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Edward Vranic, CFA
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I am a private investor based out of Toronto, Canada and I have been investing since 2003. After 8 years in Corporate Finance with a Canadian Telecom company I have decided to dedicate myself full-time to the capital markets. I write on Seeking Alpha to demonstrate my financial analysis and... More
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  • Partner Jet Is A Great Investment For Longer-Term Investors 0 comments
    Jun 26, 2014 11:25 AM

    Partner Jet is an aircraft services and management company listed on the TSX Venture under the symbol PJT. I have written once before about PJT after the company released outstanding financial results for Q1, and wanted to reiterate my position as Q2 results should be released within the next month.

    The chart below outlines the financial performance of the last eight quarters, from the Q1 MD&A listed on SEDAR.

    (click to enlarge)

    The positive trend on revenue and EPS is apparent over the past two quarters with a 0.7 EPS for Q1 2014 and 0.3 cent EPS for Q4 2013. You can refer to my previous post on PJT to dive into the details of its 87% growth in revenue for Q1. It is reasonable to expect further positive quarters going forward, as highlighted in this note:

    With a relatively small working capital of under $400K, PJT expects to be able to fund all further capital needs out of operations. That means the company anticipates continued profitability and will not need to dilute its very small float of 9 million shares.

    One might wonder how an aircraft services company of such small size has managed to become profitable? Usually this industry calls for substantial capital and operating costs which means economies of scale are paramount. I direct you to this note regarding related parties in the MD&A:

    The CEO of PJT also owns several other companies that when combined allows him to streamline work processes for them and Partner Jet and obtain more favorable market prices for items like fuel. Staff from those other companies are sometimes brought over to PJT during heavier periods of work to ensure that PJT can be run as efficiently and low-staffed as possible during down times. Note also that PJT has greatly increased its reliance on these related parties for inputs to the business:

    (click to enlarge)

    There are two ways to look at this. On the critical end, one could say that PJT needs these relationships to maintain its superior financial performance and if these relationships are ended the company does not thrive as its costs go up. PJT was a money-losing entity until just recently, and that coincides with the increase in related party purchases.

    On the positive side you can say that the CEO of all of these companies is very likely to maintain these relationships. The note about having sufficient working capital to maintain operations implies the management team is willing and able to keep these relationships going and PJT will continue to churn out ever-improving EPS figures. While PJT is profitable we don't know if the companies are underselling to make the public company look as good as possible, or if they are selling at good prices for them so the CEO collects an income on his private entities. My assumption is that he is running those other businesses at a profit and that the relationships are beneficial to all parties involved. Another good sign is that revenues from the related parties are negligible and shrunk from Q1 2013, so PJT's revenue growth from external customers is real. Perhaps the growth in EPS can be attributed mostly to the nearly doubling in revenue as opposed to the favorable cost of sales.

    I own 66,000 shares of PJT and have purchased them as low as 7 cents and as high as 35 cents. I would like to obtain a larger position in the stock but it is hard to accumulate a lot of shares quickly as it is quite illiquid. With only 9 million shares outstanding, I already own 0.7% of the company even with my relatively small investment.

    PJT is clearly not a stock for day traders. For those who are interested in accumulating shares of this high growth, low float and recently profitable company for a long-term position I would suggest putting in a bid at 20 cents and seeing if it gets filled. At the time of this writing, there are only 7,000 shares up for sale at any price. So it is a stock for those who are patient enough to wait for someone to fill their order. But illiquidity in a growing profitable company has its upside once you get filled. Because such few shares are available, you can name your price to sell upon increased demand. If the company earns 5 cents per share this year, that would lead to a 20 P/E at $1. With its current growth trajectory I believe 5 cents EPS is possible and $1 would be my lowest selling point.

    If PJT maintains its illiquid status on the exchange, it will be difficult for investors, including the CEO and insiders, to extract value from the company through stock sales. That means there are two courses of action that the company will eventually have to take. The first would be to eventually start paying a dividend. If the stock has a 5 cent EPS, a 1 cent dividend is possible and a rarity on a penny stock. If the stock price was to remain at 20 cents that would be a dividend rate of 5%. However, I believe the eventual course of action will be to sell the company. There may be some issues with that thanks to the reliance on the related parties. The CEO may choose to sell PJT in conjunction with his other companies as one entity to an interested buyer.

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