Nelson’s note: Because I am
lazier more efficient than you ever thought possible, here’s writing by someone who isn’t me. It’s by Holy Potato, who I think is a criminally underrated Canadian finance blogger. And I’m not just saying that because I’m on his blogroll. He usually blogs at holypotato.net when he isn’t neglecting the site to work on his upcoming book, which is all about teaching regular people how to become boring index investors.
HNZ Group is hardly a value stock. They haven’t increased the dividend ever so it’s not a dividend growth story either. But it’s a rare bird in the world of public companies: a company with (virtually) no debt on the balance sheet.
This is after making a major acquisition just a few years ago, when then-Canadian Helicopters bought HNZ Group (and kept the name) from a distressed seller in New Zealand. They borrowed about $100M to make it happen, and paid the debt off in a timely fashion.
That makes the balance sheet really strong; though much of it is in the form of aircraft, we can see from sales of comparable craft and their own sales of their used helicopters that the value on the balance sheet is indeed close to the real-life market value. In some years they’ve even recorded a gain after turning over units in the fleet. At about 1.2X book value, this is hardly a drool-worthy play on net asset value or liquidation, even with such a solid balance sheet and the possibility that helicopters can be re-sold at a bit of a premium to carrying value; at a 12X (normalized) P/E it’s also not a screaming buy on earnings or cash flow. But it’s reasonably valued and has some potential.
That potential, in my mind, is fairly hidden: you can’t look at the trends in the income statements and see any kind of growth. They’re not substantially expanding their fleet and aside from dabbling in providing repairs from their services arm, aren’t really expanding into new businesses in a meaningful way. The potential that I see is that balance sheet strength and the discipline in capital management they’ve displayed in paying down the debt from the last acquisition so smartly.
Helicopter exploration and transportation is a cyclical business – some years oil and gas exploration companies are crawling over each other for HNZ’s services at the same time the US military is contracting out transportation work; other years it’s quiet. I can’t say whether this is the nadir of that cycle or not. If this is the bottom in the business cycle then this valuation looks pretty good, actually. I suspect it’s not just yet, but they are well-positioned to weather whatever storms may come. Moreover, and what is exciting me about this one, is that that unlevered balance sheet and patience will set them up to expand suddenly and rapidly when the opportunity presents itself – for instance, if times get tough and a more leveraged competitor goes belly-up.
I have no idea when or if HNZ Group will have a chance to make an acquisition, which way the market cycle will go for helicopter services, or if increasing turmoil in the middle east will once again lead to high-margin civilian contracts. With a 5% dividend, I’m ok with the idea of waiting on this merely adequately valued stock and seeing what future opportunities they can seize from their position of strength in an ever-shifting business.
Disclosure: I am long HNZ.A.