Expanding SAR Contracts And Offshore Services Propel Financial Growth And Stability

Key Takeaways

• Strategic investments in new SAR contracts and optimization of the Americas OES portfolio are poised to significantly improve long-term cash flow and revenue.
  
• Enhanced revenue and net margins from higher rates and utilization in Africa, coupled with a stabilized tax rate, are expected to bolster financial stability and growth.
  
• Bristow Group's financial health is at risk from fluctuations in the energy sector, supply chain issues, unsustainable seasonal benefits, capital constraints, and increasing competition.

Catalysts

Provides vertical flight solutions.

• Higher rates and utilization in Africa are expected to continue positively impacting revenue and net margins into 2025, primarily due to increased market activity and customers returning to Bristow for higher-quality services.
  
• The strategic investments in new SAR contracts with the U.K. and Irish Coast Guard are anticipated to drive long-term attractive cash flow yields, significantly improving free cash flow and EBITDA well into the middle of the next decade.
  
• The optimization of the Americas OES (Offshore Energy Services) portfolio, including new contracts in Brazil and short-term projects in Trinidad and the Caribbean, is likely to bolster revenue and margins through improved fleet utilization and higher contract rates.
  
• The stabilization and reduction of the effective tax rate due to positive changes in the global mix of earnings will enhance net income and provide financial stability, contributing to an improved investment profile.
  
• Capital expenditure related to SAR contracts supported by advantageous financing arrangements and a strong balance sheet is expected to position Bristow for substantial free cash flow generation post-2025, impacting future growth and shareholder returns positively.

Assumptions

• Analysts are assuming Bristow Group's revenue will grow by 10.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 7.6% in 3 years time.
• Analysts expect earnings to reach $135.2 million (and earnings per share of $3.97) by about September 2027, up from $31.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.9x on those 2027 earnings, down from 31.8x today. This future PE is lower than the current PE for the US Energy Services industry at 18.0x.
• Analysts expect the number of shares outstanding to grow by 1.57% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.05%, as per the Simply Wall St company report.

Risks

• Dependence on offshore energy sector's health and commodity price stability could adversely affect revenue if energy prices decline significantly or projects are delayed or canceled.
  
• Supply chain challenges, particularly delays in parts and repairs from helicopter OEMs, could increase operational costs and impact net margins due to penalties related to availability in the government services business.
  
• Seasonal and one-time benefits that positively impacted the recent quarter's results might not be sustainable, potentially affecting future earnings.
  
• Capital expenditure for new SAR contracts and the impact of financing these investments on the balance sheet could constrain liquidity and affect the ability to generate free cash flow.
  
• Potential for increased competition or changes in customer preferences toward large capacity transfer devices, like boats for offshore transportation, could reduce demand for helicopter services, impacting revenue and net margins.

Valuation

• The analysts have a consensus price target of $48.5 for Bristow Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.8 billion, earnings will come to $135.2 million, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 10.1%.
• Given the current share price of $34.63, the analyst's price target of $48.5 is 28.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.