Why investors should keep an eye on Alliance Aviation (ASX:AQZ) shares

While the aviation industry faces unprecedented challenges, the Alliance Aviation share price has increased in value by more than 200% since March.
The post Why investors should keep an eye on Alliance Aviation (ASX:AQZ) shares appeared first on Motley Fool Australia. –

asx share price on watch represented by group of prople all looking through magnifying glasses

The COVID-19 pandemic has upended the airline industry, halting international and domestic travel. Despite this, one aviation services stock has increased in value by more than 200% since March.

Alliance Aviation Services Ltd (ASX: AQZ) generates income by providing contract, charter and allied aviation services to the mining, energy, tourism and government sectors, both locally and internationally. It is one of the few aviation companies that delivered a profit before tax of $47.7 million in FY20 (+24.1% compared to the previous year).

In recent weeks, the airline industry has been in survival mode. Listed companies such as Air New Zealand Limited (ASX: AIZ) and Cathay Pacific Airways Ltd are being placed under scrutiny. However, while the aviation industry faces unprecedented challenges, long-term investors have enjoyed a 5-year investment return of more than 470% in the Alliance Aviation share price.

Let’s take a closer look at Alliance Aviation.

Strong return on capital employed

Return on capital employed (ROCE) is one of the most popular metrics used to assess how well a capital intensive company is generating profit from its capital. The formula for ROCE is:

Earnings before interest and tax (EBIT) divided by capital employed = ROCE.

(Capital employed is the difference between total assets and current liabilities)

Using this formula, Alliance’s ROCE is $43.4 million/($435.9 million − $70.8 million) = 11.9 cents (based on its FY20 results presentation). This means for every $1 of worth of capital deployed by Alliance Aviation, the company was able to earn 11.9 cents in profit as of June 2020.

On the other hand, Cathay Pacific has a ROCE of −HKD10,913 million (equivalent to −A$1,978 million) /HKD143,455 million (equivalent to A$26,001 million) = −7.6 cents (data sourced from the Hong Kong Stock Exchange as of 22 Oct 2020)

Air New Zealand’s ROCE is −$87 million/($391 million − $44 million) = −25.1 cents (data sourced from FY20 annual financial results).

So, Alliance Aviation’s ROCE is 11.9 cents per capital dollar, versus −7.6 cents per capital dollar for Cathay Pacific, and −25.1 cents per capital dollar for Air New Zealand.  

The calculations above show that Cathay Pacific and Air New Zealand are larger businesses than Alliance Aviation in terms of EBIT. However, when using the ROCE metric, investors can see that Alliance Aviation is generating profit more efficiently from its capital than the other two. 

Reliance on the commodities industry

In addition to the ROCE, Alliance Aviation’s total FY20 revenue grew to $298.2 million, (+7.8% compared to FY19). It also recorded a strong cash flow of $98.8 million (+929.2% compared to FY19). The growth is due to an increase in additional flights from its clients and the equity raising for fleet expansion.

Unlike other aviation and airport businesses, Alliance Aviation has provided aviation services to mainly iron ore, gold, copper and uranium sectors, with the commodities industry representing 53% of its total contract value in FY20. 

I think the earnings outlook of Alliance Aviation remains positive in the near term. Based on data released by the Department of Industry, Science, Energy and Resources (DISER) in March, Australia has a resources and energy export market of $299 billion in 2020, which I think Alliance Aviation looks to be well positioned to benefit from. 

Foolish takeaway

From a financial perspective, Alliance Aviation has a relatively strong industry ROCE. It means that the company has been utilising its capital well amid the pandemic.

Even though the aviation industry is currently facing acute danger, I’d argue that Alliance’s most valuable assets are its strong business fundamentals, which have contributed to the Alliance Aviation’s impressive share price return over the past 5 years.

Man who said buy Kogan shares at $3.63 says buy these 3 ASX stocks now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

In this FREE STOCK REPORT, Scott just revealed what he believes are the 3 ASX stocks for the post COVID world that investors should buy right now while they still can. These stocks are trading at dirt-cheap prices and Scott thinks these could really go gangbusters as we move into ‘the new normal’.

Find out the names of our 3 Post COVID Stocks – For FREE!

*Returns as of 6/8/2020

More reading

The post Why investors should keep an eye on Alliance Aviation (ASX:AQZ) shares appeared first on Motley Fool Australia.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android App - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US Trades. Click Here!