[$HRBR] Harbor Diversified
A regional airline in OTC MKTS that is a typical Graham's bargain
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Harbor Diversified Operations
Harbor Diversified is a holding company of a regional airline called Air Wisconsin. They are in the middle of winding down a capacity purchase agreement with United Airlines and ramping up a capacity purchase agreement with American Airlines. A Capacity Purchase agreement is a contract between a regional and national carrier where in the routes, frequency, departure schedule is fixed by national carrier. In return, the regional carrier gets fixed revenue & costs covering fuel, airport and landing expenses. Harbour Diversified stock got beaten down as they are in middle of arbitration settlement with United over revenue to be paid. That was one major reason for switching over to American Airlines.
HRBR business has consistent revenues & high conversion to FCF
Harbor Diversified earned revenue of $280M in 2022 with a net profit of $38M. Part of their high margin is driven by the fact, they do not have to pay for fuel but only payroll & aircraft maintenance. This translates to a free cash-flow of $40M. Their contract with American prohibits management from paying dividends. But management uses share-buybacks to return cash to share-holders.
HRBR has a conservative balance sheet that does not raise red flags
HRBR owns 64 CRJ-200 jets. Not lease but own. They have owned and leased maintenance facilities, airport hangars and corporate headquarters. They have 382M worth of assets, of which 256M is current liquid assets. LT debt of 56M in fixed rates, 13M of cumulative convertible preferred & 231M of equity book value. Please note, equity book value is excluding preferred as I consider that as mezzanine equity. FCF nos. above are post-payment of dividends for preferred holders.
HRBR is stupidly cheap
HRBR market cap is 98M. Investors get a company that makes $40M in highly predictable free-cash flow, moderate debt levels (< 1.5 Debt to FCF levels) & equity book value almost 2x the price (231M).
What would be the economic value of HRBR? Let us assume this contract with American will last for only 5 years. Post which, they would be forced to liquidate. This would generate around ~$50M in free-cash for next five years & ~$150-200 (conservatively) vs $98M market cap.