First NZ increases Airwork target price after RIFA takeover offer

First NZ Capital has increased its target price for specialist aviation company Airwork Holdings in response to a takeover lock-up deed.

First NZ Capital has increased its target price for specialist aviation company Airwork Holdings in response to the takeover lock-up deed between China's Zhejiang Rifa Holding Group (RIFA) and Airwork's major shareholders.

Announced yesterday, the deal means RIFA has agreed to make a conditional partial takeover offer for 75% of Airwork's ordinary shares at $5.40 per share. The stock rose 18% to $5.20 yesterday but was down 1% to $5 in trading today.

Parties associated with non-executive director Hugh Jones hold 58.9% of the Auckland-based company and have agreed to sell, while Condor Holdings, also associated with Mr Jones, will accept the offer of some of its 5.2% holding – meaning RIFA will become the controlling shareholder, with more than 50.1% of Airwork.

The proposed takeover offer price is a 20% premium on First NZ's 12-month forward discounted cash flow (DCF) valuation of $4.50 per share, and represents a price-to-earnings multiple of 10.4 based on its 2017 forecasts, analysts Paul Turnbull and Andrew Steele said in a note.

First NZ increased its target price to $5.15 per share from $4.50, and retained a 'neutral' rating. The revised target price represents a combination of a 25% weighting for its DCF valuation, and a 75% weighting of the RIFA offer.

"RIFA has identified revenue synergy benefits that we believe may ultimately justify the takeover premium that we calculate to be implicit within the offer price," the analysts said. "The partial takeover offer remains at a relatively early stage, with the consent and approval process yet to commence and the quantum of synergy benefits potentially available to RIFA yet to be disclosed."

The takeover will be subject to a number of conditions including agreement from the Commonwealth Bank, ANZ and BNZ to continue Airwork's current funding arrangements and agreement from joint venture partners to continue those arrangements on existing terms. It will also require Overseas Investment Office and Chinese government approval.

Airwork's independent directors have advised all shareholders to take no action, pending further guidance from the company. It's understood that the deed intends a takeover notice being given on or prior to this Friday.

Airwork delivered a 58% boost in net profit for the 2016 financial year to $24.6 million following strong earnings growth in its expanded fixed wing aircraft business, which is expected to continue this year due to the impact of aircraft deliveries and new contracts. The helicopter business also reported a solid performance with earnings growth of 16% despite flat revenue.

Expansion into Asia and Latin America through the development of Airwork's maintenance, repair and overhaul capability presents a growth option with low medium-term capital investment requirements, the First NZ note says.

"Under a scenario that requires no additional capital investment beyond what we currently forecast, we calculate that an increase in helicopter engineering compound revenue growth between the 2017 and 2022 financial years from our base case forecast of 10.4% a year to 17.5% a year would generate a 12-month forward DCF valuation in line with the RIFA offer price," the analysts said, adding that this scenario would use a lot of the recently increased capacity at Airwork's helicopter facility at Ardmore.

RIFA has said it intends maintaining Airwork's listing on the NZX main board and to support its existing business strategy and retain the corporate headquarters in New Zealand.


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