Menzies has high hopes for aviation

John Menzies will this week see profits in its aviation business surpass its distribution side for the first time in the Edinburgh-based firm’s 178 year history.

Craig Smyth, the managing director of Menzies Aviation, expects full year figures to show continued growth, and has predicted that the aviation division will be on the scale of a FTSE-250 company in the next ten years.

Analysts agree that the firm is set to grow its share of the worldwide ground and cargo handling market – currently at 2 per cent – to 4 per cent by 2020, which will bring the division’s current revenues from an estimated £683 million in 2011 to £2.5 billion.

Smyth said: “We are operating in a £37bn market. Over the next ten years this will grow to by 45 per cent as more people fly, particularly in India and China.

“Over the next ten years I predict our market share will grow from 2 per cent to 4 per cent, in that case it is a £2.5bn business.

“By then aviation in its own right will be a FTSE 250, if not the group will be a FTSE 100 business, and that is conservative.”

Menzies, which is unusual in running two completely different operations under one management, has so far been misunderstood by the City, Smyth believes.

He, as well as analysts at Liberium Capital, expect the firm’s shares are set to be “re-rated” as City recognises the importance on Menzies’ balance sheet of the fast-growing aviation division.

In a note to investors, Liberium wrote: “We expect reweighting to higher rated aviation to continue and believe the shares should rerate,” adding that “the current P/E [price to earnings ratio] is well below the range from 2005-2008 when aviation was a much lower proportion of the total group”.

Dubbing the combination of the aviation business and the newspaper and magazine distribution business as “chalk and cheese”, Liberium added that there was “no obvious reason to separate the business”.

In particular the aviation division can rely on the predictable cash flow of the other division, which mainly relies on declining newspaper sales for its income, to fund growth.

Smyth said: “The market is now listening, it is taking notice of us. We use the money [produced by Menzies Distribution] to return to shareholders in dividends, to grow distribution where we can but more so to grow the aviation business.”

He admits he was once in the “separatist camp” of those who think the businesses should run wholly independently, particularly as it acts as a drag on the firm’s share price.

“Sometimes in the past I have been in the separatist camp, thinking why have we [our shares] not been rerated?”

Smyth confirmed that the aviation business would probably continue its growth on an organic basis but would not rule out acquisitions.

“There is some opportunity for acquisitions, we could get there more quickly,” he said.

“If something was good value out there, we will have a look at it.

“If you are looking at spending £25m to £50m, that could be funded through existing facilities. If it’s more banks could lend to us or we could raise capital.”

Menzies Aviation is the second largest cargo and ground handling company in the world, behind private equity-owned Swissport.

Consensus forecasts expect the combined group to report pre-tax profts of £55.3m for the year to the end of 2011 on revenues of £1.9bn.

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