Avation released their
half year results and provided a presentation on Investormeetcompany.com
Rather than dive into it straight away I thought I'd give a summary overview to begin with.
OverviewWhat really got my attention was the wholesale turnaround in attitude from management during the investor call. Over the years these calls have been somewhat unexciting in tone and a bit of a bore as they read off the details in the presentation slides. This time around the presentation material was swiftly dealt with and they answered all of the questions but this time however they were happy to let slip meaningful details regarding on-going discussions with existing and potential new customers, market forces and future plans and priorities. Whatsmore the Avation management staff looked confident. For anyone who has seen prior year's presentations this was a significant and much more open presentation.
In July last year I suggested it was worthwhile buying a starter position in Avation and wait until there is some financial (and fleet) clarity with a latter suggestion to buy between the just announced interims and the FY results. I think that was a good call.
What I found pleasing was that the results and especially the NAV were very much what I thought they would be which provides me confidence that accurately modelling the financials going forward is returning to normal i.e. pre-pandemic levels.
The HY ResultsAs expected, the HY results looked great but under the hood there was a large loss. Whether or not a lot of the following should have been classed as 'exceptionals' is perhaps arguable but it is what it is.
Gain on derecognition of a finance lease
Unrealised gain on aircraft purchase rights
Unrealised gain on equity investment
Aircraft transition expenses
Tax rebate
The above sums up to $13.63m.
Looking at the results on an 'organic' basis then you can see there was a thumping loss. On the other side of the coin is that over the last three years there were a lot of losses that were not 'organic' either!
A few commentsWhen an airline goes bankrupt the leasing company has to go and recover the aircraft. Access, getting the maintenance records, complying with local Aviation Authorities/flight permits, arranging flight crew, mechanics, engineers, spares, repairs, liaising with an FBO etc, is a non-trivial task. Nearly all of that would normally be the responsibility of the airline when returning an aircraft at end of lease.
It was interesting to note that Avation have an in house 'technical team' that were credited with reducing costs. By 'team' I assume two people. This is worth exploring. I have direct experience in knowing how much an airline representative can save millions in the sort of situation Avation found themselves in. When an aircraft, especially engines, goes for maintenance the airline will largely place an emphasis on incorporating much more than the minimum requirements because they need reliability and improved cost of ownership. When you are selling on the aircraft then you are happy to do the bare minimum at the quickest time, happy to exchange Line Replaceable Units that may be on 90 day turnaround time for a lower spec used part. Without having a good airline engineering team your costs can easily go through the roof when on a time and material basis. In this case, Avation are acting as an Airline engineering dept.
Now that Avation have dealt with the vast majority of their fleet that required transitioning these costs will be significantly reduced from now.
The takeaway from the interims are
Debt reduced
LTV at a historic low
More importantly now, is what came out of the Presentation.
There is a growing demand for replacing ATR's worldwide due to fleet age; potential replacement fleet rollover for an operator.
The ATR is the only aircraft available being manufactured in it's class
Only 35 new ATR's are being produced annually, increasing to 40 next year; creating a shortage of aircraft
Avation let slip their next ATR coming off lease will have a six year lease extension and if not there are other customers already lined up for that.
Come FY results expect more exchange rate gains
Lease rates are up 20% (which is reflected in aircraft valuations)
Expect the two ATR previously announced new aircraft to be delivered next year
More A220's to join the fleet (2024?)
As regards the Loan Maturities profile, in particular the FY2027 unsecured loan repayment, I am quite sanguine about it. Refinancing should not be an issue for an airline leasing company.
With the market perhaps now believing the company has got through the pandemic without going bankrupt then perhaps attention can turn back to valuing the company on its NAV of 282p (although by FY end it should be about 262p with the current fleet). Current share price is 132p
I intend to add to my starter position over the coming weeks when I hope fly-by-night (Rush?) investors will have bailed out and the share price reduced a bit; unless Simon Thompson ruins the party for me.
NB: Some investors may know Richard Wolanski. He has now left the company and returned to Perth. He was very much retail investor friendly and very approachable and patient. Probably explains why the website is taking longer to get updated too.
Re my prior post regarding the Myanmar aircraft; I seem to have got that broadly right unless I misheard the presentation.