The merger arb whilst not a massive return i think worked out pretty well on a risk adjusted basis especially if you annualise it. I would welcome more opportunities like this one.

Just a quick glance at the merger arb opportunity with PTB.

Takeover @ $1.595

Current price $1.57

Difference = $0.025

PLUS

Dividend of $0.03

Add Franking credits = $0.043

Profit per share of $0.058

= roughly 3.7% return

Scheme implementation date Dec 2

~3 months away

= 14.8% annualised 

Really nice upgrade to guidance from PTB today. It's interesting little aircraft maintenance company - specialising in a particular type of engine - that has had to pivot its business throughout its listed life but has done so successfully. It's not a typical company I'd look at given you'd think of this as being very cyclical, in a competitive industry etc. but in fact they've built a business model that has some protection from cyclicality and operate in a niche that enables them to build something of a moat. It's a credit to management that its an aircraft company really accelerated profit through COVID and based on today's update that looks like continuing.

[I hold a modest parcel IRL only - wish I'd bought more]

·      Covid (If countries lockdown again it would lead to reduction in flying/ servicing of aircraft, engine overhauls etc)

·      Loss of approvals or regulator risk – loss of approve from a local regulator could impact revenue and earnings.

·      Competition – increase competition could lead to reduction in margins.

• General aviation mass adoption of different turbine engine or even in future Electric engine (low probability of mass adoption any time soon).

·      Large addressable market with over 25,000 PT6 engines in world-wide circulation

·      High barriers to entry – aviation highly regulated often needing approvals from local regulators (e.g., CASA, FAA, EASA)

·      Leverage to recovery in global aviation (increase flying hours will lead to increasing servicing requirements, engine overhaul, parts replacement etc)

·      Focus on two very common engine types and should benefit from scaling leading improved margins (PT6, TPE331).

·      Pricing Power on parts - Similar comparison to the likes of Burson group, when the engines in for servicing, overhaul or repair, price increase can be passed on to operators will very little back lash.

Pacific Turbines Brisbane (PTB) was established in 2001 and provides aviation maintenance services to a diverse customer base throughout the world including Australia, North and South America, Europe, Asia and the Pacific islands. It specialises on two turboprop engines PT6 and TPE331. Currently PTB are the largest non-OEM aligned PT6A/T maintaince, repair and overhaul in the world.

Background behind Pratt Whitney PT6

Pratt Whitney PT6 is a turbo prop engine that has been around for over 50 years and is quite commonly found in a lot of general aviation turboprops. It will most like be around for at least another 50 years in greater numbers. The PT6 is a very reliable and versatile engine but due to safely and regulations often needs maintence and servicing roughly ever 100/200 flight hours  with a complete overhaul of the engine ever 4000hrs depending on the operator maintence schedule. There are number of PT6 models most have subtle differences mainly different shaft horsepower outputs, due to the fact it fitted to a variety of aircraft with different sizes, weight, configurations etc (Essentially all PT6 engines models are very similar they often share the same core but may for example differ in the number of turbines in the hot section of the jet engine for power output).

PT6 engine is found commonly in the following aircraft types Cessna 208 Caravan, All Kingair Models, Airtractor (crop duster), Pilatus PC-12 (main aircraft in RFDS), PAC 750, Twin Otter and many more. 

Brief Note TPE331 Garrett

Not as common as the PT6 engine but still a fairly common turboprop engine. From researching the CASA register there are approximately 238 Garrett engine in active service in Australia. Most commonly found on Metroliner (Death Pencil), Cessna 441, Dornier 228 and CASA 212. From my research maintenance on a Garrett engine is cheaper for a number of reasons, which is a real positive for PTB that they are there more PT6 engines in service than Garrett’s. The major reason is engine overhaul time for a Garret is every 7000 hrs compared to a PT6 4,000 hrs. A PT6 engine overhaul also costs slightly more because the engine has more accessories. Without getting to detail this reflects the difference designs of the engines a PT6 is a two-shaft engine versus the TPE331 single shaft design.

Large Addressable Market

According to Pratt and Whitney there are more than 25,000 PT6 engines that currently flying (50,000^th engine rolled off the production line Dec 2020.) According to PTB in there 2021 Annual report they estimate there are over 10,000 PT6 engines in circulation in the United States. Searching the CASA aircraft register there are currently 759 examples of PT6 in Australia (not including Australian military). In the Maldives which makes up a significant part of PTB revenue there are over 130 PT6 (assumed at least 65 Twin Otters in Maldives could be more).

PTB provides aircraft engine maintenance, repair and overhaul (MRO) on long term contracts, as well as aircraft leasing & finance and also parts sales.

It's focused on prop-engine aircraft with less than 25 seats. 80% of customers are outside of tourism, with no single client representing more than 15% of revenues

Aircraft leasing is the growth engine, as new leases include MRO contracts. Leases are typically for 5-8 years.

MRO contracts are based on hours flown, NOT passenger numbers. To date (24/3) the company says it has not been impacted by mandated shutdowns (most customers are still in the air), and the business is classed as one that provides essential services.

Recently acquired US based Prime Turbines: an engine maintenance, repair and overhaul business with 3 workshops in the US.  It doubles workshop capacity, increases margin capture (as they no longer need to outsource US based work), gives FAA/EASA approval and therefore massively expands addressable market. It will increase revenues by approx 78% on a pro-forma basis.

It has around $31m in debt, which represents about 37% of equity or ~2x pro-forma EBITDA

Post acquisition, total share count should be ~125.5m. 

Founder led, with strong inside ownership.

Shares have lost over 50% since the start of the coronavirus crisis, but this looks like  big overreaction given the nature of the business. A good update from the company on the virus impact here.

I need to do more research, but this looks interesting.