Company News

Bermuda Aviation Services Limited (BAS) is a holding company for Aircraft Services Bermuda, which provides aircraft, passenger, and cargo handling services at the Bermuda International Airport. Other BAS subsidiaries operate in a broad range of business segments, including bakery products, automotive parts and services, facilities management, cargo and courier services, and computer cabling services and maintenance. Segmented numbers for fiscal 2007 are as follows (in millions):

BCB reported earnings of $2.8 million for the first six-months of fiscal 2007, a decrease of 34% from the $4.3 million earned during the same period in 2006. Notably, 12% of this decline was due to nonrecurring expenses related to the sale process of the bank. The remainder of the decline can be attributed to lower interest and fee-based income generated on a reduced base of customer deposits. On the positive side, the bank reported significant improvements in customer deposit levels since the client withdrawals relating to the FCIB investigation last autumn. Total assets grew from $465 million on September 30, 2006 to $583 million on March 31, 2007 – an increase of 26%. It would appear that BCB is enacting a successful turnaround strategy to rebuild its battered customer deposit base.

Over the past three years, BAS has executed a series of small-scale acquisitions, using the steady streams of revenue and cash flow from its existing businesses to fund the growth of its higher-margin. Facilities Management division. Corporate management has embraced a stated goal of becoming “the service provider of choice” for Bermuda’s growing base of financial firms. Although we find this bold plan to be fundamentally sound in principle, the company has several concerns going forward:

• A persistent rise in aircraft, passenger, and cargo handling costs, which has eaten significantly into profit margins during the past two fiscal years.
• Logistical challenges associated with integrating the company’s latest two acquisitions, notably the ability to attract skilled labour at reasonable cost.
• Higher ongoing costs in the Administrative Services division, as BAS has “ramped up” its executive management team over the past several quarters.
• The loss of the Airport Fire Department management contract, which will result in marginally lower revenues for BAS-Serco (facilities management) going forward.
• The possibility of a second operator in the lucrative private jet business at Bermuda International Airport (although this potential appears unlikely.)

The Otis Elevator Bermuda and CCS acquisitions bring BAS appreciably closer to its goal of becoming a “one-stop shop” for managing the services of Bermuda’s corporate elite. Given the debt incurred over the CCS purchase and near-term integration costs, it appears unlikely that BAS will have the capacity to bolster its stable of profitable business units in the near future. Further, the company has shown an inability to curb expenses relating to its courier and aviation-based businesses.

We apply a 10.0x multiple to our 2007 operating earnings estimates of $0.72 and derive a one-year target of $7.00. LOM currently rates BAS shares as a “hold”, noting that the company has solid longterm growth potential.