Having given some thought overnight to yesterdays RNS announcements. The following is my
opinion piece. So low on facts and high on speculation!
Just over a week ago I said in
this post that I thought an Irish based lessor may be buying the two ex-Thomas Cook aircraft. It may be that I had got it wrong and were in fact looking for a much larger portion of Avation's fleet. Given the size of this Irish lessor it would make sense for them to look at Avation's assets. I therefore wonder if that is what has sparked off Avation putting the 'for sale' sign up?
I did email Avation if they had indeed been approached by this leasing company for the Thomas Cook aircraft and todate I have not received a reply. Not getting a reply from Avation is most unusual so perhaps I got a bit too close to the mark... or they are just too busy/holidays to reply!
So, Avation have put the 'for sale' sign up. I guess I would ask two questions. "Why" and "how much"?
The "Why'I think it is important to state that the company are full of hard core financiers with a wealth of experience in the aviation industry and they have operated above reproach; working in Singapore, arguably least corrupt business society on the planet helps in demonstrating their integrity. Of course, I accept this is largely a subjective matter but having met them in Singapore HQ and myself worked in this part of the world I am confident in my statement.
The CEO/Executive Chairman, Jeff Chatfield, is key to the business. He is the driving force but I suspect may have been backed into corner with little choice but to do this 'strategic review'. Jeff comes across as a very determined, shrewd, respected and a single-minded person. Avation is his true 'baby' and I very much doubt he wants to give it up. However being a publicly listed company some things are out of his control and when a meaningful approach is made by a third party for some or all of Avation's assets it has to be responsibly addressed. This can be seen by what happened a few years ago.
In 2016 they had an unsolicited approach from Chorus Aviation Capital Corp., to purchase all of their ATR72-600 aircraft (22, at the time). That also flushed out several other players, all of whom were willing to pay above NBV for the aircraft. When I had face to face discussions with the company it came to light that a number of other parties had shown interest in Avation's fleet in the past but these were less than serious/feasible approaches.
In conversation with the company it turns out they did not really want to sell a substantial part of the fleet because it would have placed them back several years in their growth plans. Not only the loss of income would be incurred but a large sale would also affect their credit ratings/borrowing rates and ability to acquire new aircraft. However the approach was a serious one and corporate governance/business meant it had to be dealt with in an above board fashion, hence their decision to work with a aviation related financial institution to review the business case of selling 22 aircraft.
At the end of the day I think I worked out Avation received
around 10% above NBV for the aircraft from Chorus. However Chorus only got six aircraft, for some very good reasons. Selling six ATR's allowed Avation to gain a useful cash pile for deployment without destroying the entire business or at least putting it back to where it was by several years.
What that activity proved was to validate the Company aircraft valuations and verify their business model.
M&A activity is aircraft leasing is immense. There hardly seems to be a month go by without someone doing something at corporate level. Most leasing companies are private equity so unless you read the trade press you will never hear about them from the usual investor news resources.
However, Avation is still a 'tiddler' company in terms of aircraft assets but, relatively unusual in that they hold a large percentage of the world's ATR fleet on their books. That would be attractive to a number of other lessors or indeed finance houses. Avation also have a large number of unencumbered aircraft, at least five, possibly seven by now. Whereas Avation may struggle in raising debt against the existing fleet using the unencumbered aircraft as collateral without breaching various financial ratios, another company may be in a much better position to utilise those aircraft to raise several million without any problems.
It therefore seems logical to me that someone else has come along and made enquiries for the entire fleet or at least the vast majority of it. Indeed the RNS effectively says that. And this is where Jeff has been backed into a corner. Am sure they don't want to sell the company or the vast majority of the assets but continue as they are. But seemingly/presumably the offer on the table is likely to be compelling to existing shareholders and Jeff can't bat this one away like he did with Chorus.Therefore it's better to announce to the world that the company is up for grabs either as a whole or piece-meal or do something with M&A
In my view Avation (Jeff) has the following possibilities (But what do these options provide for Shareholders?):
Some M&A activity but Jeff would probably demand a very big role in the new businessThe likelihood is that current Avation shareholders will get access to better finance which in the long run should generate better returns because current financial ratios for Avation are at the top end of being acceptable. Outcome is "Good"
Do some form of partial sale similar to Chorus (probably best option)Would again demonstrate the fleet valuation is below realisable value for the aircraft. Outcome for shareholders is 'Good' but maybe temporary in nature. Cash injection would need to be deployed effectively and right now the jet narrow body market is not as healthy as in recent past (see graphs that I posted a few days ago)
Sell the company and start over.Would Jeff really want to do it all over again? Management are incentivised to get the best price possible. Outcome for shareholders is very good but some of us would prefer to remain long term investors
Sell most of the assets and start overDoes provide a lot of capital and return to growth could be more rapid than when Avation initially started out. But, again, certain markets are not that healthy at the moment. However, B737-MAX opportunities may be of interest or Avation may even enter the older aircraft leasing market. Outcome for shareholders would be 'Okay'.
NB: The company's IP is really its staff which means Jeff and a couple of other board members.
Yesterday's announcement provides shareholders the possibility of getting the absolute highest price for the business as is reasonable. Whilst I do not for a moment believe Jeff Chatfield or the current management really want to sell the company, if they have to sell then getting the best price is on the agenda. But what is the best price?
"How Much"Aircraft leasing companies are essentially priced on their asset value i.e. cash and aircraft/engines. However, their is a little wrinkle in this.
Aircraft essentially have three prices attached to them. The asset value we see in their accounts, their 'base line' value which essentially determines their residual value and, finally, their realisable value.
In recent years it has been evident that both the ATR72-600's and the A321's (not so much the A320's) are being sold in the market place at a higher valuation than the accountants say they are worth. As a rough guide about 10% higher; maybe a tad more right now.
Within the M&A environment, deals for relatively young aircraft are done at around the x1.2 - x1.4 mark.
The last reported NAV was ~300p/share. Since then additional aircraft have entered the fleet and shareholders have been advised of aircraft deliveries stretching into Q1 this year. Revenue has been coming in, debt paid off and aircraft have depreciated in value and adverse $/GBP exchange rates observed. End result being NAV will be no lower than last reported and in all likelihood up a few pence per share.
But the NAV is not the value of the company or its worth when it comes to being sold. In my previous post I suggested a truer figure of around $5.00 or 370p for the assets alone.
So what price would investors be happy with? After all share price appreciation has been:
2016 45%
2017 14%
2018 10%
2019 5%
Excluding good and rising dividends (3-4%)
So what price would a long term investor deem acceptable?
Business is consistent and remains on a growth path (Rinse, and repeat) for decades to come. So I would have thought investors would not be happy to be sold around NAV. Must be NAV and a reasonable premium or some other residual amount for a healthy company like Avation.
This chart shows my view on Assets/Liabilities and a range of the NAV/Share assuming similar fleet growth rates going forward.
So in less than two years NAV of around 370p plus 4-6% dividend (higher for existing shareholders who bought in earlier) So would I be personally happy to be selling out today at 300p? Definitely not. The realisable value by then may be around 440p
In fact about three years ago I had a chat with Avation and asked them what their pricing thoughts were if the company was to be sold. At that time their view was 400p at a time of when the share price was around 170p
So personally, I would not want to let go of my shares for anything less than 450p or around 50% more than the current share price of ~300p; and even then it would be a reluctant sale. 500-550p would be nice though!
Given that I consider management are not that keen to sell and realisable valuation are ahead of formal NAV's then I have an expectation that if a deal does go through it have to be at high premium to 300p; or perhaps not happen at all. Selling the entire fleet piece meal may raise more value than selling the company. This is why I would not be surprised that something else happens, as per the RNS itself
"These options include merger and acquisition activity, an aircraft portfolio sale or review etc.,.." SummaryMost of the above is my speculation. Please note that.
My belief is that the company is not going to be taken over/sold. The value of the company is considerably higher than reported net assets. Personnel are also a key component and as such it is doubtful they would want to give up control over their destiny. A merger is more likely followed by a partial sale of the fleet. At the end of the day it will once again prove that the share price lags behind reality.