DescriptionDart group company logo

Dart Group PLC started as a flower import business and has evolved into an aviation services and distribution company. The Company is specialized in the operation of budget aviation services throughout Europe with Jet2, and is one of the UK’s largest distributors of fresh produce and chilled products to supermarkets and wholesale markets throughout the United Kingdom within Fowler Welch.

Market Cap (£) = 87m

Shares Outstanding = 142.2m

Price = £0.60

Sector =  Aviation & Distribution Logistics

Country = United Kingdom


Cheap on Many Metrics

Price/Sales = 0.16

Price/Earnings = 5x

FCF Yield = 33%

Div Yield = 2%

Div Cover = 10x



“The easiest way to become a millionaire is to start off a billionaire and go into the airline business.” – Richard Branson

Dart Group is primarily an airline (80% of profits) and therefore comes with the stigma associated with that sector. It is capital intensive and economically sensitive with high fixed costs and cyclical demand. It is a horrible industry plagued with excess capacity.

The sensible bit of advice from Mr Branson at the top has been widely followed by prudent investors who shun the sector or the brave investors who “borrow but don’t own” the stocks. I believe this has presented us with a compelling opportunity. DTG is a profitable business at a huge discount to the value of its assets if you closed up shop and liquidated everything today.

If the business remains profitable then at some point the market will be forced to recognise the inherent value of the assets and the earnings power in the business. One analyst puts a sum of the parts at 250p but applies a 40% discount to this for his price target due to management owning 40% and “limited investor exposure”. It seems odd to me to apply a discount because you know a management team is aligned with you as a shareholder and because investors won’t look below a certain market cap.

If we exclude the CEO’s 40% holding, management holdings and the 20% and 7% respectively Schroder and JO Hambro have owned for at least the last 2 years, there is a free float of only about £25m.  Not worth the time of sell side analysts looking for commissions or buy side analysts at the big fund houses. It’s way below the radar.

How about we term it a growing, well diversified, asset backed, owner-operated, consistently profitable business and see if we can get comfortable with it?

Peel Hunt describes DTG as “a cocktail of entrepreneurial flair and conservatism”. I would describe it as unknown, unloved and misunderstood. The problem is that this business doesn’t have a “normal” strategy, its building a diversified, integrated leisure and services business which cannot easily be compared with peers.


Current trading conditions for Jet2 will be challenging of course, there are Europe wide macro concerns and the consumer sentiment is on its knees. Jet 2 is experiencing weak demand whilst it tries to expand across the UK regions. Capacity increased 26% over the summer of 2011 as it expanded into Glasgow airport. Fowler Welch is continuing to grow too into its new built capacity but its having to do soon tighter margins. The aviation business is the larger of the two, contributing circa 80% of earnings but I believe the less cyclical Fowler Welch is going to increasingly balance out the earnings of its bigger sister company.

It has not always been this way, in March 2007 this company had net debt of £44.5m as of September 2011, I calculate free net cash of £10.3m or 7.2p per share. There is actually net cash of £107.4m or 75p per share, but most of this is restricted as deferred revenue.



Jet2 runs an airline from its hubs in the Northern parts of the UK. This segment has other complementary parts of the business including chartering and a contract with the Royal Mail for overnight deliveries.

Jet2 has unusually high utilization rates for the airline industry because of its unique business model. Eight of the DTG aircraft are “quick change” which means they can be converted in an hour from day time passenger aircraft to night time cargo planes to fulfil their Royal Mail contract. This demonstrates operational flexibility and efficiency and furthermore de-risks the business a little because the Royal Mail business is considerably less cyclical/discretionary.

Jet2 benefits from a negative working capital cycle – customers pay for flights/holidays before they take them. This means that DTG gets the use of the cash for the interim period between payment and providing the service. This materially strengthens its balance sheet and enhances its flexibility. Operationally this means the business is getting paid for its working capital (interest on the float) rather than borrowing from banks and paying interest to fund working capital.

Because they operate freight, passenger and charter aircraft there is an element of flexibility where they can move capacity from one use to the other to meet demand (or lack thereof).

Of the 38 planes DTG operates they own 30 outright and 4 are leased. By owning the planes the company brings significant assets onto its balance sheet and limits capex on lease payments or finance. This lowers its sensitivity to demand and improves its free cash flow.

Because Jet2 is consistently profitable it has had the fortitude to strengthen and broaden its geographic footprint whilst many competitors were fighting fires during the downturn

Revenues for Jet2 = Capacity x Load Factor (bums on seats) x Revenue per Passenger

In 2011 Jet2 flew 3.4m passengers. The average net ticket yield in 2011 was £52 and the additional retail revenue per passenger was £25. See how this compares to peers below. The additional retail revenue per passenger is from items like premium seating, priority boarding and in-flight retailing.

Jet2 attempts to differentiate itself from the other budget operators by allowing larger baggage allowances, scheduling flights at sociable hours, awarding loyalty points and by using allocated seating like a mainstream airline. This earns brownie points with families who don’t have to struggle to ensure they are all sitting together.

The expansion across the north of England offers substantial opportunity; the move into Glasgow as of H1 2011 was co-incidental with the collapse of budget carrier Fly Globespan which accounted for between 5-10% of Glasgow Airport’s traffic.

The Aviation division’s fleet is slightly older than the industry average according to Collins Stewart. This is apparently totally acceptable because the lower number of flights DTG puts each plane through limits stresses on the airframes although the overall age is worth bearing in mind. At later stages in the plane life the depreciation charge should tail off in sterling amounts too – a 5 year old plane loses less value over 12 months than a brand new plane does.

In addition to this are the stable fixed margins that come from the charter and freight businesses which represent about 20% of division revenues or £80m per annum. The largest part of this is the Royal Mail contract.

Jet2 Holidays is a business founded in 2007 which directly sources holiday and hotel packages for customers. It provides the potential to increase customer wallet share, increase load factor

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