There are plenty of cheap industrial and services small-cap stocks on the market, some cheap for good reason, but others where the entry level being asked looks attractive. Here are two single-digit price/earnings (P/E) ratio stocks – both wholly Australian exposures – that fit that bill.
1. Alliance Aviation Services (AQZ, $2.94)
Market capitalisation: $473 million
12-months total return: –16.2%
Three-year total return: –11.6% a year
Estimated FY25 yield: 2%, unfranked
Estimated FY25 price/earnings ratio: 7 times earnings
Analysts’ consensus price target: $4.48 (Stock Doctor/Refinitiv, three analysts)
The best little airline business you’ve probably never heard of, Alliance Aviation Services is Australia’s leading provider of contract, charter and allied aviation and maintenance services. It serves airlines like Qantas and the mining, energy, and government sectors, operating 70 aircraft.
But Alliance does not sell tickets: its flights are typically either contracted services on behalf of resource sector customers – flying the fly-in-fly-Out (FIFO) workforce in and out of remote sites – or “wet-lease” flights, where it operates flights on behalf of carriers such as Qantas and Virgin Australia, and provides not only the aircraft, but the crew, to the client. The company has smaller businesses in regular passenger transport (RPT) flight services that it operates on behalf of governments, on routes where major airlines don’t fly, although it is slowly reducing this business, and also ad hoc charter flights, and aviation services. Contract flights generates 51% of revenue, and wet lease 42%.
In both the contract and wet-lease businesses, Alliance usually charges a fixed fee and an hourly rate per flight; regardless of the number of passengers on the flight, Alliance gets paid the same.
When the airline industry was savaged by the COVID-19 pandemic, Alliance decided to invest in capacity, to turn the industry downturn to its advantage, striking two very advantageous deals in FY21 to buy 30 Embraer E190 jets, 14 from Panamanian flag carrier Copa Airlines and 16 from American Airlines. Alliance operated 36 aircraft pre-COVID, but at the end of calendar 2024, it had almost doubled that to 70, all owned.
By the end of FY24, AQZ operated a fleet of 74 aircraft, comprising 37 Fokker 70/100 and 37 E190s. In February 2023, it announced it plans to acquire an additional 30 E190 aircraft, potentially taking its total fleet size to 100 aircraft by January 2026. Alliance specialises in 80 to 100-seat jet aircraft, which are the ideal size for both FIFO and wet lease demand. Owning its fleet enables Alliance to offer flexible, low-cost operations.
With contract charter revenue mainly coming from FIFO services for the resource/energy sector, commodity prices and mining production levels are key demand drivers. Ad hoc charter and wet leasing is driven by AQZ’s surplus fleet capacity and market demand.
Qantas is a very significant client, with a contract to wet-lease up to 30 Embraer 190s for domestic and short-haul operations. Qantas also has options to take another three E190s by the end of June, with one more in July. Qantas is also a major shareholder: it owns just under 20% of Alliance Aviation, and last year was blocked by the Australian Competition and Consumer Commission (ACCC) from taking over Alliance wholly, in what would have been a $614 million deal.
In the half-year to December 2023, the highlight was Qantas wet lease flight hours more than doubling to 35,191 hours, with a consequent 106% surge in wet-lease revenue, to $128 million. Contracted FIFO revenue grew by 2%, to $155 million. 96% of flying activity in the year was operated for long-term contract charter or wet lease clients. Total revenue was up almost to 28%, to $304.5 million; earnings before interest, tax, depreciation and amortisation (EBITDA) was up 90%, to $80.4 million, and net profit surged almost 300%, to $26.3 million.
AQZ has not provided any formal FY24 guidance. But the company has said that it maintains a positive outlook as it continues to capture growth from its recent capital investment (planes). Alliance says demand for its contract services remains strong, with both wet-lease and FIFO contract clients requesting additional capacity as soon as it is available.
Analysts see significant earnings increases coming for Alliance as the Qantas contract and the FIFO operations benefit from the increased fleet, and the demand outlook from rising mining activity. However, shareholders were reminded earlier this month of the risk attached to providing services to miners, with the news that BHP was considering shutting its Nickel West operation in Western Australia, because of low nickel prices: Nickel West has 3,300 employees, and Alliance has been flying them in and out since 2006 (Nickel West was the company’s first client in WA.) It only signed a five-year contract extension with the operation in November.
The company does have up to $336 million of aircraft settlements that it needs to fund over the next 2.5 years. Alliance’s debt has increased to $244.6 million – more than half the market capitalisation – but the company has a very good relationship with its major bank, ANZ. Broker Morgans says there clearly is a funding gap to finance all the E190s, and AQZ is considering various financing options including debt facilities, sale of aircraft (at a profit) and deploying operating cashflow from increased activity. But Alliance will likely need $70 million–$80 million of additional capital in FY25.
In the meantime, at 7 times expected earnings, analysts view Alliance as being very cheap, with plenty of scope for share price growth as earnings rise.
2. Lindsay Australia (LAU, $1.09)
Market capitalisation: $340 million
12-months total return: 61.9%
Three-year total return: 53.8% a year
Estimated FY25 yield: 6%, fully franked (grossed-up, 7.5%)
Estimated FY25 price/earnings ratio: 7.3 times earnings
Analysts’ consensus price target: $1.562 (Stock Doctor/Refinitiv, four analysts)
Brisbane-based Lindsay Australia is an integrated transport, logistics and rural supply company that serves the agricultural and horticultural industries, with operations focused through three main brands:
• Lindsay Rural: Sale of packaging supplies for agricultural products, fertilisers, chemicals, and irrigation equipment.
• Lindsay Transport: General, dry, and refrigerated transporting.
• Lindsay Fresh Logistics: Storage, fumigation, ripening, and import and export services of fruit and vegetables.
The company offers end-to-end services, operating between growers, markets, input manufacturers, distribution centres and multi-service centres. Lindsay owns 350 trucks, 700 reefer trailers and 650 containers: Lindsay Transport operates a hybrid logistics model of road and rail, with Pacific National (PN) providing rail haulage services for more than 350 company-owned refrigerated rail containers. In FY23, the company’s rail kilometres exceeded road kilometres for the first time in its history: the company’s annual general meeting (AGM) in November heard that rail kilometres were tracking 35% ahead of the same time in 2022.
Lindsay also owns Victoria-based WB Hunter, a leading rural merchandising operator, which diversified the company’s revenue streams into new horticultural regions, in Victoria and New South Wales. About 60% of revenue comes from horticulture; almost 50% of the company’s freight tasks are based on goods and products with a regional origin or destination.
The bear case for Lindsay is that agriculture-linked companies will come under pressure as El Nino takes over from La Nina, which implies dry conditions and possible drought. But broker Shaw & Partners is one that believes Lindsay is ideally positioned for long-term and profitable growth, with a very attractive and large total addressable market, which is very fragmented; as a leader in its businesses, with an offering in the refrigerated logistics space of a size and quality that would be difficult and expensive to replicate.
Lindsay estimates that it has about 15%–16% market share of the $18 billion Australian horticulture market, and about 10% share of the Australian refrigerated logistics market. As fuel and labour costs bite the transport industry, Shaw believes that the company’s scale and efficiency can boost its market share, enabling it to drive greater scale benefit.
In FY23, Lindsay Australia’s revenue rose by 22.4%, to $676.2 million: transport revenue grew by 29.5%, to $513 million – one-quarter of that generated by the rail business – and the Rural division lifted its revenue by 4%, to $163 million. Earnings before tax, depreciation, and amortisation (EBITDA) jumped 50.3%, to $90.3 million, while underlying net profit was 95% higher at $36.5 million. That enabled a 53% lift in the final dividend, of 3 cents a share, boosting the full-year dividend by the same proportion, to 4.9 cents a share, fully franked.
If LAU were to pay the same dividend in FY24, it would be trading on a projected yield of 4.5%: but analysts expect a dividend of 6.2 cents a share in FY24 and 6.5 cents in FY25, implying an expected FY25 yield of 6%. And with reasonable earnings growth expected this year and next, the stock is priced, on analysts’ consensus estimates, on 7.8 times expected FY24 earnings and 7.3 times expected FY25 earnings. That is a very attractive entry point to a growing business.
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