Westwind preview on Discovery Air Q3

Here is a preview of Discovery Air’s (DA.A:TSX) quarter, from the research team at Westwind Partners. Discovery acquired Wellington Financial Fund II portfolio company Top Aces earlier this year:

“Discovery Air Inc. (DA.A-T: $1.25)
Rating: BUY Target: $2.25
Mkt. Cap: $164 MM ‘09 EV/EBITDA: 5.3x Total Annual Ret.: 80%

Insight or Development:
Discovery Air is expected to report Q3/08 results on December 13, 2007 with a conference call the same day at 2:00 p.m. EST (416-644-3414).
We expect Q3/08 Revenue of $45.9 MM, EBITDA of $18.4 MM and EPS (fully diluted) of $0.07.

Analysis:

The third quarter (three month period ended October 31) is expected to be a seasonally strong quarter for Discovery Air (the strongest after Q2). On a segmented basis, the rotary wing division is expected to account for approximately $10.9 MM in EBITDA and the fixed wing division is expected to account for approximately $8.4 MM in EBITDA. Corporate expenses are expected to be approximately $0.9 MM during the quarter.

Air Tindi and Great Slave Helicopters (GSHL) are expected to post strong results, with increased activity in Northern Canada continuing to drive pricing growth and an increase in hours flown. Q3/08 will have for the first time a contribution from Top Aces, which has been a part of the Discovery Air portfolio since August 27. While a slower than anticipated forest fire season may result in some weakness from Hicks & Lawrence (H&L), we expect that this weakness will likely be offset by stronger than expected performance from the other subsidiaries.

Overall, we expect another strong quarter from Discovery Air, which should increase investor confidence in the company’s growth potential. We believe that the recent sell-off has provided investors with an attractive buying opportunity.

Conclusion:

Our one-year target price of $2.25 is based on a DCF valuation and represents an 80% total return from current levels. Given the attractive growth profile and significant upside potential, we reiterate our BUY rating on Discovery Air.”

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. I also own some DA.DB convertible debentures.)