Doric Nimrod Air Three (DNA3)

[ChrisNix]

Over the last few weeks I have been selling my DNA3 shares and now have fully disposed of my holding.

On July 18th, 2020 I started this thread with my views regarding DNA3, following a suggestion from a reader from the Avation plc board, in which I identified the key elements for investing in DNA3:

1) Emirates would continue to pay their lease charges
2) No secondary market for the aircraft
3) Residual value which I then estimated to be $15m compared to the then claimed $60m
4) An estimated total return of almost 100%
and shortly followed up with a suggestion that a half-life payment of $10m would seem reasonable (we actually got $12m/aircraft)

Well today from that 35p share price we now have a sp of 56p and a total dividend of 12 x 2.0625 = 24.75p giving a total return of 130%, exceeding my expectations. In actual fact the lowest share price I obtained was 32p give a 152% return.

I have now sold out of DNA3 because the current share price is factoring in an assumption that many of the aircraft are going to be bought by Emirates at a price similar that achieved by DNA1.

It should be noted that the DNA1 aircraft was bought for spares only. Not revenue service.

The risk is that Emirates purchase of DNA3 aircraft may or may not happen and if it does there is no guarantee that $30m/aircraft will be achieved. It is quite feasible that some or all aircraft will be re-leased as per the existing contract. It is a certainty that any new lease rate would be against the end of lease value of the aircraft meaning that for the entire 4 aircraft fleet it could represent a potential income to shareholders of about 3.75p/year. (0.9p/qtr). However there would not be any immediate half-life payments, and a good chance that come end of the lease extension the aircraft would be scrapped as replacement Boeing/Airbus aircraft finally get delivered. Scrap value at that point would likely be lower and half life payments would reflect that.

From Emirates point of view they would place priority on the later delivered A380's compared to the Doric aircraft because newer aircraft would probably require less maintenance expenditure.

Also, should Emirates/Doric announce a lease extension then I would expect investors would sell DNA3 shares leading to a greater capital loss than the potential income could replace. Of course, if such a thing was to happen then it could make investing in DNA3 attractive once again!

There is also the question as to what Doric would want to do with the aircraft/company. It would not be unreasonable to think they would want to divest the aircraft and wind the company down.

So overall there are too many variables i.e. risk, going forward. Having said that, the hype generated by commentators surrounding the A380 could push the shareprice well above book value in the coming months.

As someone on TMF used to say, leave something for the other guy...

I still have a few shares in DNA2 which I see as being marginally more valuable but will look to sell those shares in the coming weeks and months.

https://www.londonstockexchange.com/new ... n/15840890

[Laughton]

Some food for thought?

https://morningporridge.com/blog/blains ... -470185054

[Laughton]

For those still holding (no longer me) or interested (like me).

https://globetrender.com/2023/06/26/emi ... rly-2040s/

[88V8]

For those still holding (no longer me) or interested (like me).
https://globetrender.com/2023/06/26/emi ... rly-2040s/

Never boarded DNA3, but I have a tickle of DNA2, so an interesting read.

V8

[Laughton]

Quarterly factsheet issued yesterday:-

https://www.rns-pdf.londonstockexchange ... 3-7-13.pdf

[Laughton]

Hmmm. This announcement actually regards DNA2 but maybe I should have another little bite of DNA3? Subdued SP reaction to this today.

This takes a bit of the uncertainty over what might happen to existing fleet and what the aircraft are worth to Emirates - or does it?

https://www.londonstockexchange.com/new ... s/16157418

[Carcosa]

If Emirates buy all DNA3 aircraft at ~$35 then investing in DNA3 now would be a no brainer.

Previously DNA1's only A380 (MSN 016) that was sold for £25.30m (~$30m) was an ex-flight test aircraft with relatively poor airframe performance and bought for spares. Given the recent DNA2 sale price £28.9m ($35m) for (I believe) revenue service then accounting for inflation, improved engine valuations, better airframe and a poorer outlook for Emirates A380 replacement programme the sale price of $35m seems reasonable, maybe even lower than might have been expected. However factors we don't know are things like engine condition which can radically change the valuation.

Emirates have also agreed other A380's to be returned in half life condition so without knowing the criteria they are using for buying/re-leasing or returning specific aircraft it's hard to say what will happen to the DNA3 aircraft.

Given the above I would view the current share price of 53p is reflecting the realities of the situation; risk on optimism.

[formoverfunction]

I bought some recently, so am also hopeful of that outcome.

[Carcosa]

Although I no longer own DNA2/3 shares I do occasionally look at A380 related news.

I note that Doric have issued their interim reports. Of particular note I see some interesting items in the DNA2 report that may influence A380 valuations going forward.

As mentioned in the past there are different valuations that can be applied depending upon what aircraft is being sold for. To put it simply the valuation goes from low to high depending upon whether the aircraft is being scrapped, parted-out, or remains an operational asset. There are also lease return conditions.

Currently the lease return conditions are the most certain part of the jigsaw. Upon aircraft return to the the lessor Emirates have agreed to pay $12m per aircraft at end of lease. Note...end of lease.

The first A380 to be parted-out (spares) was DNA1's only A380 (MSN 016) which was sold for £25.30m (~$30m). This was an ex-flight test aircraft with relatively poor airframe performance (heavier, less aerodynamically efficient) therefore likely to be the lowest valued aircraft for spares.

The most recent aircraft that have been bought from Doric sold to Emirates on 13 October 2023 (MSN077) and on 30 November 2023 (MSN090). Both of these aircraft have not re-entered service since initially being stored during the pandemic so they are likely bought for spares rather than operational service. Each aircraft was sold for $35m; reflecting the improved valuation over the initial test flight aircraft and an element of inflation.

It would therefore not be unusual for ~$35m to be ascribed to a typical part-out valuation for an A380; although a wide range of valuations can be envisaged depending on engine life/condition/modification standard.

Clearly not all A380's are going to be bought by Emirates. So what about scrap value? Well, logically, it has to be far less than part-out value. From Emirates point of view they are 'saving' $12m by not having to pay under the lease return conditions.

When an aircraft is returned to the lessor $12m cash is what they have agreed under realistic lease return conditions. It may therefore be argued that scrap value would be part-out value, less $12m, less a percentage for devaluations of parts being unserviceable (non-operational) less the cost of scrapping. That gives a top end starting range of $23m. Readers of my prior posts on the lower end of the scale suggests I believe $5m to be the bottom end of the range.

TLDR
Operational Value $60m -$85m (depends upon the economic value of the future revenues)
Part-out value $35m
Scrap value range $23m - $5m (consistent with my initial post in this thread)

[abtan]

Hi Carcosa
Thanks again for your insights, both here and for Avation. They are immensely appreciated.

That's an interesting comment that the rationale for Emirates buying the x2 recent A380's (MSN077 and MSN090) was for parts.
And thanks for the suggestions on how much Emirates might want to pay for the planes if they are to be used for their operation.

---

So working through the various scenarios (in USD):

1) Interim Cash on Balance Sheet = $42m

2) Estimated Profit by end of 2024 = Rent Due - Loans Repaid - Admin = £35m - £5m - £5m = £25m = $32m

3) MINIMUM VALUE OF PLANES:
- X5 returned and scrapped = $17m * 5 = $85m

MAXIMUM VALUE OF PLANES (I will assume $50m rather than the $60m you suggested to be prudent)
- x5 planes bought by Emirates for Operational Use = $50m x 5 = $250m

MIDDLE SCENARIO:
- x3 returned and scrapped = $17m * 3 = c$50m
- x2 planes bought by Emirates for Operational Use = $50m x 2 = $100m
- Total = $150m


4)
Current Market Cap = $187m

5)
MINIMUM RETURN FROM ASSETS BY END OF 2024 = $42m + $ 32m + $85m = $160m = 14% DOWNSIDE
MAXIMUM RETURN FROM ASSETS BY END OF 2024 = $42m + $ 32m + $250m = $325m = 74% UPSIDE
"LIKELY" RETURN OF ASSETS BY END OF 2024 = $42m + $ 32m + $150m = $225m = 20% UPSIDE



I hope my maths makes sense there!

This has been a wonderful holding over the last 3 years (thanks again Carcosa) and I continue to be in 2 minds about what to do next.
I know you've mentioned in the past that Emirates would be the only realistic buyers of the A380s - I guess that makes me wary that they could offer a low price to buy them. Would an offer of $20m be too hard to refuse. Sadly I don't know enough about the industry but logic tells me yes.

One to mull over I think. At the very least there doesn't seem to be much downside here...hopefully.

Thanks again
A

[Carcosa]

Thanks abtan,

It is my opinion that Emirates are unlikely to buy a serviceable/operational A380. I believe they would be far more likely to extend (again) the lease for a further 3-6 years. The lease rate on a $60m aircraft for 5 years would be a better proposition than buying the aircraft.

You ask "Would an offer of $20m be too hard to refuse. Sadly I don't know enough about the industry but logic tells me yes.". The ~$60m valuation would determine the future lease value and that is what will be stated in the Financial Reports/Quarterly reports but am sure Doric would not refuse an offer of 15-20% above part out value.

The risk situation with Doric and the share price has moved from a practically zero risk investment to a medium risk investment scenario as we are now being somewhat speculative as to what will happen with the aircraft/Emirates. Without doubt there is a lot of positive sentiment associated with the A380.

The thing to do is to keep reviewing what other A380's are trading for in Emirates and around the world, excluding A380's being 'returned' when the airline is likely to be ordering other Airbus products and reading the aerospace trade press for clues such as engine valuations (AirFinance Journal should be publishing their annual engine valuation update in Q1/2024).


As regards Avation, although I post weekly about the company and its market segment it's coming from a point of personal interest. As an investment I would find it hard to be bullish about the share price as it currently stands. Maybe I'll post something about that around the New Year.

[abtan]

Thanks Carcosa

That's interesting on Emirates more likely to lease than buy the A380's they don't own.
One to mull over.

If you do get the time to share your thoughts on Avation at some point that would be most appreciated.

Thanks again
Abs

[Carcosa]

abtan

FYI from today's AA4 Interim results:

"...the Board has been advised of potential values (excluding contracted end of lease compensation) for each A380 ranging from $10m (basically net scrap value) to more than $60m. The only empirical evidence of value lies in the transactions by other investment funds that have reached maturity where sales have been concluded to Emirates, being at values between $30-35m per plane."

There is additional commentary regarding other operators A380's etc;

Cheers
Carcosa

[abtan]

Thank you!

[Carcosa]

If anyone wants to spend a few hours/days reviewing four A380, Rolls-Royce Trent engines, put up for sale yesterday by Thai Airways, then take a look here:

https://thaiairways365-my.sharepoint.co ... NT900&ga=1

As you can see, considerable variances between all four engines exist, which is an indicator that putting a 'blanket' estimated value on the worth of any individual A380 is risky.