Avation (AVAP) - What to Expect in the Prelims

Monday, Jul 02 2018 by

I have posted about Avation (LON:AVAP) on several occasions e.g. a post largely about the industry and how Avation sits in that market: https://www.stockopedia.com/co...

Today Avation (LON:AVAP) has issued their interim management update https://www.investegate.co.uk/... which I will come on to a little later.

Looking at the list of RNS's over H2, not a lot appears to have happened (as expected in another post of mine from last September https://www.stockopedia.com/co... ) but in actual fact a lot has been happening behind the scenes.

At the very end of H1 the company acquired a B777 and an A330. This made a huge difference to the fleet asset value but practically no additional revenue due to the timing of the aircraft deliveries i.e right at the end of the financial year.

The company stated maximum net debt to equity ratio is x4 and their minimum EBITDA to interest ratio is x2 with a unsecured to secured debt ratio of 30% (Page 90 http://infopub.sgx.com/FileOpe... However, the credit rating agencies have indicated tighter requirements if Avation are to keep their recently improved ratings, namely less than x1.5 EBIT interest cover and Funds from Operations to debt of >7% to 9%.

I think these credit limits were reached at the end of December 2018 and therefore there were  very limited additions to the fleet in H2; providing the appearance of not a lot happening.


Over the last year we have had the following fleet additions (costs are my best guess):
* Airbus A330-300 delivered Dec 2017 at a cost of $97.6m
* Boeing B777-300ER delivered Dec 2017 at a cost of $150m
* Bombardier CS300 delivered June 2018 at a cost of $32m
* Airbus/Leonardo JV ATR72-600 x 3 Nov 2017 (1), Dec 2017 (2) Total ATR cost $56.5m

(Already announced but yet to be delivered in 2018/19 is another CS300 and x1 ATR both for delivery in July and another ATR later in the FY.)

So, in actual deliveries that's a total of $336m of new assets compared to $744m last year. I now calculate total NAV for the fleet to be $980m (not 336+744; difference due to depreciation). Thats around a 40% increase!

Of course we are also…

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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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9 Posts on this Thread show/hide all

slartybartfast 2nd Jul '18 1 of 9

I can only say that I very much appreciate you sharing your brilliant analysis of Avation (LON:AVAP) with us. By comparison, it makes many professional analysts look lazy and incompetent.

Many thanks Carcosa

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JTG 2nd Jul '18 2 of 9

Thank you very much for taking the time to make this post, Carcosa, as I did not know the CS300 wrinkles at all, having had a reasonably large position in Avation (LON:AVAP) for some time now. I certainly feel it should trade at NAV, and the div, while small, should steadily increase. But 4-5 years to Jeff Chatfield wanting to exit?

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danielbird193 2nd Jul '18 3 of 9

Thanks for a great post. I can't help thinking management could give an immediate boost to the share price by increasing the payout ratio and moving to quarterly dividend payments. With its steady, predictable cash flows, I would have thought aircraft leasing would lend itself to this sort of strategy, and setting itself in the sights of income investors could lead to a substantial re-rating of the shares in my opinion.

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Carcosa 2nd Jul '18 4 of 9

In reply to post #379189

Thanks SBF and JTG,

I suspect Jeff remains very committed to growing the company over many years to come. But all things are up for sale at the right price. If (and that's a big 'If) they do proceed with ATR's (remembering they have 30 options) and CS fleet then it would take at least 5 years to be a relatively unique leasing company that someone may wish to acquire. I do however think that perhaps Jeff is thinking longer term than that.

Since graham was kind enough to refer to my post here in his SCVR today I may as well take this opportunity to discuss some of his points.

The foreign headquarters (Singapore): This is a part of the world that Jeff (being an Aussie) is familiar with. It is also the largest geographical growth region in the world for aircraft. Furthermore the Singapore Economic Development Board ALS scheme has been revised ( https://www.edb.gov.sg/content... ) from a previous 10% concessionary tax to a lower 8% tax level. on profits.

Balance  sheet leverage: I see this a perhaps topping out to around 5.2x which is probably as high as it can really go.

Refinancing risk: I do not see this as an issue; unless there is an industry wide calamity. Airlines accept that increased lease rates are dependent on world financial market conditions and rarely baulk at higher lease charges. From memory they have about 95% of debt at fixed rates commensurate with lease duration. Any refinancing would (and has) been to obtain lower cost of borrowing; otherwise would not bother to do any refinancing at all.

Finally, interesting to note that a single buyer picked up £1m worth of shares today; all off-book.

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Carcosa 2nd Jul '18 5 of 9

In reply to post #379194

Dividend payments would be a losing proposition. For every dollar paid in dividends you are losing $0.75 in asset value plus a 12% gross yield for 25 years.

The reason a small dividend is currently paid is because institutions demanded it a few years ago.

Lets say that instead of paying out $5m in dividends they kept the money. This would then be leveraged up to $20m. That's the cost of a ATR which generates revenue of $3.4m per year; or say $1.4m gross profit per year. Hence dividend payments IMO should be kept at a minimum level necessary to satisfy institutional demand.

What needs to be done is to narrow the gap to the NAV through buybacks because then for every $ spent you are getting a return of ~$1.30+ in asset value.

Generally I am very anti-share buybacks unless you are obtaining real assets below cost, as would be the case for Avation. Nevertheless I am a firm believer that management should manage the business and not try to manipulate the share price. That is a job for investors!

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danielbird193 2nd Jul '18 6 of 9

Thanks Carcosa, good explanation of why my idea was a non-starter! I suppose I was thinking of the Doric Nimrod A380 leasing companies which are different but analogous businesses which have huge dividend yields and trade at big premiums to NAV.

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Carcosa 3rd Jul '18 7 of 9

In reply to post #379259

Hi danielbird193. Ah yes, those A380/Doric aircraft...

Historically Equipment trust certificates (ETC's) date back to the late 19th / early 20th century, originally used to finance railway box-cars and rolling stock. They are effectively a mortgage and at the end of the period the equipment becomes the property of the lessee.

Doric is an investment manager more than a traditional leasing company. From memory they are provided financing for 22 A380's plus other unattractive aircraft, so you can imagine the risks are extremely high and the ability to get a good credit rating practically impossible.

Doric are using Enhanced Equipment trust certificates (EETC's), the difference being that at the end of the lease the aircraft become the property of Doric. Enhanced equipment trust certificate ("EETC") are a novel way of financing an aircraft and when they are used they tend to be associated with the USA because of preferential tax treatments available there.

EETCs have developed into providing different slices of debt with different levels of seniority, security, risks, coupons and credit ratings and the use of special purpose vehicles to administer them which creates off-balance sheet borrowings. Any of this sound familiar? Sub-prime mortgage perhaps? ;-)

The issuer of the EETC (in this case Doric) is insulated from bankruptcy and the EETC is allowed to have a credit rating which is higher than the corporate credit rating of the lessee. What this means is that Doric, even with very low credit rating can have access to cheap capital. The way Doric has structured the EETC is to create a company - a trust - for each aircraft. So clearly a company with only one aircraft would have very poor credit rating but able to raise cheap finance and if (when?) it goes bust Doric is protected.

The returns that Doric get are almost certainly less than a traditional aircraft lease company but given the risks undertaken by Doric then its understandable they went that way.

Your point however is taken. If Avation were to enter the CS300 market in a big way then am sure they would consider EETC's as I know for a fact Avation believe this finance model can be applied to narrow body aircraft. That would be a good subject to raise with them during the investor call in September.

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smatthews1 3rd Jul '18 8 of 9

A first class write up, if we all could add as much information to one share as you have with this. We could create a powerhouse investing community.

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Carcosa 29th Jul '18 9 of 9

Forecasts call for EPS of $0.26. I just do not understand anything like that figure. My estimate is nearer $0.40. That's a huge disparity and I cannot see why...

The reason is because I inadvertently added in the $10m ex-Air Berlin maintenance reserves that was released into revenue twice! So that means, if I am right this time, Avation is standing on a P/E of 10 with a forecast EPS of $0.28. Sorry about that...

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