| Air Wisconsin (OTC: HRBR) – The Undiscovered Airline IPO Posted: 09 May 2021 12:02 PM PDT Summary Harbor Diversified (OTC: HRBR) is one of the strongest risk-reward opportunities on the market today. Harbor diversified is a non-operating entity that owns Air Wisconsin – a U.S. domestic regional airline that remains undiscovered and undervalued by the market. A 400% upside to the current share price of $1.84 is easily achievable based on the company's existing economics being fully understood and realized by the market. Mispricing - This opportunity exists because of the dynamics surrounding how this security became publicly traded and the fact that it is an illiquid micro-cap security trading on OTC markets.
- Air Wisconsin (AirWis) became Harbor Diversified, Inc. via a merger in 2011 with Harbor Biosciences, a cash-burning pharma business with substantial NOLs and deferred tax assets for the profitable AirWis to take advantage of.
- HRBR went dark and ceased to publish filings with the SEC, leaving investors unaware of the merger. Nine years later, an investor Travis Martin learned of this merger and filed a lawsuit demanding that HRBR release financials, as they had >300 shareholders.
- Consequently, HRBR released its 2019 10-K in July 2020, revealing an undiscovered airline IPO that lacked the fanfare and marketing of a traditional IPO process.
- Over the past few months, we have learned about the company in bits and pieces via quarterly filings, with the 2020 10-K being released on April 1, 2021. Given these facts, AirWis trades at 1.2x 2020 EBITDAR, 0.5x 2020 revenue, 3.3x 2020 earnings, 0.7x year-end 2020 book value, and generates a 61% free cash flow yield.
Business - HRBR is a holding company that now consists solely of AirWis and the NOLs of the pharma business ($19.1 million of DTAs); the remainder of the pharma business was liquidated.
- It owns 64 CRJ-200 aircrafts and flew four million passengers annually pre-pandemic.
- The company operates under a capacity purchase agreement (CPA) with United Airlines (UAL), in which AirWis serves as a United Express regional carrier.
- AirWis operates routes to 36 cities across the US, all of which depart from or arrive at two UAL hubs: Chicago O'Hare and Washington Dulles.
- Market cap of $100 million and generated $185.9 million of revenue in 2020 at a 23.3% EBIT margin and a 41.6% EBITDAR margin.
- $76.9 million of net cash and trades at 0.5x today's book value. AirWis generated $1.11 in FCF per share in 2020.
- Trades at 1.2x 2020 EBITDAR, 0.5x 2020 revenue, 2.5x 2020 earnings, 0.7x year-end 2020 book value, and generates a 61% free cash flow yield.
Industry - Regional airlines provide aircraft, fleet maintenance, and crew; the larger airlines pay for fuel and aircraft insurance, sell tickets, and plan routes. A typical contract compensates the regional airline on the basis of operating statistics such as number of departures, timeliness, customer satisfaction, and available seat miles (ASM).
- Regional airline industry relies primarily on leisure travel. This industry will benefit immensely upon the economy reopening, with pent-up leisure travel demand serving as a tailwind for the latter half of 2021 into early 2022.
- Air Wisconsin strategically anticipated this by announcing 5 new routes departing from Milwaukee: to Charleston, South Carolina; Myrtle Beach, South Carolina; Pensacola, Florida; Portland, Maine and Savannah, Georgia.
AirWis has strong unit economics because of the UAL contract - On an ASM basis, AirWis earns $90 in EBITDAR per ASM, compared with ~$20 for regional CPA peers Skywest Airlines and Mesa Airlines.
- In October 2020, AirWis's contract with UAL was renegotiated and incentive-based components were suspended, tying the economics of the contract entirely to the operating statistics plus a fixed payment, regardless of flight volumes.
- The contract provides an extension until February 2023, with two renewal options to 2025 and to 2027. Pre-contract renewal, AirWis earned $35 per ASM, compared to ~$20 for peers. It is clear that AirWis had superior contract economics before the pandemic and obtained even better terms with UAL during the pandemic.
- AirWis saw more favorable EBITDAR margins with an astonishing 41.6%, far outpacing Mesa's 13.1% and Skywest's 11.2%.
- AirWis's contract economics are stronger than peers because of the history between the two companies and the flight route economics. AirWis has been flying as a United Express carrier since the early 1980s and pioneered the concept of codesharing as a regional air carrier. Their relationship with United is far more entrenched than Skywest's, who started serving UAL in the early 2000s, and Mesa's, who started serving UAL in the late 1990s.
- Furthermore, AirWis's flight routes out of IAD operate at near monopoly status with greater passenger density, given that United is the only airline with a hub at Dulles (comparatively, Mesa and Skywest operate primarily out of more "crowded" hubs, e.g. LAX, where UAL, DAL, and AAL all share a hub). AirWis's routes out of IAD have shorter distances comparatively, yet still command price premiums given the monopolized status of these routes. Thus, given the long and favorable history of service between UAL and AirWis, and the fact that the routes AirWis serves operate as monopolies with high passenger density, AirWis has been able to achieve superior contract economics than peers.
Government support has provided substantial cash - AirWis received a total of $42 million from the US government in 2020 from the CARES Act PSP1 and another $10 million from the PPP loan.
- This year's strong earnings, largely driven by government support and reduction of lease expense, enabled AirWis to increase its cash balance from $69 million to $130 million during 2020 without raising any debt aside from the PPP loan.
- AirWis will receive a further $60.1 million in 2021 from the US government through PSP2 and PSP3, according to the US Treasury. With this government support, AirWis will earn 1.0x its market cap in net income this year.
- AirWis is extremely unlevered compared to peers, sitting at a net debt/EBITDAR of (1.0x) compared to peers Mesa and Skywest with 5.0x and 8.8x, respectively.
- As of the announcement of PSP2 and PSP3, AirWis has $72.9 million of net cash (incl. leases). This towering net cash balance will create the opportunity for AirWis management to deliver cash back to shareholders via a special dividend or share repurchases.
AirWis will become profitable on a normalized basis due to lease purchases - In 2021, earnings will be stronger than in 2020, but these numbers are not indicative of AirWis's future earnings power due to the enormous amount of impending government support.
- On a normalized basis, using 2019 flight volumes, AirWis will generate $20 million in annual unlevered net income, for a ~8% net income margin. This margin improvement is substantial over pre-pandemic levels, which were razor thin when factoring in one-time add-backs. The improvement is purely driven by the elimination of $40 million in annual rent expense with an incremental step-up in depreciation. This move by management was clearly margin-accretive for the business; normalized earnings will be profitable.
Valuation – Book Value Approach - Year-end 2020, AirWis had $2.12 of book value per share. For today's book value, we add back current and long-term deferred revenue ($43.2m), which will come in as earnings in 2021. We also add back the $10m PPP loan, which is forgivable. We arrive at an adjusted book value of $3.09 per share. On top of this, AirWis will receive $60.1 million from PSP2 and PSP3 to offset payroll in 2021. Adjusting for PSP2 and PSP3, we arrive at our base case of $4.19 per share.
- Furthermore, pre-owned CRJ-200s sell for $1.3 million. Even if HRBR were to liquidate, selling the 64 aircraft at 75% of the market price would generate enough cash to cover the market cap. Adding in the $76.9 million of net cash would yield a share price of $2.51.
Valuation – Earnings Power Approach - At normalized net income of $20 million, applying a 10x multiple and assuming a dollar-for-dollar conversion of $76.9 million in net cash, we arrive at a $5.84 share price.
- At 14x, we obtain a $7.30 share price.
- The discrepancy in price and value for this business is too large to ignore.
Catalysts - The primary catalyst for a rerating is capital allocation. The majority shareholder in the business is Richard Bartlett, who controls 26% of shares outstanding.
- Inside ownership is 36%, demonstrating strong alignment of incentives. Management has chosen to stay in the dark for 9 years, but after posting strong financial results and attracting substantial investor interest, they cannot remain in the shadows.
- Management has announced a share buyback program, where they will set aside an additional $1 million each month to repurchase shares. ~$13 million, an astounding 20% of market cap, has already been set aside for the program.
- While shares have yet to be repurchased, management is creating a war chest whose value will soon be unlocked by shareholders. Another capital allocation-related catalyst would be the announcement of a special dividend.
- With $76.9 million in net cash and a $65 million market cap, simple capital allocation decisions surrounding a dividend or repurchases would prove to be imminent and tangible catalysts, prompting a proper multiple rerating.
- The "call option" catalyst is an uplisting to a major stock exchange from their current OTC existence.
- An additional catalyst is the release of the next quarterly filing. The disclosure of $60.1 million of government funding from PSP 2&3 causing net cash balance to explode from $6.8 million year-end 2020 to $76.9 million today will be an eye-opening result to investors.
Conclusion HRBR is worth base case $5.84 and bull case $7.30. The share price will increase as a result of upcoming earnings announcements, which will point out the fact that the business received a $61m check in cold hard cash from the government earlier in 2021. Dividends and share buybacks will provide further upside potential. Overall, Air Wisconsin provides one of the strongest risk-reward opportunities in the market today, with a substantial margin of safety with downside protection. Disclaimer: Nothing contained in this post should be construed as investment advice. submitted by /u/SQ350_14K [link] [comments] |
No comments:
Post a Comment