The UK's Dart Group operates a supermarket logistics business (Fowler Welch) and a holiday airline serving the UK market north of the Midlands (Jet2).
It is a favorite of the value blogosphere. It has been comprehensively covered here, here, here, and even here.
This is the bird's eye view of Dart:
It seems extravagantly mispriced at a market capitalization of £107 million.
Fowler Welch is entirely severable from the airline segment of the business. For various reasons, it seems to me quite probable that this business will be sold as soon as it reaches operational maturity -- perhaps in one or two years. The most likely scenario in that eventuality is that the proceeds will be distributed to shareholders as a special dividend. Meeson doesn't seem to me to be very interested in Fowler Welch and, since he owns 40% of Dart, a £24 million cash payout would serve his interests quite well.
This is Fowler Welch:
and the following is a more or less current set of trading multiples for a basket of businesses similar to Fowler Welch:
At 10x EBIT, Fowler Welch would sell for £60 million.
Adjusting the current market capitalization by that amount places a £47 million value on what remains, an airline and package holiday business that generates normalized operating profit of £38 million per year:
Three factors explain Jet2's high return on invested capital: (1) eight "Quick Change" 737 aircraft put in extra shifts transporting cargo under contract to the Royal Mail; (2) Jet2 Holidays has done a good job of funneling additional passengers to the airline, adding 3 to 4 percentage points to the load factor; and (3) ancillary revenue generation is high -- twice as high as Easyjet and Ryanair.
(That Jet2 operates 22 year old aircraft is a wash -- lower depreciation costs are balanced out by higher maintenance costs).
So £38 million seems to me a defensible estimate of of Jet2's profitability, at least in the medium term. Over a longer horizon, I think it reasonable to assume that Jet2's profitability will tend toward £20 million: there is nothing that it does that could not be copied by an entrant into its market, and the ROIC will revert to a more normal 17%.
At £20 million, it would be yielding 45% rather than 81%.
What of the £152 million in cash? It is tempting to think of this as distributable to shareholders. But I don't think it's quite so straightforward. In my view, Dart needs to keep 80 days of cash on the books (to correspond with its trade receivables collection cycle) in order to avoid even the perception of a liquidity crisis should it ever step off the growth escalator. 80 days of cash is currently £117 million. Excess cash -- the amount that could be paid out to shareholders without in any way affecting the business -- is then £35 million, reducing the cost basis of Dart's equity further, to $12 million.
This, then, is my perspective on Dart's valuation at the current share price: a £12 million investment in a business, Jet2, that, in the medium term, will likely generate £38 million in annual owner earnings (for a 316% yield) and that, over the long term, will probably generate £20 million per year (for a 167% yield). As I say, Dart seems extravagantly undervalued.
A more reasonable minimum market capitalization would be £260 million, equivalent to a share price of 177p. And it seems to me that Dart will realize that valuation if and when it sells off Fowler Welch.
If Jet2 grows profitably, as a result of its new hub in Glasgow or its foray into transatlantic flights, that valuation should be revised upward.
Disclosure: I do not have a position in Dart, however I may initiate one if the share price falls below 65p.