Small Cap Value Report (19 Feb 2015) - AVAP, MJW, INL, PRW

19th Feb '15 by Paul Scott

29 comments 24103 reads

Good morning!

Avation (LON:AVAP)

Share price: 126.5p (down 9% today)
No. shares: 55.2m
Market Cap: £69.8m

Interim results - for the six months to 31 Dec 2014 are out today. This is an aircraft leasing business, based in the Far East. The market has reacted negatively to its interim results today, with the shares down 9%. Some of us have met with the company, as they were active on the investor circuit last year, appearing at a number of investor shows, and other investor events (including one of my Brighton investor evenings).

It's a straightforward business model, with experienced management, who know the pitfalls. So they buy aircraft, lease them out, and borrow at fixed rates and periods which match the leases. So in theory it should all be pretty simple, with Avation making a profit on the leasing charges exceeding the interest they have to pay on debt. Bad debts shouldn't be a problem, as aircraft are repossessed if necessary, and the client's security deposit forfeited.

From the research I've done, problems with leasing businesses usually arise when there's a recession, and the residual values on the assets end up being way below book value, leaving a hole in the balance sheet, which usually coincides with a withdrawal of borrowing facilities. Hopefully Avation should steer clear of these issues by carefully matching its borrowings to the leases of particular aircraft.

Profits - the interim figures appear to be quite a big miss vs forecast. Basic EPS is reported at $0.1139, so converting that into sterling at £1=$1.544 gives us 7.4p EPS for H1. I can't see why there would be any seasonal bias in a leasing business, so annualise that and it gets to 14.8p EPS (or $0.228) for the year.

The trouble is, broker consensus is for $0.33 this year, so that looks like a 31% shortfall against forecasts.

Adjustments? - this could be a presentational issue, as Avation has not published any adjusted figures today, and has not explained in the narrative anything about why some costs appear to have risen by a greater percentage than turnover.

I note in particular that other income of $609k is significantly down on last year's H1 of $1,653k. Checking note 5, these look like one-offs, e.g. forex gains, profit from disposal, etc:

Why didn't the company present underlying, or adjusted figures in the headlines, so that investors…

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Paul Scott

19th Feb '15

Hi Jane,

Indeed, the point you make first, about other income, is what I covered in the original article above.

The trouble is, today's figures look like an earnings miss. So is the stock really on a fwd PER of under 6?
Doesn't look like it is, on the reported figures anyway, which is probably why the stock has fallen today, and in the run up to today's results.

Thanks for your other comments, which ring true, based on what I remember from a couple of presentations made by the FD of Avation (LON:AVAP)

Regards, Paul.

Heisenberg

The lack of effort that the company puts into these market announcements is perplexing. The figures are certainly weaker than expected and in general investors are entitled to a fuller explanation from management on trends in key line items. Text below is from article on my blog today:

"Today’s release seems to have been crafted by amateurs – company and advisers (WH Ireland, Blytheweigh) – and I would have been embarrassed to sign off on this. The disclosure and quality of such information to the market ultimately reflects on the management. The share price has been marked down meaningfully today and it seems hard to disagree with the immediate verdict of the market despite the inherent longer-term attractions of this niche part of the aircraft leasing market that Avation is in and the relatively low valuation that the business currently trades on. The company needs to take a long hard look itself and its disclosure and communications to investors. At the moment it appears that public market shareholders are an afterthought – the company needs to understand that being a public market company does not mean that you can simply comply with the bare minimum disclosure required."

grumpy5

Re AVAP, having seen a very punchy presentation by the (non-director) FD at Mellow 2014, and also earlier last year, I am astounded that the company came up with such a rubbish RNS. Blytheweigh - no wonder I have never heard of them - need firing!

underscored

Hi Paul, can you elaborate on the signs of institutional entrance to the BTL market? Is this conversation you are hearing in The City?

Metier9

Read over to Capital Lease Aviation?

http://www.investegate.co.uk/capital-lease-aviatn--cla-/rns/half-year-results-to-31-december-2014/201502190700072850F/

janebolacha

Paul, my own calculations for EPS come very close to the 33¢ for FY15 shown in the Stockopedia stock report, taking into account interest savings (extremely important in a business with US$311m of loans and borrowings) and the other factors mentioned. That would be a PER of below 6, at the present SP. Obviously, timing of events could change that but those changes would perhaps amount to deferrals of profit rather misses. However, as time can make fools of us all, let's wait and see.

Heisenberg, you're right that their IR needs a shake-up.

A few weeks ago they put out an RNS that Cenkos was leaving as joint broker "with immediate effect", no other explanation. The SP tanked that day, as well. Not that Cenkos would be any great loss but it's obvious that AVAP don't think of how the market perceives things.

I agree - although from my perspective this goes a bit beyond IR as this all makes the management look naive.

"with immediate effect" does sound rather dramatic but tends to be used in these announcements. If I recall the Avation one was late in the afternoon - surely preferable to organise this such that they announce this before the market opens on a given day rather than during trading?

Cenkos have been joint broker for a year and from what I can see have done nothing - no research I am aware of which is what you would hope for at a minimum from a new broker on board. Agree they are no great loss but perhaps a few more heads may have improved the level of disclosure in today's RNS.

Julianh

Paul
Thanks as always.
On Avation (AVAP)
Revenue seems to have gone up nicely - more than $3m up on the same period last year. The reasons for the reduction in EPS seem to be:
* Other income - down $1m
* Other operating expenses - up $1.5m
* administrative expenses - up $0.8m
Resulting in a small increase in net profit and a small decrease in EPS - slightly down on last year but significantly down on what we would expect if they are going to meet this years profit forecast.
The notes to the accounts do provide more information:
* Other Income - last year there was a profit of $1.4m on sale of property, plant and equipment with no equivalent this year. I guess the two recently announced aircraft sales will fall into H2. If so they should more than make up for this shortfall vs. last year
* Two reasons for the $1.5m increase operating expenses:
- there is a $1m increase in the depreciation charge. I guess this is due to an increase in the fleet size. If so, this is a non-cash cost that comes with the increase increased revenue and/or the expectation of further increases in revenue
- there is a $0.6m adjustment for losses of foreign exchange
* I don’t see any explanation of the 31% increase in admin expenses. Without an explanation we are left to guess as to whether this increase will be carried forward into the full year figures and next year or whether this is some sort of blip or timing effect.
Which leaves me agreeing with Paul and many of the responses to his post. It is management’s job to explain these variances so that we know what they mean. Presenting the numbers like this leaves us guessing as to whether we are seeing
* a blip in the numbers that will correct itself in the year end accounts
* a one off shortfall that will mean that AVAP miss their profits target for this year
* an ongoing increase in the cost base which will rule out profits growth for years to come
One of an FD’s jobs is investor relations. I hope this FD can do better than this next time.
Julian

rhomboid1

I don't understand what AVAP as a small player bring to the party as a lessor, their balance sheet and credit covenant is weaker than end users !

Surely airlines look at their own residual value expectations of potential new aircraft and only lease if they believe the lessor is too ballsy? Otherwise they can fund them as cheaply themselves? If they can't then default risk must be a factor?

FREng

I buy a lot of wine from Majestic Wine (LON:MJW) - I don't know a better place to buy cheap Merlot or Malbec. Their cheap Sauvignon Blanc is generally OK too.

I see the market has voted that the departure of the CEO is a good thing.

I'm not a shareholder there at present.

Re Avation (LON:AVAP) - please see the new update section I have just written, added to the main article above, this evening, under the chart. The FD just rang me, and we had quite an interesting chat, so I've posted the gist of it in the new section above.
Regards, Paul.

herbie47

Interesting view about institutional money coming into buy to let, if so I presume that will push up prices and make it even harder for first time buyers?

imranawan

Thanks for the write up with the FD from Avation (LON:AVAP). Its much appreciated.

Agree this is helpful but still begs the question as to how the company managed to put out such a shoddy release in the first place - the Chairman has a meaningful equity stake here so surely he should be interested in presenting sufficient information such that investors can assess the developments at the company rather than having to try to read between the lines. The interims last year are almost identical in terms of poor disclosure - perhaps the company will at last start to wake up. The company should also ask the questions of their advisers as they are supposed to be the experts in terms of the public capital markets - they should have told the company that the release was not good enough in terms of disclosure.

Paul, You don't cover CTR?

Trading statement out yesterday which I missed, sounds interesting "revenues and adjusted earnings are now expected to be ahead of management's previous expectations"

Hi Herbie,

Re Charles Taylor (LON:CTR) - no, I don't cover insurance sector, or financials usually. I did see the positive trading update though, and the valuation looks reasonable on the face of it - PER of about 11.8, and divi yield of about 3.8%.

It's just not a sector that I cover, as I've never been able to make any money on insurance or financials, so I ignore those sectors now.

Regards, Paul.

20th Feb '15

Paul, thank you.

I had built most of that into my own forecast which is why I felt quite comfortable in the remarks I made in my first post. Nice to have the FD's confirmation. Like you, I bought yesterday, in three lots, averaging 126p.

Keep up the good work,
Jane.

merlin51

Thank you Paul
For the update last night. I also bought in yesterday morning, so read your update with great interest.. Will make it hopefully to your next Sussex share soc. meeting - when will that be? M

OK thanks Paul. Its possible to make money although it is a bit up and down. I don't have many shares in insurance now.

Small Cap Value Report (19 Feb 2015) - AVAP, MJW, INL, PRW

Avation (LON:AVAP)

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Paul Scott

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