By way of example, AVAP has 41 aircraft and firm commitments for another 7 aircraft by End June 2019. The top lessors has around 1300 aircraft (GECAS). Avation are about the 42nd largest lessor by mid-year. Alternatively by fleet value, $35 billion (AERCAP) down to Avation around $1bn around 45th place. In other words Avation simply do not 'feature' on anyone's radar when it comes to size. However, it's small size is a big advantage for the company and investors.
Aircraft leasing has been around for decades. There is nothing particularly clever about it nor is there much innovation in the business (historically some aircraft lease ideas originated during the time of the steam locomotives). It is also an industry which is heavily regulated, subject to a multitude of international conventions/legal framework and given the huge sums of money involved finance is obtained from reputable sources (if there is such a thing
) Finance/Auditing conventions are well established. Also, for all practical purposes, there are only two major airframe manufacturers supplying an ever increasing market.
Given the above, in my opinion the possibility of nasty surprises (i.e. fraud!) is extremely low.
Although the company is small, as it grows its fleet it becomes increasingly difficult to calculate finance costs accurately. This is because profits are relatively tiny compared to asset value/debt and a very minor change in debt costs has a large effect on profits. Furthermore some of the finance instruments being used are starting to have a noticeable effect on overall returns.
Recent interims have been excellent. However I think some investors/commentators have made assumptions regarding the future which I tend to disagree with. They centre around the A321 valuation, ATR Options and NAVThe A320/A321 Fleet:
Broadly speaking, jet aircraft pricing is determined between the airline and the airframe manufacturer (supported by the engine manufacturer). The airline buys the aircraft and then a leasing company buys the aircraft from the airline and leases it back to them i.e. A Sale and Lease Back arrangement (SALB). The leasing company has no say in the aircraft price.
By way of background, no airline in the world pays the 'sticker' price. They all get a discount. The larger airlines, especially those in 'new markets' where there is real competition between Airbus and Boeing can get what I think the general public would regard as extraordinary discounts. VietJet certainly fits that bill.
VietJet maiden flight occurred in December 2011. They will have 72 A320/A321's and have 200 B737's on order. They will have got these aircraft at a good price (along with other support). In actual fact, we can work out how much they got them for from Avation's accounts and it turns out to be $51,358,000. By comparison a normal real world price was $54.1m. So that's around $2.7m difference
Aircraft valuations are a strange beast though. In recent years as narrow bodied jet aircraft age beyond 2-3 years their actual valuations exceeded their depreciated price i.e. a 2016 delivered A321-200 aircraft is worth $45.2m in the market compared to a book value of $44.2m (these are industry values and will vary according to region, aircraft spec, condition etc).
Avation sold one of the five VietJet aircraft for a profit. They have not advised which A321 but the oldest A321 is 6 months older than the last Avation delivered aircraft. I have taken a guess its one of the last two deliveries.
Avation acquired the aircraft for $51.4
Book value at time of sale $48.7
Sold for a profit of $5.2m
Sale price therefore $53.9m
Whoever acquired it got it at world market price i.e. they did not really over pay for it.
The $5.2m profit was driven by VietJet originally getting a good price to begin with and general market pricing.
So why do I disagree with some commentators when they say the Book Value for the A321 fleet is higher than what is on the Avation books? Well, firstly Avation are not claiming this themselves. They carefully advise that the 'Realisable' value is above book and leaving it for investors to assume the A321 fleet (VietJet, Thomas Cook and Galistair) and by association the A320 fleet too.
Well, the Thomas Cook aircraft were acquired for $52m each in 2016, before the VietJet deliveries. Thomas Cook did not get as good a deal as Vietjet. Therefore their realisable value is not as great as the VietJet fleet. (I would also hazard a guess the specs are not as good as VietJets). As for the A320's, these aircraft are much older, 8, 10 and 17 years. These old aircraft have been on the market for sale for a number of years and so far Avation have yet to find a suitable lessor to take them off their hands.
It would be nice if Avation could convince the auditors to increase the BV come the full year results but I am not expecting that to happen. Will wait and see. If it happens then lets say they can apply a generous $5m against the 4 VietJet A321's. That's $20m or 23p per share in asset terms. Not going to set the world alight is it?!ATR Options
For Avation, options only apply too the ATR fleet. An option is the right to buy an aircraft/production slot within some range date in the future at a pre-determined cost and subject to some escalation. From memory I think Avation's options extend into 2025. Options cost money and if they are not used they expire worthless. Normally an option will be confirmed into an order at least 6 months in advance of actual aircraft production, but 12 months is more desirable for the airframe manufacturer.
One advantage in holding an option is that if an airline customer goes to ATR to order an aircraft ATR could, in theory, tell the airline that they have no production slots available. Hence the airline may then approach Avation to use one of their production slots. Thus these options have some value.
Avation have actually sold options in the past. At the time I worked out that they made a $345,000 gain on the option. That seemed a bit expensive to me. Some commentators claim that Avations' options are not being valued. This is true. Auditors will not allow options to have value on the balance sheet unless those options are very likely to be used and in practice that means short term. Other commentators are claiming hidden value in these options.
So how much are these options? Probably $1m each. I think they have 25 options That's $25m in total I guess with a potential $8.9m gain. All sounds good in theory. Thats around 39p NAV.
The problem is that Options do have an expiry date and Avation may have to commit to procuring an ATR without a customer. This has happened before and then a savvy end customer can negotiate a good deal for themselves with Avation taking a less than ideal lease rate or term, or indeed a less than ideal customer. The alternative is that Avation allow the option to expire worthless. The last two years ATR market has been difficult and in response ATR have reduced their production rate this year to 74 aircraft (was 100). With fewer production slots those 2016/17 Options may become even more valuable.
So do the Options have hidden value? I'd say yes but personally I would not subscribe much value to them (10p?) because there are too many uncertainties; they become a big liability if you cannot find a customer. Also, other leasing companies treat options in a similar manner and I don't see why Avation should be treated any differently in this regard.NAV / EPS
This used to be so much easier to work out in the past by using the aircraft NBV but now it's getting increasingly complicated with large changes related to Finance Lease's and Trade/Other receivables. The other complication is that Avation have not advised investors when the next batch of aircraft deliveries will be made; all we know is it is supposed to happen before end of June. As Sterling Investors the exchange rate is important. The recent interims were using an exchange rate of 1.27 but come June 2019 I wonder what it will be!? Making a range of assumptions I estimate NAV will be in the range of 305 - 315p come June 2019
On the assumption of no further aircraft sales then I am estimating EPS 29-32c (22-24p) But will be affected by actual aircraft delivery dates, and tax (Avation have unused tax credits available). This is on a revenue of $121m Other Predictions
Operating Profit +26%
Fleet BV +21%
EPS (GBP) -10%