Aircraft leasing group Avation (LSE: AVAP) and digital banking technology specialist Monitise (LSE: MONI) both published full-year results this morning. In this article, I’ll look at the latest figures from these popular small-caps and ask whether the outlook offers potential for big gains.
Significant progress
Sales fell by 24.7% to £67.6m at Monitise in the latest year, in line with guidance. But the group’s EBITDA loss was reduced by more than half to £19.6m, and Monitise reported an EBITDA profit of £0.6m for the second half.
Performance improved significantly during that half as cash from operations turned positive, rising to £400,000. However, the business remained heavily lossmaking, reporting a pre-tax loss of £32.6m for the period.
Net cash fell from £88.8m to £42.1m during the year, but cash consumption was reduced to £11.9m during the second half, from £36.4m in the first half. As Monitise is lossmaking, this is a key metric for investors. A lower rate of cash burn will give the group more time to become profitable.
Monitise hopes that its FINKit digital services solution will replace many of its legacy licence-based contracts. But persuading clients to agree new long-term contracts is “taking longer than we had anticipated” according to chief executive Lee Cameron, who says that Monitise “remains a business in transition.”
I was initially encouraged by today’s figures, but the group’s outlook statement has left me uncertain about the future. Group revenue is expected to decline and no mention was made of EBITDA guidance for the current year. This suggests to me that Monitise may not maintain the EBITDA profitability seen over the last six months.
Record profits boost dividend
Avation reported revenue of $71.2m last year, a 25% increase on the previous year. Operating profit rose by 35.6% to $45.6m, lifting the group’s operating margin from 59% to 64%.
Earnings per share rose by 42.5% to 34.2 US cents and the dividend rose by 8.3% to 3.25 cents. This gives the shares a trailing P/E of 6.2 and a dividend yield of 1.5%. The stock’s valuation looks cheap relative to earnings, even though the yield is low.
The main reason for this is Avation carries quite a lot of debt. When its aircraft are all leased at profitable rates, this isn’t a problem. However, in the event of a sector downturn, debt repayments could become problematic.
Avation added nine new aircraft to its fleet last year, causing net debt to rise to $567.5m at the end of June, up from $319.5m one year earlier. The group’s loan-to-value (LTV) ratio remained almost unchanged at 74%, up by just 1% from last year.
This stability is reassuring, but I think that 74% is quite high. I’d rather see LTV closer to 50%. This would reduce financing risks in a downturn and enable Avation to return more cash to shareholders — Avation paid $26m in interest payment last year, but just $1.6m in dividends.
In fairness, Avation appears to be executing well. The shares have risen by 25% so far this year. Growth is expected to continue and the shares could deliver further gains if market conditions remain favourable.
