Mesa Air Group, Inc.

MESA Details

Mesa Air Group, Inc. (NASDAQ: MESA) is a holding company whose principal subsidiary, Mesa Airlines, Inc., is a regional airline that operates from Cincinnati/Northern Kentucky International Airport and provides scheduled flight services to 112 locations in 38 states, as well as cargo flight services (as of March 31, 2021). Under the provisions of capacity purchase agreements with American Airlines, United Airlines, and DHL Express, MESA operated a fleet of 163 aircraft with about 440 daily departures. MESA generates income via contracts with its major partners and pass-through revenue under purchase and flight services agreements.

Strategic Investments in Heart Aerospace: On July 13, 2021, MESA announced its investment in electric aircraft firm Heart Aerospace, which plans to produce the world's first nineteen-seat ES-19 aircraft, along with Breakthrough Energy Ventures and United Airlines Ventures. MESA also aims to add 100 ES-19 aircraft to its regional fleet to help decarbonize air travel by using electric aircraft.

Encouraging Operating Performance: On July 08, 2021, the company reported a 224.6% YoY increase in block hours to 30,015 in June 2021 because of increased flying due to industry recovery from the COVID-19 pandemic. This followed a similar uptick in April and May 2021.

Q2FY21 Results: The company reported a sharp decline of 46% in total operating revenues to USD 97.28 million in Q2FY21 (ended March 31, 2021) as compared to USD 179.90 million in Q2FY20, primarily due to lower flight operations, temporary lower contract rates, and the winter storm and subsequent power outages in Texas. However, net income for Q2FY21 was USD 5.69 million, 201.8% higher than USD 1.88 million in Q2FY20, primarily due to recognizing a government grant of USD 55.97 million under the Payroll Support Program Extension (PSP2), which was offset against operating expenses for Q2FY21. As of March 31, 2021, the company’s cash balance stood at USD 147.87 million, with a total debt of USD 704.04 million.

Key Risks: MESA's top customers, i.e., American Airlines and United Airlines, contributed 45% and 53% of the operating revenue from capacity purchase agreements in Q2FY21. Excessive dependence on few significant customers for business could hurt the company’s financial health in the future. 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

(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)

Stock Recommendation: MESA stock fell by 26.45% in the past three months and is currently at the mid-band of the 52-week range of USD 2.80 to USD 17.40. The stock is currently trading between its 50 and 200 DMA levels, and its RSI Index is 40.12. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 10.91. Considering the correction in the stock price in the past three months, strategic growth initiatives, current trading levels, and associated risks, we recommend a “Speculative Buy” rating on the stock at the current price of USD 8.90, down 0.22% as of July 16, 2021, 3:20 PM ET.

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

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

LSI Industries, Inc.

LYTS Details

LSI Industries, Inc. (NASDAQ: LYTS) is a major manufacturer of lighting and graphics solutions for various industries, including petroleum, groceries, quick service restaurants (QSR), and convenience shops. LYTS generates revenues from two segments: 1) Lighting, under which it manufactures and assembles conventional and LED light sources for outdoor and interior lighting solutions. It also develops and manufactures electronic circuit boards under this segment, and 2) Graphics, under which it manufactures and designs digital visual image components such as interior branding, architectural and digital signage, and other electrical board systems for various retail locations. The company generates the majority of the revenues from its Lighting segment.

Launching a New Luminaire Brand: On June 01, 2021, the company announced the launch of Opulence, a unique series of outdoor architectural luminaires. The new brand features five different light distributions and delivers up to 14,000 lumens, with color temperatures ranging between 2,700K and 5,000K. In addition, the Opulence fixture is easy to install and can be configured with LYTS’ AirLink Blue wireless control system.

Q3FY21 Results: The company reported a slight increase of 1.68% in net sales to USD 72.20 million in Q3FY21 (ended March 31, 2021) compared to USD 71.01 million in Q3FY20. However, LYTS witnessed a slight decline in net income to USD 1.47 million in Q3FY21 vs. USD 1.86 million in Q3FY20. In addition, LYTS recorded a significant increase in free cash flows to USD 10.58 million during Q3FY21 compared to USD 3.48 million during Q3FY20. As of March 31, 2021, the company’s cash balance stood at USD 23.53 million, with a total debt of USD 1.82 million (comprised of finance lease liabilities).

Financial Metrics (Source: Q3FY21 Conference Call Presentation, April 22, 2021)

Key Risks: During FY20, the petroleum/convenience store market accounted for about 36% of the company's net revenues. The petroleum market is highly volatile and vulnerable to unfavorable reactions to significant political events in the Middle East and oil supply and demand economics. Any substantial interruption in the petroleum sector may result in a decrease in retail sales.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(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.

LYTS Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: LYTS stock has fallen by 15.94% in the past six months and is currently trading at the lower-band of the 52-week range of USD 5.76 to USD 11.22. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is at 36.69. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 8.80. Considering the company's market dominance in the US, organic and inorganic growth initiatives, sound balance sheet, current valuation, and associated risks, we recommend a "Speculative Buy" rating on the stock at the current price of USD 7.33, up 0.27% as of July 16, 2021, 11:48 AM ET.

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

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