Westwind Partners preview on Discovery Air quarter

With earnings out later this week, here is the preview note from Westwind Partners:

Discovery Air Inc. (DA.A-T: $1.50)
Rating: BUY Target: $2.25

Mkt. Cap: $196 MM ‘09 EV/EBITDA: 6.1x Total Annual Ret.: 50%

Q2/08 Earnings Preview: BUY Ahead of Seasonal Strength

Insight or Development:

Discovery Air is expected to report Q2/08 results on September 13, 2007, with a conference call the same day at 2:00 p.m. EST (Phone: 416-644-3418). We expect Q2/08 revenue of $46.1 MM, EBITDA of $19.5 MM and EPS (FD) of $0.09.

Analysis:

The second quarter (three month-period-ended July 31) is expected to be a seasonally strong quarter for Discovery Air. With the Top Aces acquisition closing in the third quarter, the company’s Q2/08 operating results will be driven solely by Air Tindi, Great Slave Helicopters (GSHL) and Hicks & Lawrence (H&L). Air Tindi and GSHL are expected to post strong results, with both subsidiaries benefiting from the busy summer activity in Northern Canada. While a slower-than-anticipated forest fire season may result in some weakness from H&L, we expect that this weakness will likely be offset by strong performances from the other subsidiaries.

In our discussions with management during recent client marketing, we received the impression that there has been no let up in demand for either fixed or rotary wing services in Northern Canada this year; growth continues to be in line with the ~15% rate seen in recent years.

On a segmented basis, the rotary wing division is expected to account for approximately $30.2 MM in revenue ($13.4 MM in EBITDA) and the fixed wing division for $15.8 MM in revenue ($7.0 MM in EBITDA). We expect seasonally higher EBITDA margins during the second quarter, given that the majority of maintenance expenditures have already been made during the previous winter quarters. We expect corporate expenses of approximately $0.9 MM, although additional one-time expenses incurred as part of the Top Aces acquisition could result in slightly higher corporate expenses for the period.

We also hope to obtain additional clarity on the Top Aces deal, which could lead us to revisit our forecasts going forward. Given our conservative assumptions regarding the Top Aces acquisition, any positive information could lead to an upward revision of our forecasts. The integration of Top Aces will also reduce seasonality in Discovery Air’s overall business going forward.

Conclusion: Our one-year target price of $2.25 is based on a DCF valuation and represents a 50% return from current levels. Seasonal earnings strength expected in the upcoming two quarters should act as a catalyst for share price appreciation. Given the attractive growth profile and significant upside potential, we reiterate our BUY rating on Discovery Air.

MRM
(disclosure – Wellington Financial Fund II and certain managers/LPs own shares in DA.A as a result of the acquisition of portfolio co. Top Aces)