Aircraft leasing company Avation (AVAP:233p) has produced full-year results ahead of market expectations, prompting analysts at broking house Canaccord Genuity to push through some eye-catching earnings upgrades for the new financial year and beyond.
Avation has continued to diversify its client base, which has doubled from six to 13 airlines since June 2015, reduce the average age of its aircraft fleet (down from 5.3 years to 3.2 years), and lengthen outstanding lease terms (from 6.5 years to 7.7 years). The other benefit of diversification is to enhance the visibility of future cash flows, and improve the company’s credit rating. As part of this strategy, the company has increased its exposure to wide-body Airbus A320 and A330 aircraft, a segment that now accounts for a third of Avation’s portfolio of 38 planes. Half the fleet are ATR 72 narrow-body aircraft and the company holds valuable options over a further 30, representing more than a third of annual global production. All bar two of the options are held on the balance sheet at nil cost and could be worth millions of dollars if traded in a new-build aircraft market being driven by long-term growth in air travel generally, and by higher demand from China, Iran and India, in particular.
The diversification strategy is proving popular with lenders, too, a fact highlighted by a reduction in Avation’s average weighted average cost of debt from 5.1 to 5 per cent. Almost 95 per cent of borrowings are fixed or hedged, and scheduled repayments are well covered by income earned from airlines leasing out the planes. Improved credit terms with lenders who provide the financing for the $1bn (£0.77bn) fleet is feeding through to higher returns for Avation’s shareholders, too.
Excluding a $5.4m gain on aircraft sales in the 2017 financial year, Avation’s full-year pre-tax profit increased from $16m to $18.9m to deliver diluted EPS of 31.8¢, a thumping 20 per cent beat on WH Ireland’s EPS forecast. Shareholders are being rewarded with an eye-catching 21 per cent hike in the annual dividend to 7.25¢ (5.6p). The company has also increased its net asset value (NAV) per share by 12 per cent to 364¢, or 283p at current exchange rates, highlighting the value being created by recycling proceeds from last year’s disposal of six leased ATR 72 narrow body aircraft to support $323m-worth of new aircraft purchases.
Clearly, Avation’s leasing business is in the ascent, which is why analysts at Canaccord upgraded their EPS forecasts by 13 per cent to 35¢ (27p) for the 12 months to the end of June 2019, rising to 40¢ (31.2p) the year after. On that basis, Avation's shares are rated on 8.6 times 2019 EPS estimates, falling to 7.5 times 2020 forecasts. Expect dividends per share of 8¢ (6.2p) and 9¢ (7p), respectively. The growing momentum in the business has also prompted me to revisit my target price, which I am raising from 275p to 300p, in line with June 2019 NAV estimates of 389¢.
So, having first advised buying the shares at 159p ('Get on board for blue-sky gains', 11 September 2014), since when the board has declared dividends per share of 20.5¢ (15.6p), I have no hesitation reiterating my previous buy advice (‘On the earnings beat’, 5 March 2018). Buy.
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