Avation (AVAP)- Ship plugged and now bailing out the water

Avation PLC (LSE: AVAP) is a commercial passenger aircraft leasing company that was incorporated in 2006 and whose shares are traded on the Main Market of the London Stock Exchange.

I have personally been involved with Commercial Aircraft, including contracts and leasing, for 30 years and the leasing business is something I am very comfortable with. I have held shares in Avation pre-Covid for a number of years and under normal circumstances would be one of very few shares I would consider holding for numerous years; so my outlook is somewhat long term.

Avation is a minnow in the aircraft leasing world. Probably around number 45 in terms of overall asset size. Not unexpectedly, the more valuable an aircraft is the more lease payments will be received. In the aircraft world there is a massive difference between lease income from a narrow-bodied aircraft versus a substantially more expensive wide-bodied aircraft. Typically though, a wide-bodied aircraft operator is more financially stable than a narrow-bodied aircraft. Avation has two wide-bodied aircraft in its fleet and one of those aircraft is with Philippine Airlines. The income and asset value from this aircraft is disproportionately large compared to all the other aircraft in Avation’s stable.

Well, I’ve gone and done it again… re-bought into Avation; albeit a very modest amount (At the height of my holding in 2019, pre-Covid, I had a six figure sum invested).

Why now?

If I may use a metaphor… 2020/21 was about sealing multiple leaks in a sinking boat and now they are in the process of bailing out the water.

The final piece of the jigsaw fell into place when Philippine Airlines restructuring was announced with the Avation B777 aircraft to continue in service. Had the B777 not been ‘rescued’ I really felt Avation would struggle immensely for a long period of time. Perhaps even forcing the company to sink.

Just having a look at the titles of the RNS releases ( avation PLC: Company Announcements ) shows a lot of activity over the past 18 months or so. Summarising, the effect is:

Practically all the aircraft are now producing income.
Non income producing aircraft (Virgin ATR’s) likely to be sold or leased in the next quarter.
All bank and airline deferments set
Improved cash/liquidity position through cash released from:

  • A220 Sale
  • Virgin Australia creditors trust payment ~$6.5m
  • PAL restructure partial payment of arrears
  • Additional repayments of airlines lease deferments
  • Potential sale remaining Virgin Australia’s ATR’s
    Likely buy-back of unsecured bonds (trading in the 80’s). This will reduce Avation’s most expensive debt
    Possible future growth late 2022

There is no question that the forthcoming year-end finals are going to be bad reading when released. Significant impairments are to be expected although given Avation’s history I suspect the impairments will not be as conservative as I would expect. Other financial metrics will likely take a beating too.

The recent increase of the share price seems a bit speculative to me; being seen as a COVID recovery play perhaps. When the Finals are released I would not be surprised to see a significant pull back on the share price unless there is some compelling positive narrative.

18-24 months from now I would anticipate Avation procuring more aircraft; being quite profitable and paying a dividend again. But; as was seen prior to COVID the potential to sell the company or its major assets is ever-present. Indeed relatively recently AerCap announced $30 billion deal for GE’s aircraft financier. Goshawk Aviation CEO Ruth Kelly only said last month they are on the lookout for M&A. Carlyle Aviation Partners’ purchased Fly Leasing Limited earlier this year… Perhaps Avation may be an attractive company post Results.

Either way as a long term investment post results I think it will now do rather well for shareholders.

Results are due 30 September 2021

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Hi Carcosa,

Many thanks for the write-up. Not a company I have looked at before.

Yes, lots going on here. From what I can tell, AVAP’s profit is essentially the rental income from the planes less the cost of debt used to buy the planes less admin costs. So the ‘rental yield’ of a plane is an important measure. Maintenance costs are the responsibility of the airline I think.

A few basic sums, acknowledging the pandemic will have negatively influenced AVAP’s recent figures…

Minimum contracted revenue is $717m over a 6.2-year weighted lease term = $116m or £84m a year. Last H1 results showed $60m lease income = $120m a year, so £84m is in the ballpark. H1 admin costs were $5.5m, so £8m annualised. EBIT profit could therefore be £76m.

Gross debt I think is now $1,119m or £810m, which gives an enterprise value of £885m with the £75m market cap at 108p.

EV/EBIT = £885m/£76m = a 11-12x valuation multiple before any tax and ‘surplus’ cash adjustments.

Historical cost of the fleet is £1 billion, so arguably a £76m annual profit is not a great return on such an investment. Debt is therefore used to enhance equity returns, which is not ideal but I think necessary for the business to produce a more appealing ROE.

I note 60% of revenue relates to only three airlines, which again is not ideal.

The directors recently invested in a placing at 110p, and the long-time exec chairman does have a £12m/16% shareholding, so the board seems promising. But I must admit the business model – effectively making a turn between lenders and airlines – is not one I am truly comfortable with (unless I had 30 years’ industry experience!)

Maynard

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Thanks for your comments.

At this point in time investors do not really know how much cash income is coming through the doors, nor the real asset value. Also there can be unexpected significant surprises arising from interest rate swaps being cancelled and increased interest rates on loans.

Before calculating any figures I would want to see the forthcoming Finals.

As an aside, for a company as small as Avation, typically when selling an aircraft it is invariably above book value. Aircraft trading is an essential part of the business too. That can make significant profit for the company. Another effect is the cost of the loans. In round numbers, shaving off 0.5% from a near Billion dollar loan has a significant effect.

For now I am just highlighting Avation as one to look out for in the medium term with their results due out shortly.

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