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Avation (AVAP)

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Re: Avation (AVAP)

#226680

Postby Alaric » June 4th, 2019, 8:30 am

simoan wrote: Avation is an asset play, so more like a REIT than a standard operating company making widgets in a factory.


Or even like a "buy to let" investor.

So what you are saying is that it borrows money, buys "property", leases "property". The "property" has a limited lifetime, so it will have to write off the purchase price over the lifetime of the asset.

Profit then is Income from leases less expenses of operation less interest costs on borrowings less amortisation costs on the assets.

Amortisation costs are going to be an estimate and thus an unknown variable in practice against the actual residual values.

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Re: Avation (AVAP)

#226690

Postby Carcosa » June 4th, 2019, 8:54 am

So what you are saying is that it borrows money, buys "property", leases "property". The "property" has a limited lifetime, so it will have to write off the purchase price over the lifetime of the asset.


It's a nice analogy but a few points for clarification...

The asset - aircraft - is generating 12% yield per annum during its first lease against a finance cost of ~5%, typically 8-10 years. During that first lease the loan is paid off. The asset has economic value for a 25 year period. Hence the aircraft in years 10-25 can generate an income which is essentially pure profit or you can sell it off at market value to book a profit which is the preferred policy due to other credit rating reasons. All through the lease it will be generating a profit for Avation. But you don't 'see' that profit because it is ploughed back into the pot to buy more aircraft/reduce cost of fleet debt.

Profit then is Income from leases less expenses of operation less interest costs on borrowings less amortisation costs on the assets.

Amortisation costs are going to be an estimate and thus an unknown variable in practice against the actual residual values.


Unlike the property owner all maintenance, operational risk, insurance and anything else you can think of is the responsibility of the airline/operator. Should there be any problem with the airline that breaks the leasing terms then under international law/conventions leasing companies have a legal right to recover the aircraft and place it with another lessor. This legal right does not cover Iran (hence Avation did not take part in the Iranian orders for ATR's) and in USA Chapter 11 provisions make it more risky for Avation to recover their aircraft; hence no business done in USA.

So profit is Income from leases less expenses (admin) less interest costs on borrowings less amortisation costs on the assets (as you say)
Amortisation (depreciation) is very very well understood in the industry and is far more reliable than say property valuations in the UK. Avation has already demonstrated that realisable value is far ahead of book value for the A321's and 2-3 years ago with the sale of multiple ATR's.

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Re: Avation (AVAP)

#228273

Postby Carcosa » June 10th, 2019, 10:37 am

From my post

Furthermore there are, according to a video I recently saw from the Finance Director, nine unencumbered aircraft which I would value at a pessimistic $117m (assuming they are all ATR's). These are aircraft which have been bought and paid for i.e no outstanding loans. So if these were sold then that is pure profit. But of course these are being valued as tangible assets and unlike a factory, machinery and other tangible assets who's realisable value is often below book, are akin to being liquid assets with very good possibility of being sold quickly if they elected to do that. In fact I am waiting on an email from Richard about unencumbered aircraft and their policy in extracting the best from them. Will advise if I get a response.


Have had a response from Richard, the FD. He advises the unencumbered aircraft include A320’s, ATR’s and F100’s

I would guess the F100 fleet (5 aircraft) is only worth around $10m so not significant in the scheme of things. The two least valuable A320's are worth around $65m which leaves two ATR's (-500) worth around $25m. So in total about $100m. However the F100's are on finance leases which finish in August 2020. That provides leverage to raise around $500m based on those aircraft alone. That's before further issuance of bonds, or using revenue income. Bottom line is that Avation are in a very strong position financially but I would caveat that by saying finance ratios/credit rating risk nay hold them back in 2019/2020 as they build up those buffers; just my speculation though.

A further two ATR's are, as previously flagged, due for delivery in June but as these have been planned months ago it's always possible one or both my slip into July.

On a separate issue, I asked why they are not entering the South America market (prompted by the fact Brazil has banned finance originating from Ireland; a country which is the home for major worldwide aircraft leasing). The response I got was "South America is higher risk as these airlines collect ticket revenue in local currency and would pay Avation is $US so the currency risk for the lessee is real and historically volatile."

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Re: Avation (AVAP)

#230104

Postby Carcosa » June 17th, 2019, 11:02 am

Avation issued a joint statement (RNS) with GE Aviation today at the Paris Airshow. Basically the announcement concerns Avation using GE's Asset tracking system.

I thought I would add my pennies worth to it...

Why do you need an asset tracking system?
As a lessor upon acquiring an aircraft, all the parts, modification status and certification paperwork becomes the asset which is leased out. During the lease, engines will be interchanged with other aircraft, items will be modified, replacement parts refurbished/repaired/replaced, different technical specifications for the same parts introduced. As the years go by these items, along with all the certification/standards/warranties will end up on different aircraft and quite possibly other airlines. At the end of the lease term the lessor expects the same parts to be delivered at the end of the lease or equivalent standard plus associated mandatory modifications, performance enhancements, maintainability enhancements up to a minimal standard as set out in the leasing terms.

Now at first you may think that is a job for the airline, and whilst 'technically' it is, it is also a job for the maintenance and repair organisations (MRO). So, for example, when an engine goes to the OEM for repair/refurbishment, hundreds of parts will be repaired or replaced or modified and it is up to the MRO to record these changes. Not only are part changes recorded but the history of those parts, say during repair, needs to be recorded such as what actual heat treatment was applied to the part or some other processes.

In almost all circumstances that engine will have parts interchanged with another engine and will be installed on to a different aircraft, or even possibly leased out to another airline. Keeping track with paper records is a headache!

What use is it to a lessor?
Traditionally the lessor would employ an inspector to physically check the paper records with what is on the aircraft. Generally they are only interested in the 'high level' data e.g engine serial numbers and overall modification standard of major parts (things that can affect on-wing or airframe life or ultimate engine life). Boxes of documents are reviewed and confirmed.

If a lessor acquires a new aircraft then all the records are already loaded on to the Avation Asset Transfer System. It is in an industry wide specified electronic system (well, it's supposed to be anyway!). Which facilitates transferring/copying records to Manufacturers, lessors, lessees and if necessary to the financiers.

Traditionally at the end of lease, which can be 6-15 years later, those original records need to be retrieved and compared to the current paper records to confirm either original specification or originally specification plus appropriate updates. That can take a long long time because records go missing, are incomplete, or in error. Imagine a single part where (if you are lucky) the OEM has provided 30 modifications but if you have modification #7 but you should by the end of lease date had modification #12 and #16. It becomes a nightmare finding out what the actual status if, often have to refer back to the component OEM repair shop... But then you have non-OEM approved repair shops that complicate matters even further.

All this affects aircraft valuation. As does the flight profile. For example an aircraft flying Iceland to Germany all its life is worth a lot more than the same aircraft flying Jeddah to Dubai. Being able to track all this data becomes a very effective tool for asset management.

So what is the "GE Aviation and Avation Asset Transfer System"?
It's part of GE’s AirVault aircraft maintenance records management system for airlines and other fleet operators. AirVault centralizes software configurations, administration, support and computer processing to bi-directionally connect the internal and external operation records and data of globally distributed fleets.

It facilitates the rapid transition of documents between lessee and lessor, and do the audit as quickly as possible in a compliant and organised way. Anything that can shorten the time frame during the transition adds value to both sides. An airline does not want it's aircraft stuck on the ground for two months whilst an inventory compiled and similarly a lessor wants to reposition an aircraft in a timely manner.

What do I think of this Agreement Between Avation and GE Aviation?
I have seen things like this in the past and they never seem to quite work as intended. The GE system was only debued in in December 2018 and will therefore be very immature. It requires the 'buy-in' of airlines, OEM's, Lessors Non-OEM shops and MRO's. That's a very big ask. It will not be perfect. I do not know how widely this system has already been deployed (but I would 'hope' GE leasing, one of the largest lessors in the world would be forced to use it) but it is quite possible GE want to deploy the system with small lessors first. So on that basis I hope that it is not costing Avation too much money, although to add the current fleet data on to the system by years end seems a bit of a challenge (and cost) to me.

I also suspect that its value (or lack thereof) will not be seen for many years as the aircraft end their leases. I would also anticipate some form of audit has to be done regularly to ensure the data is accurate for leasing purposes (although this already happens with paper based records). The system is supposed to generate, for lessors and lessee's, a checklist so perhaps I am being overly pessimistic.

The other takeaway is that Avation are embracing new IT technology and can be seem within the industry as being a 'leader' in this field. Never a bad thing IMO.

If you want to read more about this stuff then head over to the GE Digital Website and select "Lessors"


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Re: Avation (AVAP)

#232283

Postby Carcosa » June 27th, 2019, 9:29 am

Voyager IPO announced. Have had a scan read of the admissions document They are effectively a closed end investment trust which will be raising $200m to provide seed money to obtain three leased B777-300ER's from Philippine Airlines (Not the Avation aircraft though) and two A330-300's leased to Sichuan Airlines.

Those aircraft are being supplied by Amedeo leasing who stuffed up by entering the A380 market big time when things were going very wrong (they even had a go at starting their own A380 airline to get revenue). Future prospects for Voyager seem top hinge on Amedeo supplying additional aircraft to Voyager. I can only guess Amedeo is happy to get these aircraft off their books (along with the debt!) and let someone else take the finance risk whilst still supplying all the asset management for a fee.

This is somewhat reminiscent of the Doric model (A380's) where investors essentially pocket the revenue stream and hope to make a capital return when selling the aircraft at the end of lease...except that's really not going to work with the A380! Stands a much better chance with the widebodied fleet that Voyager will be financing though.

This is also remincent of the (so far) failed Sirius Aircraft Leasing fund that tried to do the same thing a while ago; except that fell apart as described here, basically got bogged down in legal proceedings. In fact that story is so similar to Voyager that it makes me think Voyager is the son of Sirius.

Anyway, Just thought I'd mention Voyager here as its in the same business as Avation albeit more akin to a specialised investment company

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Re: Avation (AVAP)

#236945

Postby Carcosa » July 16th, 2019, 8:28 am

Fitch ratings have issued two reports:

Fitch Completes Aircraft Lessor Peer Review
and
Fitch Affirms Avation PLC at 'BB-'; Outlook Stable

The industry overview is essentially suggesting that USA/China trade war has minimal impact, global growth is strong. "The outlook for lease yields across the sector is mixed. Established lessors' direct orders with the aircraft manufacturers are particularly appealing in the current environment, since the sale-leaseback market remains highly competitive. Average lease yields, calculated as lease revenue to total aircraft assets, for aircraft lessors monitored by Fitch declined to 8.3% in 1Q18 from 8.5% in 2017, 8.9% in 2016 and 9.2% in 2015. At the same time, larger lessors like GE Capital Aviation Solutions (GECAS), AerCap, and Avolon, have all selectively sold higher yielding aircraft to take advantage of the strong secondary market for older planes, thereby lowering lease yields... As interest rates have increased, publicly-traded lessors' equity valuations have been negatively impacted. Price-to-book ratios were 0.85x on average for the four publicly traded lessors (AerCap, Air Lease, Aircastle Limited, and Fly Leasing Limited) as of March 31, 2018, down from an average of 0.93x during 2017.

The Avation report very much follows prior years commentary (unsurprisingly) however as investors there are a couple of withwhile extracts of note:

"Avation's leverage, as measured by gross debt/tangible common equity, was 4.1x in 2018, and is expected to decline to 3.5x-4.0x in the near-term due to equity built from capital retention and debt amortisation. The company's reliance on secured funding has declined after it raised senior unsecured notes in 2018 to repay certain junior and senior secured loans. This increased the level of its unsecured debt and improved Avation's financial flexibility. The secured debt paydown also enabled Avation to unencumber a pool of narrowbody and regional aircraft. Unsecured debt accounted for around 36% of total debt as of end-2018, compared with 18% at end-June 2017... Avation has an unencumbered pool of approximately USD137 million as of end-2018"

Overall the path for Avation remains the same as before. Grow and diversify the customer base. The growth story mitigates the lower P/B value of the mega huge lessors and the small nature of Avation mitigates the need to take on very low yielding aircraft (as well as compensating for by lower cost of finance).

Personally am still a tad concerned that one (possibly two) ATR's that were scheduled for delivery by end June have still not been announced suggesting these may be an ongoing unexpected cost. Hopefully I am wrong.

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Re: Avation (AVAP)

#238327

Postby Carcosa » July 22nd, 2019, 8:25 am

Last Friday Avation bought more shares than ever before in the market, to be placed into Treasury
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I would not place to much emphasis on the now, nearly 1% of total shares. I suspect they may well be issued as part of share based payments/LTIP as these shares are not being cancelled. Nevertheless it is a positive move and helps to support the moribund share price.

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Re: Avation (AVAP)

#238382

Postby Carcosa » July 22nd, 2019, 12:49 pm

Ooohhh two posts in one day :lol:

Link to original article here

In its Market Forecast (2018-2037) published on July 2nd, 2018, ATR anticipates demand for 3,020 new turboprop aircraft, estimated to be worth more than 80 billion dollars. The future is therefore looking positive for our aircraft, with turboprops enjoying a stable position in the market for regional aircraft with fewer than 90 seats.

Several factors help explain the strong expected demand for turboprops: the surge in regional connectivity over the past 15 years and the potential for the creation of 2,770 new routes over the coming 20 years. Moreover, turboprops remain the most ecologically efficient solution for regional aviation.

The ability to continuously innovate in order to meet the needs of the market is crucial to satisfying the long-term demand for new turboprops. ATR has proven itself in this respect, with the recent launch of the freight version of the ATR 72-600 the "ATR 72-600F," the ATR 42-600 STOL project and the new ClearVision system which is currently at the certification stage. The development of customer services and support will also be a key factor in the success of turboprops in the coming years.

According to the market forecast for the period 2018-2037, nearly 80% of total demand will be for the 61 to 80 seater category, a market segment which has been dominated by the ATR 72 for years. The remaining 20% will be for the 40 to 60 seater aircraft market, a segment in which the ATR 42 is the only 50 seat aircraft in production. With regard to our market prospects in geographical terms, the greatest demand should come from Asia, with 43% of all turboprop deliveries.
/End

Have to remain a little skeptical about such reports covering the very long term but nevertheless it's good reading, especially for the Asian market where Avation are based.

Avation have yet to announce any customers they have for the ATR72-600F (freight version) but there again FedEx are the launch customer with potentially 50 units to be delivered from next year. How ATR will be able to deliver those aircraft in terms of a production schedule remains to be seen but i would have thought that at least in the short term it would put some constraints on the passenger versions of the ATR72-600 which will help to maintain existing fleet valuations (due to relative scarcity).

I would also imagine the freight version is somewhat cheaper to acquire new that the passenger version and over and above that they FedEx would have undoubtedly obtained a particularly good deal. I would not expect Avation to be involved with the acquisition of FedEx aircraft.

Overall the take-away is that ATR's are likely to remain in demand for the medium term and depreciation rates are unlikely to change. It also implies that not withstanding the lapsed ATR options Avation have had in the recent past the current options have some credible value.

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Re: Avation (AVAP)

#247541

Postby Carcosa » August 28th, 2019, 4:22 pm

The following are my personal views on what to expect in the forthcoming results due on 5th September for year ending June 30th. The 'Headline Numbers', when released should make for impressive reading but digging a bit deeper it may not be as impressive as the headline numbers, might suggest.

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A couple of notes: In the July Trading Update Avation indicated revenue would be $117.7m... increase of more than 20% over the prior year (2018 comparable: US$97.6 million).

Firstly ,my revenue number is a tiny shy on the Trading Update but I can't be bothered to change it. Am close enough.

Secondly the "comparable: US$97.6 million" does not reflect what the actual 2018 accounts say ($109m). I am therefore assuming the 'discrepancy relates largely to the 2018 Air Berlin aircraft when a gain was made when the airline went bankrupt. I suspect Avation will highlight this in the Results. IF they continue to present all the other figures as 'comparables' then this years headline numbers are going to be very impressive!

This year's gain on aircraft sales should arise from my a $5.2m gain on VietJet A321 and my estimate of $1.5m gain on A320 sale (2003 vintage). There could potentially be some material upside to my figures, if I was an optimist.

There are unutilised tax losses of $2.26m available. If these are utilised then my suggested tax charge could be eradicated. Singapore aircraft leasing has a 10% tax rate reducing to 8% from April 2019. (NB:2 or 3 aircraft are subject to tax in Ireland at 12.5% and one aircraft is subject to tax in Singapore at 17%)

It will be interesting to see how the book value is arrived, plus Avation's commentary. This last year, the industry has not been kind toward the ATR's but young A321's have apparently maintained their values reasonably well. In fact I estimate an additional $18.5m could in theory be applied to the VietJet aircraft realisable valuation giving a NBV of GBP 2.91 - 3.00 at current exchange rates. However I suspect they will not be able to actually book that into the accounts. Overall I can't see the current share price being that far away from NBV, as reported.

The following shows that Avation, in my opinion, are really pushing the limits of borrowing.

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However now that the fleet is starting to build in size (Avation are probably around the 45th largest lessor in the world i.e. bottom of the table) income for 2020/2021 should easily reach $145m and the balance sheet will recover very well although that does mean fewer new aircraft entering the fleet next year unless on very favourable terms.

As a consequence of Avation's growth I am finding it increasingly hard to keep on top of the financial abilities of the company, as a consequence I see my predictions as a ''worst case' scenario. Hence am not so confident that my forecasts are of much use to anyone!

Maybe later I shall post my views regarding ATR's and Jet aircraft leasing market and demand following a fair bit of research I have been doing in recent weeks.

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Re: Avation (AVAP)

#247595

Postby LovelyLovelyGorgeous » August 28th, 2019, 8:13 pm

Wow - I am really impressed by the level of detail that you have gone into and the background knowledge that you have. Thankyou for sharing all that data.

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Re: Avation (AVAP)

#247677

Postby Carcosa » August 29th, 2019, 8:35 am

I mentioned in my previous post I might write something about how I see the leasing environment as related to Avation. Well, following a few weeks of trawling the trade press/presentations/reports/news here is what I have come up with!

Here is my take on what is happening in the wider aircraft leasing industry in relation to Avation's business. I'm going to split it over two sections, namely the ATR turbo-prop fleet and A320 series fleet. Am ignoring the F100's because their value is very small and they will be leaving the Avation fleet in 2020 anyway. Similarly am leaving the Widebodied (B777/A330) fleet because Avation only have one of each on long term lease and the B737 aircraft in Avation is an old aircraft which gets kicked around various lessors and has only recently been brought into the fleet.

I'll precis this post by remininding any reader that as far as lease income goes those revenues are locked in for the duration of the multi year leases. The factors which affect Avation with the existing fleet are if an airline/operator goes bust in which case re-leasing the aircraft may attract lower (or possibly higher) leasing rates, or if the cost of finance decreases e.g. lower Fed Rate or improved company credit rating (Unlikely in the foreseeable future) which boosts Avation's profits.

However as an investor I am more concerned with asset values which I see as a proxy for the share price, so any changes in aircraft valuations are of interest to me.

ATR's

The market for the ATR72-600 over the last three years has been weak because the manufacturer has been chasing production rates. As was discussed on the board in the past, production rates got as high as ~105/year but then got scaled back to around 70-80 for the last 18 months or so.

ATR have been fortunate in that Pratt and Whitney, the sole engine manufacturer, has developed the engine over time and that allows the -600 to operate at higher weights and more lately at hot and high airfields. This represents a significant improvement in operational flexibility and potential increase in revenue for operators. The -500 variant is very much the unwanted child in the fleet. A major step change in performance i.e. 25% fuel reduction could only be underaken with a new engine design for the -600 which at best is a few years away so the risk of new technology adversely affecting aircraft valuations is some way off. Hence we can concentrate on aircraft demand/supply as the driving force of valuations, although higher fuel costs are to the benefit of ATR.

In 2017/18 the market was swamped with ATR's as ATR chased production at the expense of revenue. At the same time some airlines divested themselves of the ATR. With ATR having an order cancelled halfway through its delivery to Iran Air, as a consequence of US sanctions, resulted in ATR having to place a large number of aircraft in production at very short notice.

To some extent lease rentals have improved as ATR has sought to rein in production to levels that do not overwhelm the market. Higher production rates have perhaps allowed ATR more freedom in terms of new pricing which has been to the detriment of the used market.

Fortunately Avation have only dealt with new ATR's, indeed they have bought numerous options over the coming years. As far as I can recall Avation have never placed an ATR on the secondary (used) markert. Nearly all of their leases will pay off the aircraft acquisition cost.

There are a good many -600s on the market with an operating lease viewed as a means of disposal. It may therefore not be too long before we start to see Avation selling some more ATR's with leases attached. Perhaps its worth remembering its only three years ago when someone put in a premium bid for all of Avation's ATR's and Avation ending up selling a large number at a premium to book. The age profile of the -500 lends itself to replacement and also makes it vulnerable to replacement with the -600

NAC and ATR are among the lessors of the aircraft although Avation, NAC, Elix Aviation Capital, GECAS, Transportation Partners, Castlelake, Aergo Capital, Investec, Injet Leasing and Solenta Aviation also feature. The vast majority operate in the secondary market NAC placed an order this year with ATR to deliver 35 aircraft over the next 5 years. Avation are (I think) the second largest lessor of new ATR's

With no new aircraft type to replace the AT,R the aircraft is considered to be a desirable turboprop asset

The Bombardier competitor has managed to increase seating capacity without stretching the aircraft and new orders are being recorded. ATR has no short term answer. The depth and breadth of the operator base is notable but that can be at the expense of placement with weaker credit airlines. Indeed we see this already with Avation this year having placed aircraft (possibly up to three) with US-Bangla Airlines; a relatively new airline that has already killed over 70 people and crashed a few aircraft operating in Bangladesh. Perhaps what is even more worrisome is that these aircraft are months behind in terms of original delivery schedules suggesting finance issues. Avation has seemingly managed to get one of these aircraft on a finance lease (as opposed to an operational lease) but their short leasing terms suggest the aircraft will not finish the lease unencumbered.

Next year ATR will start delivering the very first freighter version (not converted passenger variants but new production) to FedEx. This is a large order and hopefully ATR will reign in the production rate for the passenger version even more; although I suspect that is a forlorn hope on my part.

Overall then, ATR's remain a competitive/favoured aircraft type in this segment. The secondary market is making lease rates come down and new operators with decent credit ratings and long term leases are very hard to come by. High fuel prices are an advantage for the ATR over the competition, provided the airline can remain in business! Operator base is diverse. Demand for turboprops over the next few years is much aligned to current turbo-prop production.

Going forward I see Avation having a bigger struggle than in years gone past. However Avation have not placed an order with ATR to manufacture an aircraft without a customer waiting. i.e. no speculative orders with ATR have been placed. There are options that have been paid for and although ATR seem ok to allow options to be deferred, with the large number of options Avation now has it is quite feasible they will have to allow some to lapse at an estimated cost of $125k each, or possible transfer some to another airline/leasing company. Will be interesting to see if Avation manage to pick up any orders for the freighter version, although I suspect acquisition costs will be much lower than the passenger version and lease margins & rates similarly lower


A320's/A321's

These aircraft can be broadly grouped with A320ceo/neo/737NG/MAX types. The market appears to be complex to say the least!

There are three factors which come into play. Firstly there is an unprecedented number of airline failures around the world. Airline failures are the major factor on returns especially of the A320ceo/neo/737NG families. Boeing 737-800 returns have already exceed those of the entire 2018 year.

Lease extensions are largely a function of fuel price for the older aircraft. Lower fuel price, more likely a lease extension. On top of this the problems with the B737MAX have driven up the number of lease extensions.

The A320's are coming off lease in ever greater numbers (as are similar types of narrow bodied Jet aircraft).

Turning to the two A320's Avation have, we have an 8 year old unencumbered aircraft coming off lease in September 2021. By that time the book value will be around $33m. Given its been with Air France the potential for re-leasing it is better than most. I suspect Avation would prefer to sell it on. Perhaps something to look out for in 2020. However it is also quite possible for the aircraft to be re-valued lower than the $33m

The other A320 is the old Air Berlin aircraft which found its way into the easy-jet fleet. It is now 10 years old. As this was a distressed placement by Avation I suspect lease rates and duration may be sub-optimal however I would be surprised if the lease terminates before 2022. Again I would think Avation would like to sell the aircraft accepting the less than $37m book value as a trade off to improving Aviation's credit rating

The good news is that the A321's are all relatively new, demand for them worldwide is good (and in the near term may have a positive spike in demand following the B737Max issues) and they have already been demonstrated as having a higher realisable value than current book value of $300m. Having said that I doubt an increase in book value will be reflected in the results.

Summary
Better to be placing new ATR's than used ones although finding good customers will be a struggle. A320's are not worth that much in terms of book value but are precious in terms of revenue. A321's are maintaining value. 2019/2020 May become a year of consolidation for Avation although securing orders for deliveries post 2020 is likely. Hopefully more A220's on the horizon too!

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Re: Avation (AVAP)

#247706

Postby dspp » August 29th, 2019, 10:01 am

Carcosa wrote:I mentioned in my previous post I might write something about how I see the leasing environment as related to Avation. Well, following a few weeks of trawling the trade press/presentations/reports/news here is what I have come up with!

Summary
Better to be placing new ATR's than used ones although finding good customers will be a struggle. A320's are not worth that much in terms of book value but are precious in terms of revenue. A321's are maintaining value. 2019/2020 May become a year of consolidation for Avation although securing orders for deliveries post 2020 is likely. Hopefully more A220's on the horizon too!


Carcosa,

Many thanks for this, your efforts are much appreciated.

I noted the Do328 line may restart, the turboprop version, though it is not clear why. I am sure you have seen this https://www.pprune.org/rumours-news/624 ... st10553712 and this https://www.pprune.org/rumours-news/624 ... st10554113 which I thought were as informative of the ATR vs Q400 discussion. However what I did not see being discussed is the effect that the C-series / A200-series will have on the market position of the ATR line. It is the dream of many to use small jets to replace small turboprops. Would you like to comment ?

Hopefully keeping the A320s going is easier in an environment where the B737 operators are embarassed by the absence of the Max.

regards, dspp

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Re: Avation (AVAP)

#247890

Postby Carcosa » August 29th, 2019, 6:35 pm

Hi dspp!

Nice to have a question/debate about Avation! Thanks for your question.

The Do328 is dead. 24 aircraft remain in airline service. It has seating for only around 30 passengers. The US airforce are the next major operator holding 20 aircraft. The 'yet again' revised launch is backed by German government funds if it ever goes ahead. Basically its a non-starter.

The C-series, now called the A220-300's is where I think Avation should be concentrating on. It could dismay the credit agencies to see this but I would say stuff that. There is nothing to dislike about this aircraft, operationally, cost, customer satisfaction, reliability are all number one. Boeing and Airbus (before they took it over) tried their best to kill this aircraft but what they ended up doing was killing the manufacturer (Bombardier) but the aircraft survived. Its got such a bad rap that early and current examples are being sold very cheaply but I can't see that lasting for too long. Getting in now means depreciation is going to be minimal (in fact may even increase in value for the early aircraft). If I had to put all my eggs in one basket then this would be the aircraft to go for in my opinion.

The B737MAX is an interesting case. Within the leasing industry they consider aircraft values over the life of the aircraft. This is known as the 'base value' essentially its a straight line valuation of an aircraft from new to end of life. At anyone time the 'real' value may be lower or higher than the base value but as an average it tracks base value. Here is a chart for the B737-800:

Image

Reference: https://www.youtube.com/watch?v=LGKIgF4nXH4

Within the industry the feeling is that the B737MAX is below the base value at the start of its life, given the problems seen to date. But over its life the valuations will trend 'base value. This is partly why lessors of the B737MAX are not screaming blue murder as they are taking a long term view which presupposes that all will work out just fine over the life of the aircraft.

So getting to your question about the A320's the industry are not valuing these aircraft any higher than of the B737MAX was already in service. There is however some short term demand for this aircraft as a consequence of the B737MAX but it is limited. You cannot pivot from an airline expecting B737MAX in the fleet to accepting old A320's. Flight crew are not trained, cabin crew not trained, engineers not trained, parts commonality does not exist between Boeing and Airbus etc. And remember Boeing have been promising airlines the MAX aircraft will be back in service "soon" so an airline cannot even consider planning for a short term change of aircraft. Furthermore, many of the B737MAX routes are only economic flying that aircraft type. AN older A320 may simply be uneconomic on the same route.

So in summary, for sure A320's may have some leases extended (but only a very small number) as a consequence of the B737MAX problems but the aircraft valuation are unlikely to see any changes. If aircraft valuations are affected by the B737MAX fiasco then its the A321's most likely to benefit but only in a small way.

A word of caution though, as a business leasing companies look long term. As investors we tend to look no more than a year ahead. Short term I am more concerned about the leasing business than I am long term. However Avation is a minor player in the business and perhaps they can avoid the worse of a downturn in aircraft leasing 2020/2021

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Re: Avation (AVAP)

#249776

Postby Carcosa » September 6th, 2019, 7:41 am

Avation issued their 2019 prelims yesterday.

The highlights were

• Fleet assets increased by 22% to $1.27 billion as at 30 June 2019;
• Lease rental revenue increased by 21% to a record $117.7 million;
• Net profit after tax for the year increased by 28% to a record $25.7 million;
• Earnings per share (“EPS”) increased by 25% to 40.3 US cents;
• Interim dividend per share of 8.5 US cents declared, taking total dividends for the financial year to 10.5 US cents (2018: 7.25 cents), an increase of 45%;
• Weighted average cost of debt declined from 5.0% to 4.6%;
• Net asset value per share increased 7% year on year to £2.95 per share;

Along with the commentary there were four items that drew my attention:
1) Why is the NAV increase so small given the strong growth in fleet assets/revenue and net profit?
2) How large is the new lease engine business planned to be?
3) What is the state of play with the ATR's?
4) Airbus A320/A321 Realisable Valuations

NAV
So why have the NAV only increased in 7% given the significant growth in revenue and fleet assets? The answer lies on page 8 (and 10) of the prelims. Under 'Other comprehensive income' is a charge of $18,009m representing a loss on the cash flow hedge.

Avation enters into fixed rate leases for its customers and in order to fix the interest paid against the cost of borrowing associated with the finance loans interest rate swap contract(s) are entered into. Over 90% of debt is at fixed hedged interest rates.. The big advantage is that it protects the risk of interest rates going up (requiring Avation to pay more to service the loans) and destroying net interest margin.

During FY 2019 interest rates decreased. Since an entry in the balance sheet, for accounting purposes is necessary, these liabilities are recorded as a book entry, mark to market, in this case a negative $18m.

The $18m is part of equity and since NAV is derived from Total Equity / Shares in Issue ($240,757,000/64,009,939) a corresponding reduction in NAV is derived. Had that interest rate swap $18m not occurred then NAV would have been $4.03 as opposed to the actual $3.76 an 11% increase over prior year. However, that's just fanciful thinking!

It should be noted that Avation have been using cash flow hedges forever. More information can be found in any Annual Report.

Given the length of the leases I suspect that interest rate swap contracts duration are of similar lengths and hence this $18m will reverse if interest rates go up over coming years. However consensus is that interest rates will be cut in the near term. This implies to me that increasing NAV for next year may become problematic given the need for annual mark to market re-valuation of interest rate contracts. I do not see this having any substantive effect on Avation's business but as a shareholder who relies on NAV as the principal driver of the share price it is something of a concern for me.

If anyone reading this has a reasonable grip on interest rate swap contracts can you please comment/reply. Am particularly interested in knowing what, if anything Avation could reasonably be expected to do in order to mitigate against decreased interest rates. Or is this something we just have to live with?

Lease Engine
Personally I have been involved with lease engines for many years. When I first saw this in the prelims my first thoughts was 'administration'. Engines are subject to almost daily issued modifications, whether they be inspections, maintainability, performance, durability, configuration, safety and of course Airworthiness Directives (the only sought that get mentioned in the press). Then there is the need for tracking the hundreds of parts that get replaced/repaired/scrapped when in operation. Sometimes the airline will or will not want to do a modification or the lessor will have a different opinion and then enter into an argument as to who should pay for it. Then there are decisions to be made as to what should happen to it during shop visits. Leasing contracts, as well written as they are sometimes do not provide clarity as to who does what in a specific circumstance. Basically there is a LOT of administration required, much of it technical. Therefore I was pleased when Jeff Chatfield (CEO) specifically mentioned that they now have a technical team in-house

Engine leasing broadly falls into two categories. Emergency 'Aircraft On the Ground' (AOG) or long term leasing. AOG rates are HUGE. This is when an unplanned engine removal is necessary, often away from base maintenance, the airline does not have its own spare engine and therefore needs a lease engine shipped within hours to the aircraft. The lease rates are typically enormous and the airline will want to get that engine removed asap and returned to the lessor. The disadvantage for the lessor is that they may only end up leasing it for a few weeks/months a year.

Long term leasing rates are more reasonable. This is often when an airline is getting over a 'hump' in engine shop visits and need to lease a spare engine for a year or two.

Generally speaking the AOG engines are to a lower engineering standard than a long term lease.

The rationale for lease engine business is partly the fact that a lot of the residual value of an aircraft is in the engines. Avation say they will lease a small number of narrow bodied jet engines. However not a core part of business in the short term and relatively small in terms of money and engine quantity.

No specific details about Aviation lease engine is currently available but it has been confirmed that any lease engine business falls under the Singapore Aircraft Leasing tax agreement i.e. 8% tax rate.

Lease engines for A321's are in demand. However it is possible Avation's engine is for the A220. They have not indicated who they have done a SALB with. Could be an airline or a third party

Credit ratings

As mentioned before this a lynch pin in any aircraft leasing business. Of all the agencies covering Avation there is one 'laggard' which is Standard and Poor that has a corporate credit rating of B+ fro Avation with an outlook of positive B+

Avation are therefore aiming to get S&P to upgrade the rating in the short to medium term.

ATR supply and Demand

II have written about this for sometime. Supply has been saturated because lessors ordered too many aircraft. Aviation indicate that the outlook for the ATR, in their opinion, is much better than in recent years. ATR are effectively the only game in town and the reduction in production numbers has helped considerably.

There are 9 ATR's ordered, 3 for delivery this year and 6 next year.

Airbus A320/A321 Valuation
We now know that the 16 year old A320 and the 2 year old A321 were sold for $3.4 m and $5.2m representing in excess of 10% above book value. I find that A321 sale extraordinary. If that is typical of the VietJet fleet, which Avation is inferring is true, then that provides a level of reassurance for investors. It also provides something of an exit strategy for Avation should the interest rate swap contact take another hit!

Conclusion
Results pretty much as expected except for the interest rate swap. Outlook for ATR's (surprisingly) bright. Further narrow bodied jet aircraft likely. Engine leasing business can be ignored for now. Dividends now becoming useful to have!

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Re: Avation (AVAP)

#250924

Postby Carcosa » September 11th, 2019, 9:27 am

A reader sent me the text of this weeks' article about Avation by Simon Thompson. As I have done in the past I'll give my views regarding what he says ;-)

Aircraft leasing company Avation (AVAP:299p) has reported an eye-wateringly good set of annual results, vindicating my decision to rate the shares, at 270p, a buy ahead of the release (‘Avation primed to make new all-time highs’, 15 July 2019).

In the 12 months to 30 June 2019, Avation increased its fleet assets by more than a fifth to $1.27bn (£1.05bn), adding 12 aircraft to the fleet including six ATR 72-600s, five Airbus A220-300s and its first Boeing 737-800. The company also sold two narrow-body aircraft for 10 per cent more than their book value, booking a $10m net profit and highlighting the significant hidden value in the balance sheet.

The segment accounts for 48 per cent of total fleet assets and includes seven valuable Airbus A321-200 and two Airbus A320-200 aircraft. Mark the narrowbody planes to their open market values and there could easily be $50m (£40m) of hidden value in Avation’s balance sheet, a hefty sum in relation to the company’s market capitalisation of £191m.


Small point but I am aware Simon talks directly to the company so it's interesting he uses the phrase 'first Boeing 737-800'. With a bit of over-analysing it could be interpreted that additional B737-800's are to be expected. If so then they will not be new off the factory floor but existing aircraft. Other than that everything seems factual

It is rare an aircraft realisable value is the same as the book value. It swings from years to years over and under book value. I would not take too much notice of it other than when an aircraft is sold. It also implies that should they buy/SALB a similar aircraft type then they will be paying more than book value, not so good for the long term, perhaps.



That’s not the only part of the risk profile that’s improving. The customer base continues to diversify, increasing from 13 to 17 airlines, thus reducing financial risk in the event of any one airline getting into financial difficulty. Virgin Australia, the largest customer, now only accounts for 20 per cent of Avation’s revenue compared to 66 per cent in the 2015 financial year. In total, company’s 48 aircraft generated a record $118m of lease rental income, up by a fifth in the 12-month trading period, and three times higher than in the 2013 financial year. The increased scale of the operation is being recognised in the debt markets (weighted average cost of debt on borrowings of $1bn improved from 5 to 4.6 per cent), as is the relatively young age of the fleet (average of 3.4 years) and the strong visibility offered to future cash flow by a stable average lease length of 7.5 years.

Again, factual although to be fair the revenue was generated from 45 aircraft not 48 because one was delivered to a customer after year end and another two have yet to be delivered.

So, with the fleet growing, and the cost of borrowing declining, profits have accelerated skywards to record levels, too. Annual pre-tax profits rose by 35 per cent to $25.7m to deliver earnings per share (EPS) of 40.2c (33p), the latter representing a thumping 26 per cent beat against WH Ireland’s forecast, a performance that also enabled the board to maintain their progressive dividend policy by declaring a 45 per cent hike in the payout to 10.5c (8.5p) a share.

The reason for the beat was the sale of two aircraft. Not from lease revenue

The plan for the new financial year is to focus on growing the fleet and adding new airline customers.

That's ALWAYS the plan!

Bearing this in mind, eight ATR 72-600 aircraft are on order for delivery between 2020 and 2022, and the company has options over a further 25 of these turboprop aircraft, all of which are held on the balance sheet at nil cost. Each option could be worth $1m on the open market given their scarcity value – ATR only manufactures 85 planes a year and demand from China, India and Iran is tightening the regional aviation market for these fuel-efficient aircraft. Avation’s reported net asset value of $240m, or 374c (304p) a share, significantly understates the true value of the company’s assets.

Ok, Simon is going a bit of track here. Options cost money and can be seen in the Annual Report. No way are they reasonably worth $1m. More like $0.3m to $0.5m at best. Not sure the 85 number is correct but I don't think there are any ATR72-600's in China! ATR42's and ATR 72-500's have been delivered but then sold back into Europe years ago. I am unaware of any substantive orders having been placed as well. ATR did a demo sales flight there recently but to no avail. Similarly the US embargo on Iran meant that only a handful of ATR's made it before ATR were forced to stop deliveries. As for India, yes there are a lot of ATR's there except for the issue that Jet Airways went bust and those aircraft came back onto the market.

That’s not being lost on investors as Avation's shares have posted a total return of 100 per cent, including dividends, since I first advised buying them at 159p ('Get on board for blue-sky gains', 11 September 2014). However, they are still only trading on 10 times historic earnings, and offer a 2.8 per cent dividend yield – the 8.5c (6.9p) final payout goes ex-dividend on 3 October – a modest rating that offers clear blue sky to WH Ireland fair value target of 352p. A chart break-out above the March 2019 record high of 299p is firmly on the cards. Buy.

Always good to have Simon write something positive about a share. Am not so sure much headway is going to be made over the next 12 months in terms of NAV, and the exchange rate could prove a drag too. Would have liked a mention from Simon about the Interest Rate Swap contracts.

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Re: Avation (AVAP)

#250933

Postby dspp » September 11th, 2019, 9:42 am

Carcosa wrote:A reader sent me the text of this weeks' article about Avation by Simon Thompson. As I have done in the past I'll give my views regarding what he says ;-)


He (Simon) has clearly been reading your excellent analysis .......

regards, dspp


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