“Boss score” harvest part 1: Dart Group Plc (ISIN GB00B1722W11)

After having introduced the “Boss Score” in a series of posts, I have now build up a database of around 1000+ companies. o it’s time to look at results !!!

As I am looking for some UK exposure to add to the portfolio, I concentrate on UK companies first.

One of the best scores is achieved by a company called Dart Group Plc, a UK company which operates

1) a budget airline (Jet2)

2) a tour operator

3) a distribution / ground transport company (Fowler Welch)

The great thing about about potential UK value small caps is the fact that you find many great blog posts among the excellent UK based value logs about Dart Group.

So please read the following post on Dart Group at:

Kelpie Capital (very good blog by the way)
Expecting Value
Interactive Investor
Value Stock inquisition

I would try to summarize the pros and cons for the company out of the blogs as follows:

+ cheap, asset rich company with a conservative (and improving) balance sheet
+ entrepreneurial management, founder holds 40% of company
+ competitive and regionally focused business model, profits from demise of competitors
+ business is growing

– unloved airline sector
– low margin business, exposed to oil price and consumer behaviour
– low dividend payout

Let’s have a quick look at the traditional valuation indicators of Dart Group at the current price of 0.67 GBP:

P/E: 4.7
P/B: 0.6
P/S: 0.1
Div. Yield 2%
Market Cap 97 mn GBP
Debt/Assets 2%
EV/EBITDA 0.02 (!!!!)

EV/EBITDA is tricky for Dart Group. Dart group has a lot of cash on its balance sheet but a lot of that cash is “restricted”. In one of the blogs someone said it is restricted because of the deferred income on prepaid airline tickets.

If we look into the 2010/2011 annual report, it says however the following:

16. Money market deposits and cash and cash equivalents
2011 2010
£m £m
Money market deposits (maturity more than three months after the balance sheet date) 8.5 —
Cash at bank and in hand 98.3 52.2
Included within cash is £81.1m (2010: £38.1m) of cash paid over to various counterparts as collateral against
relevant risk exposures.
These balances are considered to be restricted and collateral is returned either on the
maturity of the exposure or if the exposure reduces prior to this date.

This is something to be explored further, but I assume this has to do more with fuel hedging than prepaid airline tickets.

Historical volatility

Dart Group is a prime example how the Boss Score works in practice. Let’s look quickly at historical EPS vs. historical “comprehensive income”

EPS BV p. Share Dvd p.sh CI p. SH
2000   0.22    
2001 0.046 0.25 1.67 0.047
2002 0.036 0.27 1.70 0.038
2003 0.056 0.33 1.70 0.071
2004 0.037 0.36 1.75 0.054
2005 0.052 0.43 1.93 0.083
2006 -0.013 0.42 2.16 0.015
2007 0.062 0.53 2.31 0.132
2008 0.193 0.66 0.72 0.142
2009 0.111 0.82 1.19 0.168
2010 0.122 1.04 0.83 0.233
Total 0.70     0.98

We can see 2 important points here:

A) The comprehensive income over this 10 year period is significantly higher than the stated EPS (by almost a third !!)

B) the volatility of the comprehensive income is much lower than stated EPS, even in the loss year 2006, total comprehensive income was positive

Why is that ? The answer is relatively simple: Fuel hedges !!!!

In the annual report they state the following:

Aviation fuel price risk
The Group’s policy is to forward cover future fuel requirements up to 100% and up to three years in advance. The magnitude of the aviation fuel swaps
held is given in note 22 to the Consolidated financial statements. As at 31 March 2011 the Group had substantially hedged its forecasted fuel requirements for the 2011/12 year and a proportion of its requirements for the subsequent two years in line with the Board’s policy

So what happens is the following: If fuel prices move up like in 2010/2011, margins go down, because the cost increases. However an off setting effect takes place in Dart’s balance sheet because the hedges increase in value and increase equity. The effect is not perfectly correlated as they are hedging partly future years as well but nevertheless, on a combined basis, the total P&L is a lot less volatile than if one just looks at EPS.

Banks for example do exactly the opposite. A bank will always try everything to smooth earnings but to book everything unpleasant into comprehensive income.

If we look at the corresponding P&L lines we can clearly see the effect:

Fuel costs increased significantly from 95 mn GBP or 23.1% of total cost in 2009/2010 to 128 mn GBP or 23.8% of total cost in 2010/2011. Gains from hedging in 2010/2011 were 23 mn GBP. If we just deduct this gain from fuel costs, we would end up at 105 mn fuel cost or 20.3%. As they have mentioned before, they have “overhedged” for one period, but in general I would say that Dart’s results including the hedges are a lot less volatile than simple EPS would indicate.

Chart, relative strength and momentum
A comparison with the FTSE all share shows at least, that the stock doesn’t have a real negative momentum.

Compared to Halford’s, which is still in its free fall phase, the stock looks surprisingly strong

Also relative performance with the last 6 months or so is neutral or positive:

dtg ln equity 1.2% -6.1% -0.3% 1.2% -16.8%

Current developements

In april 2012, Dart issued a cautious trading statement saying:

The Group continues to develop and grow its business base across its operations, although in the current challenging trading environment, limited profit growth is expected in the current financial year.

Based on the current valuation one might think that the market expects a significant profit drop, so for me that is actually good news.

Management / Founder

Philipp Meeson is a 63 year old trained RAF pilot

The CEO seems to be very hands on but also sometimes quite rude to his employees like this article from 2009 shows:

Philip Meeson, boss of budget airline Jet2.com, was warned by police after flying into a rage at his own staff after becoming annoyed at the length of time it was taking them to deal with a long queue of passengers.

Officers had to be called as the airline’s chief executive berated check-in workers during an early morning ‘spot-check’ visit to Manchester airport.
Police had to warn the millionaire about his conduct and behaviour after he used a string of four-letter words – even though his outburst was applauded by many of the 200 passengers.

Could be that clients like him better than employees….

A nice quote from the same article is that one:

But it’s not the first time Mr Meeson has attracted controversy.
Three years ago he condemned strike action by French air traffic controllers by writing an article on his company’s website which called for “lazy frogs to get back to work”.


Founder Philip Meeson holds around 39.6% of the shares, followed by Schroders (according to Bloomberg either 25% or 22%), Jo Hambro with 6.3% and Norges Bank with 3%.

For some strange reasons, no real “value shop” is invested, which might be a good thing after all after having read Nate’s blog post about shareholder structure at Oddball.

Interestingly, Bill Ackman form Pershing seems to have established a new position of ~0.4%, whereas Standard Life seems to have sold down more than 1% in the last few months.

EDIT: Bill Ackman was nonsense. I mixed upPershing Llc with Ackman’s Pershing Square.

Business model

There is an interesting discussion about the business model to be found here.

In essence within the airline business, their main competitive advantages seem to be

– regional focus (not fighting on the crowded London market)
– buying cheaper used airplanes for cash instead of leasing new ones (used aircraft buying seems to be one of the special abilities of the CEO..)
– higher flexibility due to ownership and contracts with Royal Mail
– differentiation with slightly better services as a “family budget” airline

I am not able to judge how this holds against Ryanair and Easyjet going forward, but so far the strategy seems to have worked OK and better than many of the smaller competitors.


A few simple thoughts about valuation:

Dart Group will never be a P/E 15 company, but it could easily be a P/B 1 company. At the moment, you get a company which increases shareholder equity by something close to 20% p.a. at 0.6 times equity. If we assume for instance they manage to generate 15% ROE in the next 3 years and the company would trade at book at that time, we would have a fair value of 1.7 GBP per share or an upside of 150% over 3 years. More than enough for me.


After reading all the blogs and going through annual reports, the company grew on me. In the beginning I thought: Airlines – keep away. But the more I looked at the company the better I liked it.

The reason why its cheap is relatively clear, no one likes airlines, especially when fuel prices are increasing. On the other hand I think the market is exaggerating the implied volatility and is not giving credit to the hedging program, which I think is one of the “hidden stories” of the stock.

So to summarize the stock I would pick out the following aspects:

+ stock is really cheap and unloved and in an extremely tough sector (so no “feel good” value investment)
+ company is led and owned by an entrepreneurial founder which has proven that he can grow the business ( no “cigar butt” either)
+ underlying returns on equity are really good despite asset intensity and low margins

I will add Dart Group with a limit of 0.7 GBP to the portfolio as a “half position” (2.5%) under the usual rules (max 25% of daily VWAP). After the final 2011/2012 numbers in July I wull then decide if I increase it to a full position.


  • Quick update as I got some questions: I mixed up Pershing Llc with Pershing Square (Bill Ackman). So Pershing Square is NOT a shareholder. Sorry for any confusion.

  • Investors underestimate the attractiveness of the business model of regional low cost airlines. There is very little real competition in pricing as there is no incentive to compete on the added fees for check-in luggage, priority checking or credit card use. That’s where the margins are in what is basically a freemium model for airtravel.

    The result is a highly predictable business in which the only big risk, fuel costs, can be fully hedged away while still maintaining profitability.

  • mmi, thank you. I really enjoy reading your articles. Somme comments to your discussion:

    UK is generally speaking investor friendly, but what do you think about the stamp duty? I don’t buy CFDs to avoid this tax.

    In order to avoid weird results I deduct goodwill from equity and ammortisation/depreciation of goodwill from income.

    If a company shrinks due to fixed cost the margins will fall. This leads to a decrease in ROE, even if it is still positive. However the amount of fixed cost varies…

    Proplem of the boss score is imho not to be able to anticipate a game changer like the effect of digital revolution for the printing industry.

    • hi martin,

      the Boss score is not intended to find or identify game changers. The Boss Score should identify “boring” companies.

      The second step will always be a detailed analysis.


  • A shrinking company only means a shrinkung revenue, and shrinking profits, but normally still positive profits (ok, I have to admit, that is is common, that companies in such sectors often face years with losses, think of the print industry), so the book value would grow and so would the comprehensive income.

    In the case of Dart, it is even more astounding. I already thought that it might be a growing business, as the earnings grew. That’s even better. Even with the smaller business value from ten years ago, the number is still good – if they are able to maintain that level, your BOSS score would only become better. Well, it’s no wonder with a pe<5…

    But why on earth do you want UK exposure? Euro hysteria?

    • correction: the comprehensive income would not grow, but be positive, and so would the BOSS score.

    • interestingly, in many cases book values shrink relatively quickly through goodwill write offs and other “one offs” in terminal decline cases.

      Why I want UK exposure ? First of all, UK consumer sector is really beaten down. Secondly, Dart Group could actually profit from a lower Euro if more Brits fly to cheap EUR countries. So its (maybe) also some kind of hedge against my significant Euro Zone exposure.

      Thirdly, many UK companies do have relatively good management who can allocate capital well. In France, Italy or Spain this is much harder to find.

      Finally, UK does not deduct any Tax on dividends….

  • Hi winter,

    no, it is not rewarding shrinking companies. It is basically “killing” shrinking companies. If book value shrinks for some reasons, the boss score turns negative.

    It is not like the KGV 10 which is a simple average. If a company had big profits lets say 8 years ago and then a loss in the last 2 years, volatility increases dramatically and you get a low score.

    Dart is by the way growing pretty rapidly….


  • The problem with your BOSS model in general – I write that here at more prominent place and not at the comment page of your original posts – that it punishes growth (and rewards shrinking companies in an unrewarded way). That’s the most important thing why I think it is inferior to my KPV, that only looks at the profit margins and not the absolute numbers, which can be quite lower for the earnings ten years ago (of course you can apply the same logic to comprehensive income, EBIT, cashflow or other measures of income).

    • just a few more comments:

      – the boss score only uses ROE in%, no absolute numbers
      – I don’t think it is inferior or superior than other models,it just rewards certain companies more than others
      -as you might know, I use a version of KPV myself. In my expereince, this is a very good indicator for contrarian reversion to the mean stocks.The Boss Screen is looking for different stocks as I have outlined in the previous post.

      Why don’t you name a few declining companies and I check the scores ?


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.