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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's Outstanding Earnings Growth Points To 1000% Gain Potential 0 comments
    Jul 25, 2014 9:31 AM

    Partner Jet (PJT.V) released financial results on July 24 for Q2 ended May 31. I have written about Partner Jet before, and these results further my long-term bullishness on the company. Keep in mind when reading these results that upon market close on July 24th the stock price was 11.5 cents and the market cap was just over $1M. Here's a chart from the company's MD&A that shows the last 8 quarters of performance:

    (click to enlarge)

    Needless to say, these were excellent results. The 2 cent EPS for Q2 2014 represents a 196% increase to net income compared to Q1 2014 and a continuation of the trend of outstanding revenue and earnings growth for the past three quarters. Revenues for Q2 2014 of $3.7M more than doubled when compared to the Q2 2013 result of $1.7M and were more than 50% higher than Q1 2014's result of $2.4M which at that time was a record for the company.

    For the last three quarters the growth in the company has been phenomenal. The key questions going forward is how did the company grow so much all of a sudden in the first place and if the company can maintain this aggressive growth rate?

    We can begin to answer those questions by looking at what has changed for the company over the last little while. What stands out is the acquisition of an aircraft called the Citation X in April 2013. This aircraft claims the title of being the fastest business jet around. Clues from the MD&A seem to point to that conclusion as well as the explanation of "... more aircraft activities due to the increase in number of corporate aircraft managed" appears to be a prevailing theme.

    Note that with the increased revenue comes better gross margin with not only the aircraft management sector of the company's business, but with all three sectors. A clue that suggests Q2's revenues are sustainable and are not just a fluke can be seen in the company's charter activities.

    Regarding the sustainability of these revenues, I point to the first paragraph stating that the "charter rates remain unchanged...fixed by the long-term contracts with the aircraft owners". This suggests that Partner Jet has a set of long-term contracts that will ensure a solid base of revenue going forward. These customers must be very happy with PJT's services as evidenced by the increased flight volumes. It looks like PJT has found a niche to service clients effectively, because business travel as an industry has not been on a growth path given cuts to corporate spending and increase in teleconferencing. My guess would be due to the new aircraft, PJT is able to offer some of the fastest and cheapest travel services around. Since the company is so small, it isn't making a big dent into the services of larger commercial carriers and other chartered flights services so it may be able to grow like this for quite a while before competitors react.

    The final division is aircraft maintenance. As seen by the numbers below, it is the youngest and fastest growing division and the only one with negative gross margin. That margin appears to be quickly heading towards positive territory for future quarters.

    While the revenue growth has been extremely impressive, the company's ability to control costs during this growth period is truly unique. Even with record setting revenue growth, general operating costs were flat for the quarter when compared to Q2 2013. As the company has grown, it hasn't lost focus on efficiency gains from cost control measures.

    Reading through the MD&A, Partner Jet takes advantage of the relationship its CEO has with ownership of other companies at a centralized location. Refer to this note:

    "Partner Jet Corp. and its subsidiaries are located at one centralized location at 2450 Derry Road East, Hangar #9, Mississauga, Ontario. These recently renovated facilities house sales, dispatch, maintenance, administration and accounting, all under one roof allowing synergies for the Company to move forward. The hangar is large enough for the continued expansion of the Company's management and maintenance operations. The hangar also has 24 hour surveillance and is completely controlled by the Company."

    As well as the related party transactions:

    What does this mean for PJT going forward? Reviewing once again the last four quarters of financial performance, the following numbers can be gathered.

    The important thing to gather from this growth rate is that revenues are very likely to be growing each month. Meaning that while revenues for each of the last three months average out to $1.2M, the exit month of May probably had a much higher figure, as illustrated by my estimate below.

    (click to enlarge)

    If the company achieved $1.5M in revenue for May, that means the June starting point would also be $1.5M and likely to grow from there. With this growth trajectory, revenues should be $4.5M or greater for Q3 ended August. Based on the increase in net margin and controlled operating costs, a margin percentage of 6.5% seems achievable. On $4.5M in revenue that would lead to net income of $292,500, an EPS of 3.2 cents.

    Assuming no growth or margin improvement thereafter (a very conservative assumption), the 3.2 cent quarterly EPS would translate to a 13 cent annual EPS. A conservative 10 P/E ratio leads to a stock price of $1.30, or more than 1000% above the 11.5 cent close.

    One could argue that PJT.V is deserving of a much higher P/E ratio than 10 given the growth rate and that the 13 cent EPS target is too conservative. I can easily see this stock trading between $2 and $5 at this time next year if the market finally recognizes and rewards the company for such great financial performance.

    The issue with PJT.V is that it is an extremely thinly traded stock. I have been much of the purchase volume over the past several months and there are times when no shares are up for sale at any price. Because of this, I plan to offer up a few of my shares at $1 and above. Not because I feel that's a good price to sell (I did the last time, but that was before Q2 was released), but because I want to ensure a market for these shares so that people don't get discouraged and ignore PJT's great growth because they can't buy into it. So for full disclosure, if you plan to purchase at $1 and above, there's a chance you could be buying a bit of my shares. But I assure you it's not because I want to sell out of my position. Sacrificing 10% or so of my holding in order for PJT to be valued at a more reasonable price is worth it to me.

    Based on these financials, a stock price of well over $1 for PJT seems very reasonable to me and upon investors doing their own research, I'm confident many others will feel the same.

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