Despite a volatile operating environment, particularly in the second half, Skywest Airlines*, the Australian and South East Asia regional airline, yesterday announced a pre-tax profit of Singapore $14.26 million (£6.43 million), a year on year increase of 178% for the 12 months to June 30th 2010. Earnings per share increased by 194% to 4.71c (2.12p) and the final dividend was increased by 10% to 1.1 cents per share (0.52p). The company is somewhat cautious in terms of the near term outlook as a result of mixed signals concerning the Australian economy, exchange rates and fuel prices.

However the introduction of new routes, a modest increase in its fleet size, and the abolition of the proposed Resources Super Profits Tax in Australia give us confidence that the six months to December 2010 will show some improvement over the last financial year’s first half performance. We will be reviewing our estimates for 2011 but believe that on an historic price earnings ratio of just 8.3, coupled with strong asset backing (net tangible assets of 10.1p per share), the shares offer good value and we reiterate our buy stance.

The second half of the year was clearly not as strong as the first six months with Skywest adding S$4.13 million to pre-tax profits compared with a first half contribution of S$10.13 million, off a similar revenue base, suggesting a deterioration in margin. The Board states that the proposed Resources Super Profits Tax ‘caused a weaker overall profit result than would otherwise have been achieved’. Increased fuel prices and a weak Australian dollar did not assist.

Given these tough trading conditions the full year results were highly creditable. Total revenues increased by 18.7% to S$215.2 million (£96.9 million) and profits showed significant increases at all levels. Earnings before interest, tax, depreciation and aircraft rentals rose by 43.9% to S$52.8 million (£23.8 million) and net profit after income tax increased by 189.3% to S$9.2 million (£4.2 million).

Cash conversion was extremely strong with cash generated from operations at S$30.1 million (£13.6 million). The balance sheet remains strong with net cash of S$5.7m (£2.6 million) despite capital expenditure of S$25.5 million relating largely to new aircraft. Net tangible assets increased by 25.8% to S$ 42.3 million.

Skywest’s dual model of regional airline, and charter services to corporate clients, largely in the Australian natural resources sector, has served it well during a period where most airlines have been struggling  just to survive. Since 2006 its revenues have more than doubled. The charter side of the business came under some pressure in the year just ended due to proposed changes in the Australian taxation regime. According to the Board, these factors appear to have been mitigated and the sector is returning to growth.  The company has also shown its flexibility by securing a contract outside of the resources industry, to distribute Perth’s major daily newspaper, The West Australian, throughout Western Australia.

Since the year end the Australian dollar has appreciated by c7% against the US dollar and the price of crude oil is now 17% below it 12 month peak from May 2010. These factors should help Skywest’s margins to recover this year. The company is also in a good position to drive passenger numbers higher. The company states that the regular airline side of the business is continuing its organic growth and the company is expanding its route network. Subject to local regulatory approval, the company will soon addan Airbus A320-200 to its existing fleet of 17 aircraft. This aircraft is larger than the Fokker aircraft that make up the current fleet.

We will be issuing 2011 forecasts in the next month when management return to the UK. However with the shares now on an historic price earnings ratio of just 8.3, enjoying solid asset backing and offering a dividend yield of 2.9% we rate the shares as a buy.

Results table

*Skywest Airlines is a corporate client of Bishopsgate Communications, which is owned by Rivington Street Holdings, the ultimate owner of GE&CR. The SF t1ps Smaller Companies Growth Fund, managed by another subsidiary of Rivington Street Holdings, owns shares in Skywest Airlines.

This research note cannot be regarded as impartial as GE&CR has been commissioned to produce it by Skywest Airlines*, it should be regarded as a marketing communication.

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