The Lemon Fool

Quarterly fact sheet was issued today for DNA3 (and all the other DNA's).

Not much to say really, everything remains 'on plan'. Aircraft appraisals came in marginally higher than expected at $50.95m per aircraft against an estimated forecast of $50m but in the grand scheme of things is all but identical. That equates to 70p/share. at CoB today the share price was 42.5/44.0p.

There is an expected future income stream of 37p





Assuming a 75%* discount for the appraisal valuation that gives me:



Difference between my quoted 21p and 75% discount of 70p which would give 17.5p relates to timing and inflation assumptions.

The effect of high inflation should be a positive factor in USD terms but I suspect may all be wiped out by currency exchange movements. However, I really have no idea! Ask an economist and then guess.

Could DNA3 etc suddenly jump with 'reopening' ?

e.g. https://www.cnbc.com/2021/07/15/airlines-race-to-train-pilots-as-travel-demand-roars-back.html & similarly with Ryanair.

I very much doubt it. It makes no real practical difference whether the aircraft are flying or not nor whether they are operationally profitable or not.

Personally I would prefer them not to be scrapped early due to the various lease clauses which would be beneficial for shareholders; but that is highly unlikely to occur.

Correction: I meant to say " I would prefer them to be scrapped early..."

https://www.telegraph.co.uk/investing/f ... -one-hold/

Questor obviously very optimistic on the scrap/resale value of the planes in 2025. I'm a happy holder as things stand but will be even happier if his valuation is anywhere close to being correct.

I do not see any valuation, scrap or resale value being mentioned. Maybe it was in the print edition?

No value in the print version either. I emailed saying I thought their yield calculation was overly optimistic and at least they took the trouble to reply. Part of which as follows:

As far as the dividends go, given we view Emirates continuing as a going concern as highly likely, we think these are safe. And if they continue at the current rate they will be worth 37p per share, so nearly as much as the 43p at which the shares are trading.

Which means that it doesn't place much burden on the eventual resale value of the planes to justify the shares as a hold. Forecasts for this have already been understandably lowered, from $556m in the trust's prospectus to $203.8m. This lower forecast equates to 70p per share - of course there are no guarantees the eventual resale or scrap value will actually reach that figure, but just a fraction of it would be enough to justify the shares as a hold at 43p.

I thought I was due to write an update on DNA3.

In general terms, increasing numbers of A380's are re-entering service but similarly increasing numbers of A380's are being scrapped. There remains overcapacity for the aircraft type but largely because the A350 and Boeing aircraft are well behind with their deliveries the shortfall in capacity os being met with A380's re-entering service. The last brand new A380 was delivered a few months ago.

It seems unlikely to me that demand for A380's will ever be sufficient to allow all stored aircraft to reenter service and/or lease extensions to be common place. Furthermore with very high oil prices feeding into aviation fuel costs these 4 engines behemoths with relatively inefficient engines in todays market are a further negative for operators of the type.

As a result the value of the aircraft is essentially scrap; initial A380's that are scrapped will have higher value than the others because part-out demand will be higher.

The value of aircraft scrap remains in the engines, APU and landing gear. Avionics would provide little return. In my estimation I would anticipate scrap values of around $10m which is inline with a 75% discount to the DNA published estimate.

By end March this year the Singapore Airlines A380 realised scrap value should be available and that will a good data point for the appraisers to provide a more realistic valuation, I would think.

However, a potential source of additional income is contractual. All these aircraft have to be returned to Doric under typical return conditions. That essentially means fully refurbished. The vast majority of that related to engine condition and Limited Life Parts time remaining. Usually the original engines have to be re-fitted to the airframe but those engines could be anywhere in the world right now. Redelivery process is highly complex.

It makes no sense for Emirates to overhaul/refurb and find and re-install the original engines, APU, Landing Gear and avionics if the aircraft is going to be scrapped. That could cost $25-$30m (or more) depending upon status, condition and location. It would therefore make sense for the parties to agree some form of reconciliation, say bung DNA $10m/aircraft, perhaps and agree a transfer of ownership between the original engines and whatever is fitted at End of Lease. It is in neither parties interests to fulfill the original end of lease conditions so some compromise is warranted.

Emirates also have the potential to extend the lease; somewhat unlikely given they do not need them and are in storage. They also could buy the aircraft but again highly unlikely.

The upshot is that the residual value of the four aircraft ranges between $40m and $80m or 13p to 26p /share. (If you believe the figures suggested by the appraisers then double that). Add back dividend payments between now and the end of lease then even at todays share price a 20% return is achievable.

DNA3 shareholders would do well to keep an eye on DNA as Emirates are likely to make an offer over return conditions by mid year.

Update much appreciated carcosa but would be interested to know how you arrive at a 20% return figure.

For this instrument I think using IRR is the correct way to value and with a current share price of 37p and scrap value of 20p I arrive at an IRR of a shade over 12%. I'm still happy with that but, obviously, if 20% was realistic I'd be buying more.

Hi Laughton,

There are about 3.5 years remaining on the leases but I would consider investors have to start to begin to start thinking about an exit price on the basis of the Singapore Airlines A380 scrap realisation and Doric Nimrod Air One which comes off lease at years' end (and mid 2022 should provide some indication of what/if Emirates are likely too pay cash in lieu of Return Lease obligations; it may also be an agreement encompassing multiple Doric aircraft).

Which is a long winded way of saying end of lease/scrap value has a tremendously wide variation; potentially up to 69p with rose coloured glasses! We have about 31p due in dividends. So calculating an IRR is very much dependent on personal assumptions.

What I think what we are both trying to do is calculate the risk associated with DNA3. Whatever IRR you deem acceptable reflects risk tolerance and given the variables associated with DNA3 that's not an easy calculation.

Personally I would buy DNAx at around the expected dividend income stream and/or more than an IRR of 20% based on an investors underlying assumptions.

Personally I am up over 50% on my investment with DNA 3 so my risk tolerance may be greater than would otherwise be the case.

I was in a bar last night (in Kuala Lumpur, Malaysia) and I met someone who was commercially involved with the scrapping of the Singapore Airlines A380. He said they netted $8.5m for the aircraft.

If true - It must be because I believe everyone I meet in a bar - then my estimation in a prior post of $10m is not far off the mark.

Couple of points to note:
SIAEC is not exactly the cheapest option when scrapping an aircraft
Part out was to SIA and that probably does not reflect true value

Ignoring the positive effects of inflation I would now use a working value of $7m/aircraft scrap plus re-delivery compensation of $8-12m; say 5-6p/share.

Hi Carcosa,

Ignoring the positive effects of inflation I would now use a working value of $7m/aircraft scrap plus re-delivery compensation of $8-12m; say 5-6p/share.

Just to be clear - you do mean 5-6p/share per aircraft?

Sorry. I should have stated for the DNA3 fleet as a whole.

Probably get a better guide for actual value and return compensation as early as mid year from Doric themselves as a result of lease expiry of the one aircraft in DNA.

Not withstanding that, the 31 March revaluation should occur.

Hope you're wrong, because plugging a 6p per share scrap value for the fleet at June 1st 2026 gives a negative IRR on my spreadsheet.

Looks like someone did their maths...

Understand that DNA2 reporting that Emirates will return a plane in half life condition and make the $12m half life payment.

https://www.londonstockexchange.com/new ... n/15359137

Is this big buyer reading across to DNA3 and potential positive impact??

Hi Laughton,

Thanks for posting that RNS link. That is a precedent announcement and in line with my earlier thoughts, thankfully;

It makes no sense for Emirates to overhaul/refurb and find and re-install the original engines, APU, Landing Gear and avionics if the aircraft is going to be scrapped. That could cost $25-$30m (or more) depending upon status, condition and location. It would therefore make sense for the parties to agree some form of reconciliation, say bung DNA $10m/aircraft, perhaps ...

So we can reasonably expect ~16p/share return for all the DNA3 aircraft before any actual returns from scrapping. Perhaps you are correct in your assessment of the thinking behind whoever bought those shares yesterday.

Thanks again for that RNS link

DNA3 share price has climbed 21% month to date to 43p. Seems a bit crazy to me.

Either it's been tipped somewhere, a mis-belief that so many recent A380's entering the skies again is meaningful or a realisation that high inflation is a good thing when it comes to hard assets. However I fully expect a significant reduction in the appraisal value to be stated in the coming weeks in which case this share price direction will quickly reverse.

In my modelling 48p is about as high as I would comfortably risk buying at for a first time purchase.

Yesterday Doric issued their quarterly updates for DNA, DNA2 and DNA3.

Emirates Airlines Annual Report Link

From the commentary it appears that Emirates President, Sir Tim Clark has decided not to scrap any further A380's (they have scrapped five to date) largely because Boeing and Airbus have royally screwed up with the B777X, B787 and A350 leaving Emirates with no alternative for high capacity aircraft.

Thus "...With a looming aircraft shortage in Emirates’ fleet in 2024/25, Clark wants to extend aircraft lives: “Life extension will affect about 120
aircraft, 80 of them A380s, plus about 40 or 50 Boeing 777-300ERs." and "...Today, if we had 118 [A380s] they’d all be full..."

Despite significant fuel price increases the biggest challenge appears to be getting an extra "...8,000 to 10,000 crew members".

So it appears Emirates A380's operational future is secured.

The leasing arrangement between DNA3 and Emirates provides a lease arrangement is to 2023 (the initial Lease is for 10 years) with an extension period of two years ending 2025, in which rental payments reduce. Contractually the present value of the remaining rentals in the extension period at the end of the initial 10 year Lease term must be paid even if the option is not taken. Shareholders have not been informed what the two year option lease payment value is and I'm not sure if the 31p income distribution mentioned in the quarterly report includes this option. It should, but am not convinced it is!

Up to this point I was thinking the aircraft would be coming off lease in 2025 but given Emirates demand for the A380's it is not entirely unreasonable to think the two year operating option may actually occur (not really in the best interests of DNA3 shareholders). This would to some extent go against the ethos of Emirates in maintaining a young fleet; remember Emirates took delivery of three new A380's last year.

Yesterdays quarterly report maintained an aircraft residual valuation of $50.8m each but that valuation is still based on a March 2021 valuation. Clearly that is optimistic to say the lease; even taking into consideration current inflation rates. Interestingly DNA1 which comes off lease end of this year values an A380 at $43.6m but again that is based on March 2021 valuations. My personal view is that a figure of $3.0m/aircraft is nearer the mark; that equates to about 5-6p/share.

However, as mentioned earlier, DNA lease return conditions are being re-negotiated to a 'half life' equating to about 17p for the fleet.

Even today, if you add up income distributions, residuals and lease return conditions a buyer today would still make a reasonable profit. And if I am severely under-estimating residuals then significant profits remain to be had.

Shareholders have not been informed what the two year option lease payment value is and I'm not sure if the 31p income distribution mentioned in the quarterly report includes this option. It should, but am not convinced it is!

Having re-read the prospectusthe 31p income distribution does indeed include the additional two year lease period. This is payable whether or not Emirates actually extends the lease.