Avation (AVAP) Prelims (7 Sept 2017)
.png&w=384&q=75)
Today, Avation (LON:AVAP) released their FY prelims for June 2017. The delay between year end and the announcement is ridiculously long for a simple leasing company; but at least they are consistent!
Overall the ATR aircraft are once again selling like hotcakes around the world and production slots are likely at a premium. Avation currently holds a number of production slots values in excess of $3m but quite possibly worth a tad more.
Demand for the ATR aircraft has resulted potential and meaningful gains on aircraft sales against their deprecitation book value. As Avation tend not to hold on to old aircraft the industry depreciation rate will continue to hide the hidden value in their ATR portfolio.
This past year Avation were approached by several entities wanting to buy their ATR fleet at a substantial premium over book. Whilst as first glance this sounds an excellent outcome, in practice it would have resulted in the company effectivly going back to 'sqaure one'. A compromise of selling a portion of the fleet was made resulting in a gain of $5.3m or I estimate about 5% over book value; lower than I initially thought at the time of the sale.
Their headline numbers showed:
NB: Items in brackets are (Consensus Forecasts) [My forecasts]
Lease Revenue up 32% at $94.2 million ($94m) [$92.8m];
Operating Profit grew 32% to $60.2 million; [$56.1]
Profit before taxation increased by 18% to $21.4 million ($19.7m) [$24.3m]
Total profit after tax increased 16% to $21.3 million; (19.7m) [$21.9m]
Operating cash flows increased 20% to $63.0 million;
Dividend per share increased by 85% to 6.00 US cents; and
Earnings per share ("EPS") increased by 6% to 36.3 US cents.($0.32) [$0.36]
Other areas of improvement include a lower LTV of 72% and an upgrade in the credit rating. Sitting on a hefty cash pile following the ATR sales too
Of particular interest was their annoucement that they would now start to consider wide-bodied aircraft to be added to the fleet. Thi sis a new development and something that they have shied away from in the past. It suggests that narrowbodied aircraft valuations are high and, although potentially higher risk perhaps the returns from widebodied aircraft are more attactive now.
Certainly lease income form one widebodies aircraft, if less that 8 years old, is a multiple of that obtainable from ATR's and indeed narrow-bodied jet aircraft.
Interesting to note that for the first time Avation have not split out asset valuations between jet and turboprop aircraft (or may have to wait for the annual report for that detail).
The 'real' measure for share price valuation is the book value/share which stands at $3.21/share
Current share price in $ terms is ~246p which is marginally above yesterday's closing price. However a fair view is that the share price should be a premium to book value.
Going forward however, the loss of lease revenue from the now sold 6 ATR's is going to substantially decrease lease revenue and aircraft asset valuation next year. However it is in the nature of their business to acquire further aircraft and if they announce additions to the fleet within the next three months then I am comfortable with the current share price.
A conference call commencing 1pm UK time today is accessible here
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
8 comments
Today Avation announced the introduction of a new Boeing B777-300ER and a two year old Airbus A330-300 into the fleet by 2017 year end.
The B777 will be heading to Philippine Airlines and has probably been acquired from Intrepid Aviation (a privately held commercial aircraft lessor with offices also in Singapore). The value of newly delivered -300ERs are falling as demand is weak. The oldest examples have values of less than $55m with another 30 percent fall expected over the next three years, greater than trend.
There are only around 800 -300ER's in service and the aircraft is at the end of its production life. Lease terms have been relatively short with many garnering less that 10 years on lease. Emirates has a very large number and is already divesting aircraft. It is therefore quite likely that aircraft valuation may fall rapidly and, unlike the narrow bodied aircraft the number of potential customers to re-lease the aircraft too are limited.
The B777X is due to enter service by 2020. The B777X offers a considerable improvement in operating efficiency. With 400 seats, the B777-9X is larger than the existing B777-300ER which comprises 386 seats.
On the other hand the A330-300 has more of a secondary market than Boeing 777s. This is because the 777 is larger, used on longer flights, and the A330 is often used in regional services, such as intra-Asia i.e. ideal for Eva Air.
Certainly today's not entirely unexpected announcements mark a major change for Avation. I see the B777 risk to be that the aircraft valuation may well fall short of expectations in 5+ years. However to get into the market such risks have to be taken; mitigated with an airline that has historically paid it's bills on time albeit came a cropper during the financial crises. Would be useful to know the lease term though. The Airbus aircraft I am much more sanguine about; clearly the contacts made via UNI Air ATR business proved fruitful.
So what does this mean for the basic numbers in relation to Avation?
B777-300ER (New)
Year 2016, Market value $164m - Minimum Lease Rates $1.150m/mth (~8%)
Year 2014 Market value $142m - Minimum Lease Rates $1.050m/mth (~9%)
A330-300 (2 year old)
Year 2016 Market value $106m - Minimum Lease Rates $0.7m/mth (~7.9%)
Year 2014 Market value $91.2m - Minimum Lease Rates $0.6m/mth (~7.8%)
So roughly speaking this should increase fleet NAV by around $262m (FY 2017 Fleet NAV was $744m) and an annualised lease income $21.6m (FY2017 revenue was $94m). Should be noted of course that only half of this revenue stream will be seen in the FY 2017 results as there will only be a 6 month contribution to revenues.
NB: Above does not include additional NAV/Revenue from the three ATR72's due for delivery year end 2017 or the five ATR's due for delivery by end 2018
Logic would dictate the share price should increase considerably from the current 230p level; however the market appears to disagree with me! However there should be a relative plethora of announcements toward year end which may hopefully generate some people's interest in the company again.
Have just listened to a recording of the webcast.
My 'take-away points'
Looks like I will be entering my fifth year as a shareholder...
I'm a long term holder so biased.
Webcast / call went well, probably can catch later on their website. They were positive that they would be able to place the Berlin Air jet easily and had plenty of offers. Second hand market for aircraft they have is strong with values increasing. ATR order book has value following recent demand from Iran, USA etc. Oldest aircraft they have recently re-leased for a further 6 years with a new airline. 3 new ATRs being placed with Mardarin Airways between October and December. They have cash to spend and at a minimum they will replace the 6 ATRs they sold this year (I believe). Appear to be looking at twin aisle aircraft in the second hand market as it offers some value relative to lease yield.
From previous discussions for AVAP they have a desire to build their asset base aggressively turning sale proceeds from one aircraft into many deposits on additional aircraft (and financing the balance with debt), pay down the debt and sell the aircraft and do it all over again. In a few years from now we may be able to double the asset base and lease income from here.
Carcossa - Thanks for the update. The aircraft sold were on lease and it was the long leases that increased their valuation. Aircraft sold off lease have been around book value. Sometimes higher and sometimes lower.
Hi ratioinvesrtor,
Poor terminology on my part. I should have said at a premium to book value. The sales price agreed for the ATR aircraft was at a premium to book value. The price achieved provided confidence that the realisable value of the ATR fleet is above book value and also confirms the liquidity of this aircraft type given the amount of interest received throughout the process. Furthermore they reduced the concentration of assets with individual airlines.
Within the leasing industry an acquirer has paid above book value too for the assets.
NAV going forward may significantly change over the coming months. Wide-bodied aircraft yields are higher than narrow bodied and it offers the potential to accelerate growth. Debt costs are lower too with wide-bodied aircraft; particularly with the good credit rating Avation have obtained. It's also easier to get aircraft credits on wide-bodied aircraft. IF Avation can get a couple of theses aircraft on their books then it will have a considerable positive impact on NAV this time next year. Hopefully the webcast will discuss this further today.
Historically the share price has closely followed NAV; hence am ignoring low P/E's as a valuation metric
Hi Carcosa,
You did say "premium to book value"
"However a fair view is that the share price should be a multiple of the book value."
Not really sure on this. I.e. you are stating an opinion as fact. The other aircraft leasing groups trade at around book value. The return on equity is reasonable at 13.7% for Avation but this is achieved through significant financial leverage which increases the risk profile. The return on capital is 6.3%.
I don't really understand the argument that Avation is worth a multiple of book value. If the group was sold today it would get around book value for its planes. Being worth a multiple of book value is pie in the sky.
To be correct about this, Carcosa used the word "premium"and not "multiple" as you state.