Thought I would keep this thread going with my take on Avations following the recent FY prelims which can be
found here together with the
presentation slides and
accompanying webcast.
As a bit of recent background, the latter part of 2016 saw interest in the ATR aircraft grow tremedously. Not only was this set against a background of general commercial aircraft growth (passenger growth rates high YoY +7.4% and about 1,850 new aircraft manufactured and backlog growing) but most notably from orders and interests from India (50+ aircraft), Libya (20+20). Furthermore the ATR aircraft are currently going through certification in China and industry observers are predicting demand for 100's of ATR to serve the Chinese market. And they ahve eventually found there way back into USA.
Currently ATR are only able to produce 85 aircraft a year.
Due to the demand for the ATR's I think Avation shareholders can rest assured that aircraft valuations are going to remain high for at least the medium term if not the long term. Furthermore, Avation are the largest holder of aircraft options, 27 as of last week. I would estimate that each option cost around $125,000. What that means is (as they have done so in the past) these options can be sold on for a considerable profit of up to around $250,000 each or potentially more depending on how a deal may be structured.
The downside is that when aircraft valuations are relatively high the yield on these aircraft declines and that has what has lead to Avation to start looking at 'twin-aisle' or 'widebodied aircraft' (am not specifically sure if there is a distinction between the two terminologies).
Although the mechanism or process of leasing wide-bodied aircraft is in principle the same as narrow bodied aircraft there are some significant differences. First of all a typical ATR72 sells for around $19m-$20m and an A321 (narrow bodied aircraft) sells for around $52.5m. Widebodied aircraft are a quatum leap in valuation. Perhaps the cheapest wide-bodied aircraft starts at a list price of $250m but with discounts that may go down to around $165m to a large, established airline. Financing becomes somewhat more complex as essentially aircraft manufacturers sell gliders and then the airlines shop around for engines which potentially will be financed differently. Furthermore governments often have a say. Payment schedules can be vary variable with time but leasing companies usually require a payment schedule which is the same per month for the duration of the lease. Airlines seeking wide-bodied aircraft can also attract the best credits.
Only with Avation having built up their experience to date have they now been able to start to address this market. An improved credit rating, lower Singapore tax rate, perhaps an aircraft portfolio currently worth in excess of published NAV and reduced ATR yields have seemingly conspired to provide Avation this opportunity. There is less competition amongst lessors for this space, lease terms tend to be much longer and cost of debt is often cheaper. Contract negotiations can become arduous and long-winded involving mutiple parties. Therefore if Avation are entering this market they need to keep things as simple as possible and certainly not pre-announce deals until the ink is dry and money is in the bank!
If risk is not well managed during an accelerated fleet expansion phase then things can go horribly wrong. Have a read of "Crash Landing – An Inside Account of the Fall of GPA" for how things can rapidly turn to pooh!
Avation have already hinted that they would only be interested in either financing a new wide-bodied aircraft or - more likely in my opinion, as it is easier - take on an existing leased aircraft of say, less than a couple of years old.
[As an aside; and pure speculation on my part, I would not be surprised if the aircraft they are focussing on will be for Malaysia Airlines who still wants to lease additional Airbus A330s to cover short-term needs sourced from bankrupt European airlines.]
But what does this mean for Avation's shareholders? Well, the quick and dirty answer is that the share price is a rough proxy of NAV. Currently fleet assets are $744m. So one wide-bodied aircraft will instantly add >15% to the NAV and a commesurate increase in revenue (although savvy airlines will probably force Avation to take a somewhat lower lease rate than industry norms). Of course the associated debt will also increase substantially and I do wonder as to how that will affect Avations credit rating given that one or two widebodied aircraft significantly increase the risk profile for the company. It may also take quite some time for the share price to react accordingly.
Current Fleet Portfolio
There were the typical aircraft fleet changes during the last FY resulting in a current fleet of
ATR72's x18
A321's x8
A320's x3
We also know that a further 3 ATR's for Mandarin Airlines and will be added to the fleet before calendar year end, so that will represent around $57m addition to fleet assets.
Plug that into a spreadsheet and I would hazard a guess that total revenue will be around $46.9m ($45.1m) and NAV $3.38/share for H1 and for the full year revenue would be $100.3m ($94.2m) and an estimated NAV of $3.73/share
Few notes worth pointing out though...
The Air Berlin aircraft is expected to bring in an extraordinary gain. In a perfect world $10m but in practice I suspect this will be significantly less; maybe $2-3m?? Just a guessing game at the moment.
Also there will invariably be additional fleet changes in the next few months. Hopefully one or two wide-bodied aircraft will have a large impact on the figures. I can see improvement in profitability.
Overall then, Avation are in a good position. Potentially additional gains from the ATR options, gains from the Air Berlin aircraft, some gains from the cash pile of $87.6m ($48.3m). All of that falls straight to the profit line.
However, for the company 2018 could prove an inflexion point with wide-bodied aircraft entering the fleet. I suspect 2018 is going to be the most significant year for many years in the history of Avation.
Management have a really good story to tell but they appear to be keeping it all low-key for the moment. Am fine with that.
Carcosa