Orion previews Discovery Air's quarter

Here is the pre-quarter note from Orion Securities on Discovery Air (DA.A:TSX). Discovery acquired Fund II portfolio co. Top Aces last month:

“• Discovery set to release Q2 results on Thursday morning. We are looking for EPS of $0.10 and CFPS of $0.13. Seasonally, Q2 tends to be the company’s strongest quarter, though its recent acquisition of Top Aces will not begin to contribute until Q3.

What Do We Expect?

• Good performance expected against tough year-over-year comps. Last year Discovery put up $0.12 in EPS in its July-end quarter. This was primarily due to the inclusion of its Great Slave Helicopters acquisition for only the strongest part of the quarter (June 20 – July 31). Moreover, investors should be aware that i) we have had a healthy ice road season this season and ii) forest fire activity in Ontario (a small part of the business) has been subdued. Together, these factors could weigh somewhat on results.

• We really like what Top Aces brings to the table… Recall, Top Aces is an airborne training company operating a fleet of Alpha Jets (10) and Westwinds (4). Given its high barriers to entry, excellent ROIC, and burgeoning relationship with the Canadian Department of National Defence, we expect this business – and its management team – to be an excellent addition to the Discovery alliance going forward.

• …expect incremental colour on growth plans during the conference call. We believe there are less than a dozen Alpha Jets on the global market and would not be surprised to see Top Aces look to add capacity in preparation for a move into the U.S. We would also not rule out the possibility of other aircraft types being added to the company’s training platform.

What Is it Worth?

• No change to $2.60 target; stock is trading at a significant discount to its peers. DA.A
shares currently sit at 9.2x 2009E EPS and 5.6x 2009E EV/EBITDA. This compares to the peer group at roughly 12.9x and 6.5x, respectively.

What to Do

• We recommend investors remain Overweight heading into the quarter. While weather issues always make forecasting difficult on a quarter-to-quarter basis, we believe Q2 results should give investors a sense of the type of earning leverage embedded in this business.

Conference Call Details

• Discovery will host an investor conference call on Thursday, September 13. The call is scheduled to begin at 2:00 ET. The dial-in number is 1-800-731-6941.”

MRM
(disclosure – Wellington Financial Fund II and certain managers/LPs own shares in DA.A as a result of the acquisition of portfolio co. Top Aces)