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Avation (AVAP)

Carcosa
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Avation (AVAP)

#68939

Postby Carcosa » July 22nd, 2017, 7:04 am

Thought I would start a new thread as the original one mostly dealt with the ATR fleet sale. That can be accessed by clicking here.
==============

Seems that the 16 year-old Airbus A321-200 D-AIAA (MSN 1607) currently on lease to Thomas Cook/Condor which was due to expire in April 2018 but has recently been re-leased to a new customer is no longer 'up for sale' on the Avation website

Three possibilities occur to me

1) Just an 'admin' error on the webpage / Unlikely given the very small number of Avation employees

2) New leasing terms are so fantastic the idea of selling it has receded / That goes against the general Avation policy of selling old aircraft.

3) Aircraft has been sold subject to formalities ahead of an RNS / Removing it from the website ahead of an RNS seems a bit pedantic

Selling the aircraft would, presumably, be a lot easier if there is an attaching lease so who knows... maybe we will get an RNS in the coming days?

Given what I foresee as a reduction in profitability for FY 2018, selling aircraft above book value is necessary to maintain the share price.

Carcosa

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Re: Avation (AVAP)

#69473

Postby simoan » July 25th, 2017, 2:46 pm

Hi Carcosa,

I must admit I still hold these but it's getting increasingly difficult to justify it at the current 250p. There seem to be so many small cap share prices that have disconnected from the underlying fundamentals recently that the strangest thing is that the recent rise from 200p doesn't really seem that exceptional. Strange times...

All the best, Si

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Re: Avation (AVAP)

#72282

Postby Carcosa » August 5th, 2017, 1:01 pm

An important LOI was recently signed with ATR by Silver Airways for the ATR 42-600 aircraft. The LOI commitment is split between 20 firm aircraft and 30 options with the ability to swap up to the ATR62-600's. First delivery Q4/2017. This is important for ATR due to the fact Silver Airways is US based and the last time ATR won an order there was 20 years ago.

The environment is moving toward's the ATR now because the Bombardier Q400 is aging in US service, as are other similar aircraft and replacements will be needed soon.

Link: http://atwonline.com/aircraft-orders-de ... turboprops

Perhaps there will be opportunities for Avation to enter the US market, doubtful but possible. Nevertheless this is positive news for aircraft valuation.

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Re: Avation (AVAP)

#80531

Postby Clitheroekid » September 12th, 2017, 1:21 am


Carcosa
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Re: Avation (AVAP)

#81212

Postby Carcosa » September 15th, 2017, 7:35 am

Thought I would keep this thread going with my take on Avations following the recent FY prelims which can be found here together with the presentation slides and accompanying webcast.

As a bit of recent background, the latter part of 2016 saw interest in the ATR aircraft grow tremedously. Not only was this set against a background of general commercial aircraft growth (passenger growth rates high YoY +7.4% and about 1,850 new aircraft manufactured and backlog growing) but most notably from orders and interests from India (50+ aircraft), Libya (20+20). Furthermore the ATR aircraft are currently going through certification in China and industry observers are predicting demand for 100's of ATR to serve the Chinese market. And they ahve eventually found there way back into USA.

Currently ATR are only able to produce 85 aircraft a year.

Due to the demand for the ATR's I think Avation shareholders can rest assured that aircraft valuations are going to remain high for at least the medium term if not the long term. Furthermore, Avation are the largest holder of aircraft options, 27 as of last week. I would estimate that each option cost around $125,000. What that means is (as they have done so in the past) these options can be sold on for a considerable profit of up to around $250,000 each or potentially more depending on how a deal may be structured.

The downside is that when aircraft valuations are relatively high the yield on these aircraft declines and that has what has lead to Avation to start looking at 'twin-aisle' or 'widebodied aircraft' (am not specifically sure if there is a distinction between the two terminologies).

Although the mechanism or process of leasing wide-bodied aircraft is in principle the same as narrow bodied aircraft there are some significant differences. First of all a typical ATR72 sells for around $19m-$20m and an A321 (narrow bodied aircraft) sells for around $52.5m. Widebodied aircraft are a quatum leap in valuation. Perhaps the cheapest wide-bodied aircraft starts at a list price of $250m but with discounts that may go down to around $165m to a large, established airline. Financing becomes somewhat more complex as essentially aircraft manufacturers sell gliders and then the airlines shop around for engines which potentially will be financed differently. Furthermore governments often have a say. Payment schedules can be vary variable with time but leasing companies usually require a payment schedule which is the same per month for the duration of the lease. Airlines seeking wide-bodied aircraft can also attract the best credits.

Only with Avation having built up their experience to date have they now been able to start to address this market. An improved credit rating, lower Singapore tax rate, perhaps an aircraft portfolio currently worth in excess of published NAV and reduced ATR yields have seemingly conspired to provide Avation this opportunity. There is less competition amongst lessors for this space, lease terms tend to be much longer and cost of debt is often cheaper. Contract negotiations can become arduous and long-winded involving mutiple parties. Therefore if Avation are entering this market they need to keep things as simple as possible and certainly not pre-announce deals until the ink is dry and money is in the bank!

If risk is not well managed during an accelerated fleet expansion phase then things can go horribly wrong. Have a read of "Crash Landing – An Inside Account of the Fall of GPA" for how things can rapidly turn to pooh!

Avation have already hinted that they would only be interested in either financing a new wide-bodied aircraft or - more likely in my opinion, as it is easier - take on an existing leased aircraft of say, less than a couple of years old.

[As an aside; and pure speculation on my part, I would not be surprised if the aircraft they are focussing on will be for Malaysia Airlines who still wants to lease additional Airbus A330s to cover short-term needs sourced from bankrupt European airlines.]

But what does this mean for Avation's shareholders? Well, the quick and dirty answer is that the share price is a rough proxy of NAV. Currently fleet assets are $744m. So one wide-bodied aircraft will instantly add >15% to the NAV and a commesurate increase in revenue (although savvy airlines will probably force Avation to take a somewhat lower lease rate than industry norms). Of course the associated debt will also increase substantially and I do wonder as to how that will affect Avations credit rating given that one or two widebodied aircraft significantly increase the risk profile for the company. It may also take quite some time for the share price to react accordingly.

Current Fleet Portfolio
There were the typical aircraft fleet changes during the last FY resulting in a current fleet of
ATR72's x18
A321's x8
A320's x3

We also know that a further 3 ATR's for Mandarin Airlines and will be added to the fleet before calendar year end, so that will represent around $57m addition to fleet assets.

Plug that into a spreadsheet and I would hazard a guess that total revenue will be around $46.9m ($45.1m) and NAV $3.38/share for H1 and for the full year revenue would be $100.3m ($94.2m) and an estimated NAV of $3.73/share

Few notes worth pointing out though...

The Air Berlin aircraft is expected to bring in an extraordinary gain. In a perfect world $10m but in practice I suspect this will be significantly less; maybe $2-3m?? Just a guessing game at the moment.

Also there will invariably be additional fleet changes in the next few months. Hopefully one or two wide-bodied aircraft will have a large impact on the figures. I can see improvement in profitability.

Overall then, Avation are in a good position. Potentially additional gains from the ATR options, gains from the Air Berlin aircraft, some gains from the cash pile of $87.6m ($48.3m). All of that falls straight to the profit line.

However, for the company 2018 could prove an inflexion point with wide-bodied aircraft entering the fleet. I suspect 2018 is going to be the most significant year for many years in the history of Avation.

Management have a really good story to tell but they appear to be keeping it all low-key for the moment. Am fine with that.

Carcosa

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Re: Avation (AVAP)

#87329

Postby Carcosa » October 11th, 2017, 8:54 am

Today Avation announced the introduction of a new Boeing B777-300ER and a two year old Airbus A330-300 into the fleet by 2017 year end.

The B777 will be heading to Philippine Airlines and has probably been acquired from Intrepid Aviation (a privately held commercial aircraft lessor with offices also in Singapore). List price of a B777-300ER is around $347m (Only GE engines are available for this model) but given that PAL is a very old customer of Boeing and a well established national airline I would hazard a guess the actual aircraft valuation is nearer $210m. The value of newly delivered -300ERs is also falling as demand is weak. The oldest examples have values of less than $55 million with another 30 percent fall expected over the next three years, greater than trend.

There are only around 800 -300ER's in service and the aircraft is at the end of its production life. Lease terms have been relatively short with many garnering less that 10 years on lease. Emirates has a very large number and is already divesting aircraft. It is therefore quite likely that aircraft valuation may fall rapidly and, unlike the narrow bodied aircraft the number of potential customers to re-lease the aircraft too is limited.

The B777X is due to enter service by 2020. The B777X offers a considerable improvement in operating efficiency. With 400 seats, the B777-9X is larger than the existing B777-300ER which comprises 386 seats.

On the other hand the A330-300 list price is around $256m - the EVA Air example may be worth ~$185m and is an aircraft in demand. There is more of a secondary market for Airbus A330s than Boeing 777s. This is because the 777 is larger, used on longer flights, and the A330 is often used in regional services, such as intra-Asia.

Certainly today's not entirely unexpected announcements mark a major change for Avation. I see the B777 risk to be that the aircraft valuation may well fall short of expectations in 5+ years. However to get into the market such risks have to be taken; mitigated with an airline that has historically paid it's bills on time albeit came a cropper during the financial crises. Would be useful to know the lease term though. The Airbus aircraft I am much more sanguine about; clearly the contacts made via UNI Air ATR business proved fruitful.

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Re: Avation (AVAP)

#87496

Postby Carcosa » October 11th, 2017, 3:33 pm

I am significantly revising my estimate for the wide-bodied aircraft having come into some recent information:

B777-300ER
Year 2016, Market value $164m - Minimum Lease Rates $1.150m/mth (~8%)
Year 2014 Market value $142m - Minimum Lease Rates $1.050m/mth (~9%)

A330-300
Year 2016 Market value $106m - Minimum Lease Rates $0.7m/mth (~7.9%)
Year 2014 Market value $91.2m - Minimum Lease Rates $0.6m/mth (~7.8%)

Increase in NAV of ~$262m (FY 2017 Fleet NAV was $744m)
Annualised lease income $21.6m or (FY2017 revenue was $94m)

NB: Above does not include additional NAV/Revenue from the three ATR72's due for delivery year end 2017 or the five ATR's due for delivery by end 2018

Logic would dictate the share price should increase considerably from the current 230p level; however the market appears to disagree with me!

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Re: Avation (AVAP)

#87539

Postby simoan » October 11th, 2017, 6:04 pm

Carcosa wrote:I am significantly revising my estimate for the wide-bodied aircraft having come into some recent information:

B777-300ER
Year 2016, Market value $164m - Minimum Lease Rates $1.150m/mth (~8%)
Year 2014 Market value $142m - Minimum Lease Rates $1.050m/mth (~9%)

A330-300
Year 2016 Market value $106m - Minimum Lease Rates $0.7m/mth (~7.9%)
Year 2014 Market value $91.2m - Minimum Lease Rates $0.6m/mth (~7.8%)

Increase in NAV of ~$262m (FY 2017 Fleet NAV was $744m)
Annualised lease income $21.6m or (FY2017 revenue was $94m)

NB: Above does not include additional NAV/Revenue from the three ATR72's due for delivery year end 2017 or the five ATR's due for delivery by end 2018

Logic would dictate the share price should increase considerably from the current 230p level; however the market appears to disagree with me!


Hi Carcosa,

Thanks for sharing this information which is very interesting. I must admit I was in the camp that wasn't sure what the market would do having read the two RNSes this morning. Not that I thought logic would have anything to do with it! :) Clearly it changes the risk:reward of the company but it's good to get an idea of how much from the 2016 lease rates and yields you have listed.

All the best, Si

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Re: Avation (AVAP)

#87680

Postby Harrogate » October 12th, 2017, 1:44 pm

Hi Carcosa

Thanks as always for the market info - it adds real colour to the AVAP RNSs
I am positive about the company over the next 12 months and as you say this period is going to be one of the highest growth periods in its history.

Not sure why the market reacted as it did but much lower and I will add to my already large and long held shares.

One thing I would point out is that the purchase of these 2 aircraft for $262m doesn't increase the NAV by anything unless they have bought them for a steal and will revalue them - only profit and aircraft revaluation can increase NAV.

Lot's to see for the next 12 months for sure - keep up the good work. I have registered on LF purely to follow what you say as you seem to have deserted ADVFN

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Re: Avation (AVAP)

#89591

Postby Clitheroekid » October 20th, 2017, 4:07 pm

An interesting report on the company - http://www.proactiveinvestors.co.uk/com ... 84013.html

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Re: Avation (AVAP)

#89596

Postby dspp » October 20th, 2017, 4:23 pm

Will the ATR get squeezed by the Bombardier C that Airbus have just taken over* ? Will this affect ATR residuals ?

* they have an option to buy out the other C partner shareholdings idc.

regards, dspp

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Re: Avation (AVAP)

#89692

Postby Carcosa » October 21st, 2017, 6:29 am

The Bombardier C series is serving a different market to that of the ATR's. They are not particularly comparable technically or commercially.

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Re: Avation (AVAP)

#90136

Postby Carcosa » October 23rd, 2017, 3:08 pm

Press release from Fitch Ratings, well worth a read regarding an expected rating of 'B+(EXP)'/'RR4' to the recent offering of senior unsecured notes. Goes on to explain the strengths and weaknesses and essentially confirms that Avation are heading in the right direction i.e. need to grow the fleet considerably more!

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Re: Avation (AVAP)

#99166

Postby Carcosa » November 27th, 2017, 10:28 am

December will see the biggest change in Avation's history in terms of fleet asset value.

Today the first ATR to Mandarin Airlines was delivered. I would hazard a guess that a further delivery is due in a few days and a third sometime later in December.

We will also have the new B777-300ER for Philippine Airlines and the 2 year old A330-300 for EVA Air to be delivered, both in December. So that increases fleet NAV to ~ 380p??

Thus 5 aircraft worth over US$300 million, to deliver to new airline customers by Christmas. These aircraft deliver around 30% growth from the FY 2017 total assets, and achieved before we are half way through FY 2018.

Although we sold 6 ATR's recently the Dec 31/17 revenue is, at a guess, going to be broadly flat compared to last year, but I see considerable growth in FY revenue of ~22 percent.

With the increased year end newsflow I believe this is a good time to acquire further shares in Avation (obviously I am biased!)

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Re: Avation (AVAP)

#104310

Postby Carcosa » December 15th, 2017, 8:36 am

FWIW... The Philippine Airlines B777 completed it's third customer flight at Boeing. If there are no further technical snags then I would hope the aircraft gets delivered by Monday (18th December).

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Re: Avation (AVAP)

#112932

Postby Carcosa » January 24th, 2018, 7:41 am

I have a meeting with Avation in Singapore next week. If anyone wants me to ask a question on your behalf then do please let me know, either on this forum or via PM.

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Re: Avation (AVAP)

#121574

Postby Carcosa » March 2nd, 2018, 11:15 am

On 26th February 2018 Avation issued their HY interims ending 31 December 2017. There is also a investor webcast and associated presentation provided by the company. Not much info provided in the formal part of the webcast so skip to the Q&A session for the more interesting bits. I was quite happy to hear some analysts asking the same questions I have asked during my visit to the company; so at least I did not sound an absolute plonker! BTW during my visit to Avation I had about a 3 hour one-to-one session which I thought was very generous.

The interim results lined up very well with my own forecasts although I admit I was lucky in guessing the gain arising from the Air Berlin A320 aircraft placement (see way below in an earlier post). For those with nothing to do I also posted some items on Stockopedia both here and here. The first link is a sort of introduction to aircraft leasing and the second is a review by Graham Neary (which I will come to later in this post) and a comment or two by myself.

The interims had no surprises as such but there was one glaring omission which I thought should have been highlighted, namely, the two ATR72-600 aircraft on finance lease (Uni Airways) were removed from the fleet in October 2018. Am a bit surprised this was not the subject of a separate RNS. Anyway...

In Grahams review on Stockopedia he mentioned "When you put all of these numbers together, the after-tax return on equity comes out at a modest level. We will have to wait and see what happens for the full-year 2018, but previous years have seen ROE somewhere around the 12% level."

I think to some extent the fact that some 35% of assets and associated costs/debt landed on the balance sheet at the end of December which generated no appreciable revenue complicated matters somewhat.

Profit After Tax ROE has been:
2016 10.53%
2017 10.85%
HY 2018 6.51%
So based purely on the half year, I see his point, but if I run my numbers for the full year I get:
2018 12.67% - which is what he indicates

Where he does have a point is balance sheet leverage ended the period at 5.4x. In 2016 and 2017 leverage was 4.9. As you would expect this is largely due to the increased LTV which went up from 72% to 75%. Overall these numbers are within industry norms but given how small Avation is I do start to wonder how this may impact their ability to raise finance. Not a concern at the moment but something to keep an eye on perhaps.

All in all the Interims were a bit lacklustre to me (as expected) but the real interest is going to be the full year numbers (June 2018). Assuming no changes to the fleet (and ignoring the three ATR72-600's that will be placed before year's end) then I get the following numbers (lets see how much of an ass I make of myself posting this!):

Image

Other positives not included in the above are:
- Continual lower cost of finance (Avation already say they expect no increase over HY cost of debt i.e. 4.8%)
- Positive changes from credit rating agencies
- Upward revaluation of ATR fleet given the huge demand now*
- Aircraft sales, specifically the Skywest and EasyJet A320-200's
- Unannounced additions to the jet fleet

* An ATR coming off the production line in 2017 cost $19.3m according to my research. In the Avation presentation (p13) they quote aircraft option valuation of $623m. Given they have 30 options that's $20.77m/aircraft, giving an increase of 7%. Whilst perhaps 3-5% could be attributable to annual price increase the remainder, say 2%, I would attribute to demand and therefore would apply to the existing ATR fleet. That works out to be worth about $6m in assets for Avation. Even if I am wrong with the quantum I am confident in my own mind there will be a positive revaluation of the ATR fleet.

So, in summary. Am happy to be a shareholder and should there be any significant pull back on the share price over the coming months I would consider adding to my shareholding.

Carcosa

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Re: Avation (AVAP)

#130096

Postby Carcosa » April 5th, 2018, 8:01 am

Richard Wolanski's 40 min presentation at Master Investor Show 2018. Link starts at the Q&A session as I assume most readers will be familiar with the usual presentation pitch. Much more emphasis on the implications for the share price this time around.

Note that next ATR deliveries due end Q2 2018.

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Re: Avation (AVAP)

#132576

Postby Carcosa » April 16th, 2018, 3:48 pm

S&P Global Ratings issued a research update on the Company which can be found here (registration required)

Some of the more interesting parts are:

Avation's capital structure reflects the company's aggressive growth and the associated high leverage. Given the company's fleet expansion plan, we expect its capital expenditure to remain high at US$250 million-US$300 million in fiscal 2018, and US$175 million-US$225 million in fiscal 2019. We expect Avation's debt to increase to US$850 million-US$900 million in fiscal 2018.

The positive outlook reflects our expectation that Avation will expand its fleet and reduce earnings concentration from its top three customers over the next 12-18 months. We anticipate that the company will maintain good profitability and moderately increase leverage, with EBIT interest coverage of around 1.6x and a ratio of FFO to debt of 7%-9% over the period.

We would revise the outlook to stable if Avation fails to meaningfully broaden its asset base. This could happen if the company's fleet mix remains
concentrated on turbo-prop aircraft, or if the new planes on order are largely placed with the largest customers.

The EBIT interest coverage deteriorating to below 1.5x could also trigger an outlook revision.

We would upgrade Avation if the company continues to grow and diversify its operations. We would also expect Avation to maintain a consistent financial policy, so that its EBIT interest cover remains above 1.5x and FFO-to-debt ratio stays above 7%.


NB: FFO = Funds From Operations

We know that there are three ATR's to be delivered in 2018, so that's $60m on top of the $264m already spent, totalling $324m yet they are only referring to a max of $300m for 2018. As of December 2017 debt stood at $862m; add in a further $43m for the to be delivered ATR's then that totals $905m which is where S&P expect them to be by June 2018. So either Avation are not going to be adding any new aircraft to the fleet that we do not already know about or else S&P are way under estimating/being conservative.

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Re: Avation (AVAP)

#136049

Postby Carcosa » May 1st, 2018, 3:27 pm

Today Fitch followed up saying (I think) that refinancing of $300m notes will be at a cheaper rate when issued and are assigning a rating from B+ to BB- (a one notch improvement - see https://en.wikipedia.org/wiki/Credit_rating )

Although this proposed rating improvement is modest at least it is in the right direction. I have no idea what this theoretically means in terms of cash savings but if this rating provides 0.25% cheaper finance then that's a saving of $750k/annum (in practice I would expect any theoretical saving would be plowed back into the business).

However, just like S&P in my former post, the stumbling block for further improvements lies with the fact that the company has a miniscule number of aircraft (37) and relatively few quality customers. Perhaps a meaningful credit rating improvement requires a 100 aircraft and tripling of customers???

Incidentally this has not been released via an RNS yet (Holiday in Singapore) so that may come tomorrow.


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