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The thesis is working out as previously stated by a number of people here, including cardboard.

 

DHL is honouring their put agreements, which include taking the underwater capital leases (5 767s which were held at a book value of 20million but had a lease liability of 50million). As for, the note, that was a pleasant surprise, but is not altogether irrational. There were days when people felt ATSG was a zero, but the puts always gave it value, as did its ongoing, business with Bax Schenker through CHI.

 

We still have a long way to go for most folks to break even, my average price is around this point only because I averaged down heavily in the 0.16-0.20 days.

 

I still maintain that the intrinsic value is at a minimum book value ($3.50-$4.00) and possibly $6.00-$7.00 as a going concern. As uncertainties start to settle out, we will see. This is definitely a 2-3 year hold. (For my valuation numbers look at the old MSN BRK archives).

 

M.

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Hi Mloub,

 

Honestly, I was quite worried for a while that this stock would end up being a zero:

 

1- DHL was not willing to negotiate at all.

2- The economy was down hard making it difficult for their non-DHL business to obtain decent lease rates.

3- The term loan could have been called if the banks had determined that DHL discontinuing their business in the U.S. represented an event of default.

4- With the stock market tanking, their pension liability has grown significantly weather you look at ABO or PBO.

 

So I did not average down in the $0.20 area (my market position being large enough relative to my portfolio and considering the risks), but should have once I saw management buying some shares and seeing that they were able to re-lease planes in this tough environment proving that their B767's are truly worthwhile.

 

Still, I will be happy to see my money back (around $1) and some more as things are improving. Their latest moves tell me that management is better than I thought and that they are unwilling to dilute shareholder equity unlike so many other firms when things got tough.

 

Cardboard

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  • 2 months later...

Hi Myth465,

 

It has been quite a roller coaster! I am loving the current share move and glad that this is turning into a return on capital vs return of capital.

 

I believe the key is that we have had strong data points confirming the value of their B767's fleet:

1- New customers signing to lease them at what appears to be good rates from their latest financial results. This is being done at a terrible time for air cargo demand.

2- DHL reversing its stance from being a foe to a "friend".

 

Oil turning higher is certainly helping demand for these B767's.

 

The share price move has been really fast, but I am convinced that there is more to go over a longer period of time. Annualized earnings were $0.68 from the first quarter results. Free cash flow around $1.80. These will come down when they become taxable in 2012 and when you make out some adjustments for current DHL earnings, but still. A current target of $4-5 does not seem crazy at all.

 

I see them turning into a smaller company with a very stable cash flow model, paying back their debt and eventually distributing back to shareholders via share buy-back (they are now allowed) and/or dividends.

 

Cardboard 

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Thats what I am hoping for. The earnings are very difficult to model but, I think everyone thinks its worth much more than $1. We need one clean quarter without the DHL sort and a resolution to the DHL leases, that way everyone can see what G&A and cash flow really look like.

 

Then like you said we will have a small company with very stable cash flow. Looking forward to those days and north of $4 would be great.

 

 

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I think everyone is reacting to what they presented at the annual meeting:

 

http://www.atsginc.com/ir/2009-atsg-shp.pdf

 

Those shares at 20 cents or so back in November look mighty attractive then, don't they?  What I found interesting is that the DHL

contract wasn't really too profitable.

 

Insiders bought nearly $1 mil worth of stock recently.  There were a few investment firms loading up their shares as well.

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Congrats to all who stuck this one out. In hindsight, I have got to hand it to management. Some of the executive decisions that helped surface value (buying CHI, converting 767's and buying a few more) were ones I opposed at the time as wasting precious cash. It seems they were able to do it just right - pay down debt, and employ their assets at exceptional rates of return.

 

That being said, it seems to me the value was always there. The pain was in watching the price sink, month after month for those who bought at $2, then 1.50, then 0.90, then 0.34, and finally the rock bottom price of 0.16. Somedays I thought it would have been better if one could ignore these quotations altogether lest they infect our rational thinking. In the end, the market was wrong, and the patient investor was right. It never ceases to amaze me. (No comment for those whose average price was $6-7. I always thought the company was fully valued there).

 

All the best,

M.

 

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I did not load up in the $0.20 range back in November and I don't think it was a mistake. I think it was a mistake to not buy some after they leased some planes early this year and when Joe Hete was buying the stock (still in the $0.20 range) and then to back up the truck after they announced the incredible deal with DHL regarding the note. I got some, but I think that is where the psychology of quotations really hit me. Paying 2, 3 or 4 times the recent price seems crazy, but it was the right thing to do. I had bought a lot in the $1 range previously, so what was the hesitation at $0.40, $0.60 or $0.80?

 

Back in November the story could have turned very wrong. The 4 points that I mentioned in my March 24 post presented major challenges. Then imagine the following:

1- DHL enters a deal with UPS (both companies were confident that it would get done) leaving no business at all for ABX Air, the DHL note remains repayable in full and timing still in question, no possibility to agree on the capital leases.

2- With management continuing its agressive expansion plan: converting many B767's to freighters with put proceeds from other DHL planes and the delivery of one more this year, cash becomes really tight, lenders are worried and potential customers smelling blood lease the planes at very poor rates.

 

This could have well happened. The odds of significant value erosion and a potential bankruptcy were not zero. I think that the market over-reacted, but was still trying to price these odds vs value vs other opportunities appearing with the crisis in the marketplace.

 

Cardboard

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Another day another dollar. I would love to see an updated balance sheet and income statement post DHL. Im hoping most of the underfunded pension debt falls off due to the layoffs, and can only guess what the put option will do to some of the that long term debt.

 

If they can significantly deleverage and earn even just $100 million in cash a year then we are looking at a great return with even just a 5 multiple.

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5x on $100M in cash flow is looking like a reality.  Big ? hanging over ATSG has been lifted.

 

 

 

 

Press Release Source: Air Transport Services Group, Inc.

ATSG Completes Aircraft Lease Option Agreement with DHL

 

Will Result in Significant Deleveraging of Balance Sheet

 

    * On Monday June 1, 2009, 10:56 am EDT

 

WILMINGTON, Ohio--(BUSINESS WIRE)--Air Transport Services Group, Inc. (NASDAQ: ATSG - News) said today that its subsidiary ABX Air, Inc. has completed an agreement with its principal customer, DHL, concerning leases of certain ABX Air aircraft.

 

The agreement, which is further to a memorandum of understanding that DHL and ABX Air executed in March 2009, grants DHL options to lease from ABX Air, or an affiliate, up to four Boeing 767-200SF (freighter configuration) aircraft under favorable rates, and for terms beginning August 15, 2010, and continuing through 2015.

 

In exchange, DHL has agreed to assume financial responsibility, retroactive to January 31, 2009, for ABX Air’s obligations under capital leases on five Boeing 767-200PC (non-standard cargo door configuration) aircraft currently dedicated to DHL’s U.S. network. As of March 31, 2009, ATSG’s balance sheet reflected $50.2 million of debt and $21.5 million of net book value related to those aircraft capital leases.

 

The agreement calls for ABX Air to grant to DHL up to $10 million of credit against future rent obligations for the four 767-200SFs. If DHL elects not to exercise its options for any of the four 767-200SFs, ABX Air would pay DHL $2.5 million for each such option that DHL elects to forego.

 

ABX Air is expected to continue to operate some or all of the five leased 767-200PCs as required under the current ACMI Agreement between the companies. The agreement does not stipulate whether ABX Air would continue to operate any of the four 767-200SF aircraft that DHL may opt to lease.

 

ATSG CEO and President Joe Hete said, “The completion of this agreement with DHL formalizes the deleveraging process that we announced earlier this year, including the restructuring of our promissory note to DHL. The combined effect of the capital lease transaction and note restructuring, including our commitment to pay DHL $15 million to further reduce the principal balance of the note, would be to reduce our outstanding debt principal by approximately $113 million. The note restructuring also removes some of the limitations on our Board’s ability to consider dividend payments or buybacks for our shareholders. DHL has worked closely with us in finalizing these agreements, and we continue to jointly explore opportunities to provide DHL with additional 767-200SF aircraft on an ACMI or dry lease basis beyond 2010.”

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  • 4 weeks later...

Good catch Roger!

 

Wow! I never thought and had never seen that this could have such influence. At least not on the exact day that the rebalancing is occuring.

 

I picked randomly some names in the additions: AHCI, MITI, MLR, RBI, UVE and they all showed dramatic increases in trading volume Friday. Most did go up by a fair amount, but not like ATSG.

 

Cardboard

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  • 1 month later...

ATSG appears to have had a decent quarter with CF of about $30 million (EBITDA plus interest and taxes). In my opinion there are still too many moving parts to come up with an accurate valuation. Management appears to be handling the wind down of the DHL business well and their explanation for the termination of the ACMI on the call was excellent. It appears that DHL and ATSG want to squeeze the unions for some cost concessions and hope to sign a new better agreement where DHL has predictable costs and ATSG earns a decent margin on its assets. I would say the stock is worth north of $3 but, less then $8 and that analysis isn't worth much. I plan on holding to see what the balance sheet looks like in Q3 and also holding for additional announcements on the leasing of the 767s. DHL by law cant operate the airplanes and inmo will lease them from ATSG and find an operator or will let ATSG handle everything.

 

To come up with a full valuation we need a settled balance sheet and some ideas on the margins related to ACMI work and dry lease work. The presentation earlier this year provides some details but, I prefer to wait and see what a few contracts look like. I also want to see how much overhead consumes and what happens with this underfunded pension liability. It looks like they had a gain of $16 million but, I don’t see how you can lay off 8000 people and not have it change by much. I think the stock sold off on the bad ACMI news but, will continue going up if new planes or leased, or on a new ACMI agreement with DHL.

 

The real only bad news to me was the disagreements over vacation reimbursement and plane valuations. These show that DHL and ATSG haven't fully worked out their differences and are still not totally on the same page. The loss of business which produced less then 3% margin doesn’t bother me much.

 

With regard to the balance sheet the positives are significant cash coming in with cash on hand of $112 million + $60 million due from DHL with $15 million going back to DHL for the note reduction. On the liabilities side there will be a reduction in Q3 of $47.5 million for capital leases which went to DHL. On the negative side it looks like we will have to pay $26 million towards the pension liability.

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