The Virgin Australia Holdings Limited (ASX: VAH) share price is down 9.7% so far in 2019, making it a good time for investors to add this company to their portfolios.
Background on Virgin Australia
Virgin Australia is the operator of Virgin Australia Airlines. Together with airline partners, Virgin Australia operates flights on both domestic and international routes. The group's aircrafts fly to 45 Australian destinations and 17 international destinations. Virgin also operates budget airline Tigerair Australia.
Why I think it's a buy
While the group reported a loss after tax for the 2018 financial year and is set to do so again in 2019, there is a silver lining. First, Virgin's losses last year were mostly caused by non-cash accounting items. This included more than $570 million of non-cash charges to the group's accounting statements. While these may affect the overall value of the company, they do not affect the cash flow that the company earned last year.
Underlying earnings, which are not affected by unusual circumstances or one off events, were positive at $109.6 million. These were the highest underlying earnings for the group since before the GFC hit in financial year 2008. This was despite fuel cost increases and suggests, when we take one-off accounting charges out of the equation, that the Virgin business is performing well.
In addition to improved underlying earnings, revenue was up 7.4% and is expected to have increased 6% in the 2019 financial year. This has been an ongoing theme for the company and suggests that when business conditions improve, the group will be ready to turn larger profits.
While Virgin has not paid a dividend in recent memory, this is not necessarily a negative for new shareholders. It has inevitably contributed to the weaker share price and means that when the company is again ready to pay a dividend there will be an improvement to the share price. This will reward shareholders that purchase while the company goes through its current difficulties.
Virgin trades on a price to book ratio of 1.31. Considering that the company could experience a turnaround in the coming years this is a low value. While the group has debt of around $2.57 million, it also has cash of $1.1 million, which, along with growing revenue, should be adequate to service the debt.
Foolish takeaway
While the Virgin share price has suffered with accounting losses, underlying profits are healthy and the group is growing revenue. Virgin is set for a turnaround and will experience a significant re-rating if dividends are resumed.
