Mesa Air Group, Inc.

MESA Details

Mesa Air Group, Inc. (NASDAQ: MESA) operates as the holding company for Mesa Airlines, Inc., a regional air carrier that provides scheduled passenger services in the U.S., Bahamas, and Mexico, and cargo services out of Cincinnati / Northern Kentucky International Airport in the U.S. The company currently operates a fleet of 160 aircraft under the terms of capacity purchase agreements with American Airlines, United Airlines, and DHL Express. As of May 18, 2021, the company’s market capitalization stood at USD 383.42 million.

Eyeing International Growth: On March 02, 2021, the company signed an agreement with London-based Gramercy Associates Ltd. to develop a Europe based joint venture which will apply for a new Air Operator’s Certificate (AOC) in the European Union using the CRJ-900 aircraft. The goal of the JV is to introduce a CPA (Capacity Purchase Agreement) and ACMI (Aircraft, Crew, Maintenance, and Insurance) in passenger or cargo services in Europe. MESA will own 49% of the JV once the AOC is obtained.

LOI to Lease Additional Cargo Aircraft: On February 23, 2021, MESA signed a letter of intent (LOI) to lease an additional Boeing 737-400F cargo aircraft currently planned to be made available in May 2021. This would be the company’s third 737 aircraft for DHL Express. This is in line with the company’s decision to expand its cargo flying operations.

Q2FY21 Results: The company reported a sharp decline of 46% in total operating revenues to USD 97.28 million in Q2FY21 (ending March 31, 2021) as compared to USD 179.90 million in Q2FY20 (ending March 31, 2020). However, net income for Q2FY21 was USD 5.69 million, 201.8% higher than USD 1.88 million in Q2FY20, due primarily to the recognition of a government grant of USD 55.97 million under the Payroll Support Program Extension (PSP2), which was offset against operating expenses for Q2FY21.

Key Risks: The company derives all of its operating revenue from its capacity purchase agreements with American Airlines (around 52% in Q2FY21) and United Airlines (around 48%). Termination of either agreement could have a material adverse effect on MESA’s business. Moreover, the company has high leverage and significant long-term lease obligations relating to its airline fleet, which may affect its ability to raise additional capital on acceptable terms or at all.

Outlook:

Forward Guidance (Source: Company Press Release, May 10, 2021)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

MESA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: MESA stock fell 11.24% in the last month. The stock price is currently close to the mid of the 52-week range of USD 2.80 to USD 17.40. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 12.17. On the technical chart, the next support level is USD 9.55. Considering the company’s strategic shift to cargo fleet to offset the loss in passenger flying due to the pandemic, positive cash flow in Q2FY21, and associated risks, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 10.74 as of May 18, 2021.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.