Avation (AVAP): Staying Grounded

Monday, Jul 29 2013 by

After Dart's rather spectacular success recently, I'm casting my eyes over a rather less beloved aeronautical stock - Avation, the £35m market cap aircraft leasing company. I should note that a company being unloved, in this sense, is almost a prerequisite for it being an interesting investment. That was exactly the position Dart found itself in a few years ago - a company thinly traded (though not as bad as this one) and with a rather lowly apparent valuation, and explains both my and Richard Beddard's slight unease at a company which has gone from that position to being far more discussed, tipped, followed and - more importantly - richly valued. Still, I'll come to Dart in a later post.

Avation is an interesting group to me particularly because valuing it should be quite easy. An aircraft leasing company does something very simple in the world, and there's not a huge amount of room for differentiation. Their role, it appears to me, is twofold. Firstly, they allow companies to shift some assets off balance sheet. I suspect this is an attractive proposition, but also appears to be one that's liable to come to an end in the next decade with improving rules on operating lease accounting. That's far from the only value they provide, though - more importantly they allow for everything that's positive about leases generally. They allow companies to expand more rapidly than they otherwise could, without the need for huge amounts of capex up front. They also mitigate completely the risk related to holding an asset which depreciates fairly quickly (at least compared to the other big ticket leased asset that comes to mind, property). 

I don't know how liquid the market is for second-hand aircraft, but if we assume it is fairly liquid, valuing Avation should be easy. After all, the operations are soothingly straightforward - they buy an aircraft, financed with debt and equity, pay interest on the aircraft over the next x years, lease the aircraft over the x years, and then can either sell the aircraft at the end, lease again if it was for a short term and so on. Since their customers - big airlines (notably Virgin Australia) - will nearly always have the option of buying the aircraft themselves, their isn't much room for predatory margins. If/when they acquire reasonable…

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Avation PLC is a United Kingdom-based company engaged in leasing of aircraft. The Company is a commercial passenger aircraft leasing group managing a fleet of 47 aircraft, which are leased to airlines globally. The Company's fleet includes Airbus A220, A220-300 A320 and A321 narrow-body jets, Boeing 777-300ER and Airbus A330-300 twin-aisle jets, Boeing 737-800 NG, ATR 72 twin engine turboprop aircraft and five older Fokker 100 jets. It supplies regional, narrow-body and twin-aisle aircraft to the airline industry. It serves the commercial airlines. It owns, through its subsidiaries, a range of commercial passenger jet aircraft, which are leased to various airlines in Europe, Asia and Australia. The Company's subsidiaries include Avation Capital S.A., which is engaged in financing, and Capital Lease Aviation Limited and MSN429 Leaseco Limited, which are engaged in aircraft leasing. more »

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2 Comments on this Article show/hide all

bsharman 30th Jul '13 1 of 2

Hi, I have been watching this one because it shows up as good value although the massive debt pile puts me off. However it is interesting to note that Mark Slater hold these in his growth fund. He must rate them then.

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cig 15th Aug '13 2 of 2

Isn't the second hand value of the planes the crux of the problem? If there's an even modest improvement in fuel efficiency, the old gas guzzlers will be worth their scrap metal price (see what happened to MD-80s), and you've also got exposure to the ups and downs of the airline industry where a downturn will mean a glut of second hand planes (the manufacturers have relatively unresponsive capacity). Presumably that's why airlines like to lease planes, to pass on these risks.

Perhaps a way to detect value in this sector is to price airplanes at scrap metal value for long leases (say >10 years) with a matching progressive haircut to current prices for shorter leases, and if it looks above water with aggressive discounting, then you're safe with a free call option on any surplus value.

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About ExpectingValue


Private investor turned hedge fund analyst, looking predominantly at global small caps. Sector agnostic.


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