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:

54e5c876d7d29AVAP_note_5.JPG

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

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