don't see that often at a company generating over a billion dollars in revenue.

Magellan looks like a quality company that is very cheap in the long-term. It appears to have the ability to survive the current downturn, thanks to a spread-out term structure and reliable government customers.

Disclosure: Author has a long position in shares of MAL.TO

1 comment:

Anon said...

Thanks for this well thought out article.

However, the share price reduction is partly justified. The pandemic is likely to be a significant blow. The Boeing and Airbus business (approx. 40% of 2019 revenue) could take years to recover. Also current assets include inventories and receivables totalling $432m in March which are quite sizable for a billion $ business. How much write off will there be in these for the lost business.


Satinder Jolly