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Avation (AVAP)

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Carcosa
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Re: Avation (AVAP)

#299150

Postby Carcosa » April 9th, 2020, 5:51 am

Hi Reaggedtp,

I have all but abandoned Stockopedia as it does not meet my needs anymore. So AVAP discussions are largely restricted to this quiet corner of the online investing community.

The RNS issued by the company was long overdue. I can understand why, in that until all of March lease and finance revenue income was received (or not) and airline/govt interventions were known that they were not really in a position to say much. Nevertheless they should have said something earlier.

The RNS was pretty much a reflection of my earlier post on the subject. It was interesting in what they left out
How much revenue was actually lost in March
The fact they probably have 4 ATR's on their books yet to be delivered
Asset valuation decrease (Of course there are no appraisers out there to do such an 'audited' evaluation but general comments would have been welcome)
Refinancing
Of course, I do not expect them to say they are unable to rescue aircraft from defaulters although there was a hint of that when they said Expenses would be reduced (aircraft recovery costs are part of admin costs)

We then had Simon Thompson's IC article yesterday which also rescued the share price from a poor start of the day.

The Corporate activity is alive and well albeit on hold. I have never believed the company is up for sale but some type of merger is possible/likely. At these depressed prices I would have thought a management buyout must be on the table. With Management and a major shareholder on board it can be bought for next to nothing.

When the company started out, having a full UK listing was an attractive proposition when they had no serious aircraft on the books. Avation is very different now. They will never in the ordinary course of business come to the equity markets and say, give us a billion dollars to buy some aircraft when the market cap is less than 100m! So what's the point of having a listing?

My biggest concern remains the wide bodied aircraft. If those aircraft come off lease then that's expensive hardware to maintain, just parking fees alone is pricey let alone finance costs, and there are no long term storage facilities available anymore.

COVID-19 will likely be over in a two years. Many airlines flying again in 6 months. They have issued/provided loans to some airlines to enable finance costs to be honoured These could just as easily go bad but I suspect those loans don't amount to much. Even allowing for defaulters and long term storage of those aircraft Avation will be able to get through ok. Valuations will have normalised in a couple of years.

When I model a bad scenario for the fleet I still end up with a valuation well north of the current share price. In an earlier post I suggested waiting 2-3 months after COVID-19 started and I hold on to that timeframe before re-investing because any (likely) poor news around the world relating to the Avation industry will likely affect AVAP share price to the downside.

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Re: Avation (AVAP)

#299270

Postby simoan » April 9th, 2020, 12:23 pm

Hi Carcosa,
Carcosa wrote:The Corporate activity is alive and well albeit on hold. I have never believed the company is up for sale but some type of merger is possible/likely. At these depressed prices I would have thought a management buyout must be on the table. With Management and a major shareholder on board it can be bought for next to nothing.

When the company started out, having a full UK listing was an attractive proposition when they had no serious aircraft on the books. Avation is very different now. They will never in the ordinary course of business come to the equity markets and say, give us a billion dollars to buy some aircraft when the market cap is less than 100m! So what's the point of having a listing?

I've got to admit, this is my biggest worry at the moment, as it is with any asset based investment i.e. someone with a longer term view than the ordinary share holders who have forced the price down, and with a better handle on the true NAV, will come along and remove my shares from me on the cheap. With the joint holdings of management and Oceanwood, this is a distinct possibility.

Carcosa wrote:When I model a bad scenario for the fleet I still end up with a valuation well north of the current share price. In an earlier post I suggested waiting 2-3 months after COVID-19 started and I hold on to that timeframe before re-investing because any (likely) poor news around the world relating to the Avation industry will likely affect AVAP share price to the downside.

Whilst I am conscious of confirmation bias this is my take as well, and I am currently sitting on my hands.

All the best, Si

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Re: Avation (AVAP)

#301257

Postby Carcosa » April 17th, 2020, 9:59 am

https://www.youtube.com/watch?v=10Ufm5HQU00

IBA Group and Brendan Crowley, Director, from KPMG Ireland teamed up to assess the likely impact of the current crisis on both narrowbody and widebody aircraft ABS finance models.

• How will possible early returns, rental holidays and repossessions impact on previously expected/modelled maintenance events and cashflow?
• What risks could lead to an unexpected Event of Default if not monitored?
• What are the outcomes and options available to various stakeholders?
• Will retirement trends change in the near term?
• What is the impact on current market values and lease rates now and in the longer term?
• How will models need to change to reflect the current climate and minimise the impact?

Whilst the video is addressing a worldwide industry it does have relevance to Avation. Some points that I feel should be highlighted within the Avation fleet is that there are no lease expires due in the near term, it is believed that pre-Covid Maintenance Reserves/equivalents are good.

Options:
No change
Payment holiday/reduced lease rental but with extended lease period
Revised end of lease conditions
Temporary change to power by the hour instead of calendar rentals
Early lease termination
Redelivery

Currently, 2-3 month lease deferrals are typical but if we take China being 2-3 months ahead of the RoW, it is showing little sign of coming out of park and storage; a 10% increase in seat capacity but low seat factor. - May require payment holiday of 6 months?

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Re: Avation (AVAP)

#305220

Postby Carcosa » May 3rd, 2020, 8:18 am

Thought I would update this board with my current thoughts.

Shortly after COVID-19 appeared my attention was away from the markets due to personal health issues, otherwise I would have been more aggressive in my selling. At the time, I was hoping the 'corporate action' would come to the rescue of the share price. I did start selling in earnest around mid March. Having held just short of £0.5m in shares it took a while to offload at 'reasonable prices' for the time, having disposed all of my shares by last week. In the end I ended up with a profit of 0.002% since my initial purchase in 2013 :roll:

The reasons for selling are numerous however that does not mean I believe Avation will go bankrupt. Far from it. However the commercial aviation industry is seeing something that it has never experienced before.

It should be noted that Avation formed the bulk of my shared ownership and although I may no longer be a shareholder because it no longer satisfies my criteria, it may still prove to be useful holding to have for some people as an appropriately sized part of their portfolio

As with many companies issuing RNS's it is what they don't say or how they phrase things that is the most interesting. Avation RNS's are littered with omissions or phrases which can catch out the unwary. For example since COVID, they omit to state that they (Avation) have taken delivery of ATR's prior to the capital expenditure moratorium for which they have yet to place with customers. Indeed last year they had an ATR on their books for almost a year for which they are paying finance on without being able to place the aircraft with the intended customer. Also an investor may be forgiven in thinking that Avation do not place orders without having a customer first. True for the Jets but wholly untrue for the ATR's.

Similarly a couple of years ago they changed the way they calculated LTV. The method is not comparable with industry practice (although they would claim otherwise because it depends on what part of the industry you wish to choose). This gave a marked improvement on their LTV ratio.

More recently they included the much famed ATR options (asset purchase rights) on their books being worth ten's of millions. At best, this is an intangible valuation until it turns into hardware but again, no one in the industry values far out aircraft options in this way. Indeed the rating agencies have already called them out on this.

All of the above is not really a problem during normal times because as the fleet grows it all washes out in the end. But of course, we are now in a situation where fleet growth is all but stopped for Avation. So what are the risks for the company?

Avation is highly leveraged compared to its peer. I have mentioned this in the past but was forgivable during a time of high growth. However real leverage is around x5 which reduces capitalisation headroom to withstand impairments. Impairments are coming. The two long haul aircraft in the fleet equate to about 18% of total BV and are likely valued at 50% of their current book value (I have previously indicated around 30% prior to COVID) That's around $69m on those two aircraft alone. I would think the A320's and ATR's would not be too badly off but still in negative territory. That puts Avation in an uncomfortable position.

The leverage increase has been driven by asset growth outpacing internal capital generation, combined with impairment losses and lower gains on aircraft sales. Result is pretax profit to average assets of only 1.2% in 1HFY20.

Given Avation's reliance on secured funding it puts strain on funding of debt maturities and purchase commitments over the next 12 months. It may also result in an element of cancellation charges over the next year.

Cash is primarily obtained through aircraft leasing. We already know that some, perhaps a small part, of customers are unable to pay their lease charges and Avation have provided them with interest bearing loans; presumably more debt on Avation's balance sheet. I would assume these are our 'tin-pot' airlines who cannot raise finance anywhere else; so perhaps a few ATR's. Once going down that path it becomes more difficult to stop issuing further loan tranches to these airlines in an effort not to have those aircraft returned for which there are no secondary customers.

I would guess that perhaps 3-4 ATR's are at very high risk of being returned to Avation. I'm reasonably sanquin over the ATR fleet as a whole and similarly so with the A321 fleet. I do expect some payment holidays, reductions or some other form of cash preservation by the airlines to be agreed to with Avation but the vast bulk of this years income has already been secured.

My immediate concern is with the widebody aircraft and also negative general industry news. Indeed today all commercial flights in and out of the Philippines will be suspended. That has implications for Philippine Airlines (Avation/B777) who are an airline with a history of bankruptcy. That one aircraft represents 10% in value and income for Avation. EVA Air (Avation/A330) looks in better shape though.

Over the medium term airlines are going to be able to dictate lease rates in the full knowledge that there are a stack of parked aircraft around the world. ATR's are likely to be in demand though but should oil prices/AVJET remain at current levels there is very little incentive to procure fuel efficient aircraft when older less efficient aircraft can bring in same or better profits to the airlines. Airlines/lessors with old aircraft will not want to retire them as their end of live value is much reduced compared to this time last year.

In my modelling of Avation's fleet (wide bodied lessees continue paying), with my assumptions, I still see NAV 50% higher than current share price and I still see Avation able to fulfill their debt servicing commitments including bond maturity obligations. However I cannot see them returning to growth as an independent company for quite some time, perhaps 3-4 years away. I cannot see them resuming the dividend at prior levels either. Raising new finance may be problematic given rating agencies rightfully consider both airlines and lessees to be at much higher risk, requiring higher debt servicing levels for new finance at a time when airlines will be paying ultra low lease rates.

So for me without that dividend income it becomes a hard share for me to own. All things being equal if the share price gets sub 100p then the resulting safety margin would get me interested again.

It does make sense for the leasing industry smaller players to consolidate. I would therefore expect the current corporate activity to be the saviour for shareholders to some extent but perhaps that deal is at least 6 months away, if not 18.

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Re: Avation (AVAP)

#305835

Postby raggedtp » May 5th, 2020, 1:24 pm

Thank you for your comments, Carcosa, although they make me wish I had sold last month. They are not such a big holding for me, but they have been a great white hope as I one my few 'growth' shares. My faith in my own stockpicking is collapsing. I didn't realise PAL was just one aircraft, for instance. I had hoped for a grind back to 150p. But now you've sold, who's to buy?!

If you have any further thoughts, I'd be grateful. Very nervous holder, but struggling to find anything with good prospects of 50% upside...

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Re: Avation (AVAP)

#306583

Postby Carcosa » May 8th, 2020, 6:24 am

There is some very good commentary from Fitch Ratings which I would suggest is required reading and supports my prior indicated views.

Here are some extracts.

The [second] downgrade of Avation's ratings reflects the increased risk associated with its exposure to Virgin Australia Holdings Limited (VAH, D) and Braathens Regional Airways AB (Braathens) after the airlines entered administration in April 2020. Both VAH and Braathens are expected to be restructured and resume operations after the administration process. We expect the resultant deterioration in asset quality to lead to impairment charges and lower lease yields for restructured leases.

Avation has thus far granted lease rent deferrals to larger portion of its lessees than higher-rated lessors...

Fitch expects [Virgin Australia] balance sheet to be restructured and some of its leased ATRs to be returned to Avation, with the remaining lease contracts expected to be renegotiated at a lower lease rent. Avation's credit profile could weaken further depending on the magnitude of terminated leases and aircraft returned

Fitch does not expect immediate liquidity or refinance risk for Avation

Given Jeff Chatfield's history/relationship with Virgin Australia and the fact that ATR's will be in (relative) demand in Australia there is always the possibility that the ATR's will remain with Virgin Australia's new bosses and 'other' ATR's will be let go instead... okay slim hope but there nonetheless!

Yesterday Avation issued an RNS 'COVID-19 STRATEGY INVESTOR UPDATE CALL' for next Tuesday in which it is expected they will discuss strategy going forward. This can also be seen at https://avation.emincote.com/avapcovid.

I would look for the following in that conference call:

    Mitigation actions taken to reduce the risk of aircraft returns; even allowing extended payment holidays/operational refinancing
    Specific commentary on the wide-bodied aircraft
    Third party interest in merging/taking over Avation
    Restricted cash that can be moved to unrestricted cash
    Specific details on which aircraft are unencumbered and whether it better to sell them
    Cost/break of interest rate swap contracts
    Views on aircraft utilisation (China/Taiwan/Philippines/Australia in particular)

Overall I have not changed my views as expressed on May 3/20

NB: raggedtp. Prior to COVID-19 the business was performing admirably and I believe (for many years) that Avation qualified as a good stock pick. It is only the impact of a rare event that has resulted in a current bad outcome. That should not make you lose faith in your stock pickling abilities. Stock selling abilities however... ;-)

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Re: Avation (AVAP)

#308192

Postby simoan » May 13th, 2020, 10:35 am

raggedtp wrote:Thank you for your comments, Carcosa, although they make me wish I had sold last month. They are not such a big holding for me, but they have been a great white hope as I one my few 'growth' shares. My faith in my own stockpicking is collapsing. I didn't realise PAL was just one aircraft, for instance. I had hoped for a grind back to 150p. But now you've sold, who's to buy?!

If you have any further thoughts, I'd be grateful. Very nervous holder, but struggling to find anything with good prospects of 50% upside...

Hi raggedtp,

I'm not sure why someone else selling should effect your own thoughts so much? Carcosa made clear why he has sold, and that's fine, obviously he became uncomfortable with the exposure he had to a single company in an industry going through a hugely negative event. That is totally understandable and when giving his reasons they are going to seem negative, especially since there will be a large element of confirmation bias in his post i.e. his post will almost be a re-affirmation to himself that he made the right decision to sell. It must've been a very difficult decision for him given the attachment he must have built up over the years.

I don't think there's much chance of Avation going bust and if it is a small part of a well balanced portfolio I don't see a problem holding through this difficult period. My own take is that it has been heavily oversold and the NTAV is well above the current price. If you believe a company will survive, then they may actually emerge from the crisis in a stronger position within the industry. I think you should listen back to yesterdays webcast here: https://avation.emincote.com/event/webc ... edia=flash and make your own mind up about whether you want to continue holding. There's some interesting commentary, particular with regard to the situation with Virgin Australia, and the solvency and current operations of Fiji Airways, Philippine Airways, Air Baltic and Vietjet, amongst others.

All the best, Si

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Re: Avation (AVAP)

#308585

Postby Carcosa » May 14th, 2020, 10:44 am

From the COVID call presentation material we can get an idea of some valuations.

Surprisingly they are valuing the ATR's ar Virgin much higher than in prior years over an additional $1m per aircraft.

The old A320 (easyjet) amd A321 (Glassair) stated values are ~30% below prior valuation, which seems about right to me given their age and expected utilisations.

The 'newer' A321's 'should' not be suffering the same level of depreciation so perhaps 15-20% is the right ball park

The widebodied aircraft, were suffering a lot prior to the pandemic (as I had written about in earlier posts here). Previously 30% reduction in value was on the cards, but now 50% would not be unreasonable.

The ATR's, not withstanding an unexplained increase last year in their valuations I thin it would be fair to assume 10-15% decline would not be unreasonable.

I was going through each and every aircraft on my spreadsheet but there are too many variables to be that granular but an overarching view can easily be considered.

Depending on how you want to measure it LTV is is the range of 72 to 80%. Therefore with current asset valuations Avation probably owes more than the value of their aircraft fleet assets (i.e. excluding cash). That's not a viable situation to be in long term.

Mitigating circumstances are that over time the fleet assets will recover in value. Also their is a difference between aircraft valuation and realisable value (which tends to be higher).

Avation will also be able to refinance in the future, hopefully bringing the cost of debt down.

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Re: Avation (AVAP)

#308598

Postby raggedtp » May 14th, 2020, 11:47 am

Hello Both Si and Carcosa (recognising you both from Stockopedia: I have a different name thr=ere but don't post much)

Si, my gloom was bad last week, as nearly everything I had bought in recent years for growth has fallen 50% or more in the past three months. Having done rather well for a few years, I was too agressively positioned for my circumstances. Thank goodness for certain investment trusts like BSIF and Legal & General. I am more like purpleski and live off income, and am rubbish at selling shares to pay bills.

Anyway, I did actually have along call with Richard Wolanksi last Thursday, who was very open and happy to answer any questions I had (and then told me they would likely do the investor call, which I listened to yesterday). On balance, I am reassured. OK, I have a bias. I think Asia is handling CV19 SO much better than Britain that they will open up regional transport with fewer ill-effects. I am a fan of Vietnam now, realising how successfully their economy is developing, how well they are dealing with CV19. And today they have put on hold the authorisation of any further airlines. So, as they open their skies, Vietjet should benefit.

The fact that Vietjet and AirBaltic are 47% of future revenues and safe airlines (the €250m grant from Latvia and news of likely Baltic Bubble reassures me on them too) is good news currently, but how do you win, if then open to concentration concerns?

You may know better than me, Carcosa, but I found them both reassuring on Virgin Australia. I know Jeff Chatfield talks a good game, but then his own gilded retirement depends on his 18% shareholding remaining useful over the next couple of years of AVAP, so I tend to believe him when he says they will transition all the unwanted older ATRs. Australia needs a second airline, and if there are indeed at least 6 bids being tendered for Virgin, then I would hope making good on leases will get in there.

PAL is the biggest risk. But with just free cash and owned aircraft well in excess of the current market cap, I am reassured they will be a survivor. NAV now, anyone? I hold and think there should be some buyers as there are prospects of returning to 200p in a year or so.

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Re: Avation (AVAP)

#310506

Postby Carcosa » May 21st, 2020, 8:19 am

Narrow bodied aircraft change in Market Value pre-COVID to now
Image

Narrow bodied change in Lease Factors pre-COVID to now
Image


Wide bodied aircraft change in Market Value pre-COVID to now
Image

Wide bodied aircraft change in Lease Factor pre-COVID to now
Image

Data source: https://www.iba.aero/

Additional point to note:
Some aircraft, especially wide bodied, valuations were falling relatively considerably prior to COVID.
A220 valuations are holding up extremely well largely because they were significantly undervalued at point of sale.
Leases (at least in theory) already secured by Avation should not be affected but under these trends it seems more difficult than ever for a leasing company to sign new profitable leases under the current market.

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Re: Avation (AVAP)

#313884

Postby Carcosa » May 31st, 2020, 10:12 am

Update for ATR72-600 aircraft market valuation pre/post COVID:
New ATR's -2%
Young (3 year old) ATR's -8%
Mid-Life (12 year old) ATR72-500's -14%


Update on Lease Rate pre-post COVID:
Mid Life ATR 72-500 -24%
NB: Lower rates for shorter term placements


Data from IBA.Aero (Independent aircraft assessors)

Again, exisiting lease contracts 'should' not be affected in principle but clearly the 6 ATR72-500's with Virgin Australia will be at risk to change. Already expecting 3 of those to be placed with another customer and the remaining three, if kept in the revamped VA fleet, will likely be re-leased at a much lower rate.

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Re: Avation (AVAP)

#315221

Postby dealtn » June 4th, 2020, 3:21 pm

https://www.investegate.co.uk/avation-p ... 34259865O/

Might be of interest to holders. Buying back Senior Notes at 76.25p for cancellation.

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Re: Avation (AVAP)

#315277

Postby simoan » June 4th, 2020, 5:57 pm

dealtn wrote:https://www.investegate.co.uk/avation-plc--avap-/rns/transaction-in-own-senior-notes/202006041134259865O/

Might be of interest to holders. Buying back Senior Notes at 76.25p for cancellation.

Nice. It's a no-brainer to buy back bonds at way below par if you have funds, what with the interest rate being effectively zero. It also shows an element of confidence in the future, which we can but hope is not misplaced!

All the best, Si

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Re: Avation (AVAP)

#315506

Postby Carcosa » June 5th, 2020, 12:03 pm

Those bonds were bought back because a US based bond holder had to liquidate their portfolio. Not only did Avation buy them but also Avation Management and other existing shareholders. Info from AVAP's Finance Director

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Re: Avation (AVAP)

#315532

Postby simoan » June 5th, 2020, 1:11 pm

Carcosa wrote:Those bonds were bought back because a US based bond holder had to liquidate their portfolio. Not only did Avation buy them but also Avation Management and other existing shareholders. Info from AVAP's Finance Director

Thanks for the info. Even better buying from a distressed seller :-)

All the best, Si

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Re: Avation (AVAP)

#320398

Postby dspp » June 22nd, 2020, 10:43 am

https://www.pprune.org/australia-new-ze ... ralia.html

Avation remarketing Virgin Australia aircraft.

- dspp

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Re: Avation (AVAP)

#320410

Postby dealtn » June 22nd, 2020, 11:20 am

dspp wrote:https://www.pprune.org/australia-new-zealand-pacific/633457-avation-remarkets-five-aircraft-virgin-australia.html

Avation remarketing Virgin Australia aircraft.

- dspp


Sounds a bit more than "remarketing" if the story is correct in them "finding new homes for the aircraft" don't you think?

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Re: Avation (AVAP)

#321639

Postby Carcosa » June 26th, 2020, 7:49 am

Today EasyJet issued an RNS relating to SALB:

Six A320neo aircraft for aggregate cash sales proceeds of $255m (approximately £206m).

The net book value of the aircraft, which vary in age from six months to two years of age, was approximately £141m as at 31 March 2020.

The aircraft will be sold to SMBC Aviation Capital, the leading global aircraft leasing company, and leased back for terms of between 110 and 122 months. The lease obligations generated amount to a total of approximately £155m. Over the terms of the leases the average net annual headline cost reflected in easyJet's income statement will be in the mid-single digit millions of pounds.


So that's an average of $42.5m per aircraft; and these are new/young aircraft.

An A321 of the type in Avation's fleet is historically about 8% higher in cost than an A320neo. Pre-Covid A321-200's of similar age were worth about $46m. Easyjet's deal suggests that A321-200's in Avation's fleet are now worth around 7% less than pre-covid times. That's rather remarkable in my view and suggests either Easyjet secured a very preferential deal (they are now tied to their new SALB lessor going forward) or valuations are bouncing back.

Interesting.

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Re: Avation (AVAP)

#321768

Postby flint » June 26th, 2020, 12:08 pm

Moderator Message:
Deleted. I am afraid we do not allow advertising on TLF, most especially when the people(s) in question have repeatedly ignored polite requests from TLF-Central. I expect you are unaware of that, but if not please pass the message back. regards, dspp

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Re: Avation (AVAP)

#325138

Postby Carcosa » July 10th, 2020, 12:12 pm

Avation's presentation from 10th July (without the Q&A):

https://vimeo.com/436112481/110bb36edf


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