When it comes to investing, we’re not big fans of airlines. But in the case of Alliance Aviation Services (ASX: AQZ), we’re happy to make an exception. You see, Alliance operates fly-in fly-out charter services for Australian mining companies, and its flights are in demand. With high returning business and strong cash generation, we think there’s a lot to like.
The Montgomery Small Companies Fund looks to invest in stocks with competitive advantage, run by talented management with their hands deftly gripped to value creation levers in their control. The airline sector with its high capital intensity, inflexible and high fixed cost and exposure to major imponderable externalities such as fuel costs (oil prices) and unknown demand is not the normal place to go shopping for stocks that meet that criteria set! These are not the best of times for the aviation sector but that’s when Alliance’s value creation opportunity resonates.
Management are proven value creators
In our view Alliance is an example of the value that quality management can bring in small caps. They listed on 20 December 2011 with an IPO price of $1.60, delivering a total return including dividends of 149.1 per cent since then, that’s an annual compound rate of return of 11.2 per cent, smashing the rate of return for the Small Ords Accumulation Index at 5.4 per cent over the same period.
The management team has built a resilient winning business model, executing a nimble strategy to take advantage of opportunities that arrive from the cyclicality of the aviation sector. Let’s run through AQZ’s equity story and the opportunities ahead.
Key Competitive Advantage 1: Low unit capital cost assets are in AQZ’s DNA
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We think Alliance Aviation Services' competitive advantage means it will profitably grow and generate strong cashflows into the post-COVID-19 opportunity that exists in the Australian aviation market. Here's why. Click To Tweet