Poised for take-off

Avation has just agreed the conditional sale of one of its eight Airbus A321-200 aircraft to an Asian buyer at its current market value, representing a significant premium to the carrying value of the asset. We will have to wait for the deal to go through for the finer details to emerge, but on the basis that Avation’s A321-200 is just 23-months old and has a book value of $48.7m (£37.5m), and current market rates are around $53m, then it’s fair to say that the profit on the sale will be significant in relation to the pre-tax profit of $18.9m the company reported from its leasing activities in the 2017-18 financial year. It will also boost Avation’s last reported net asset value (NAV) of $228m, or 280p a share at current exchange rates.

The plane is leased out to Vietjet, an airline accounting for 20 per cent of Avation’s revenues of $109m in the last financial year. The disposal makes sense because it reduces revenue concentration, improves the risk profile of Avation’s income stream, strengthens the credit profile for bond holders, and frees up cash to expand the fleet and take advantage of highly supportive industry fundamentals. Drivers of aircraft demand include growth in global demand for air travel, capital constraints among airlines and normal cycles of aircraft replacement.

In fact, industry experts predict that the world fleet of commercial passenger aircraft is predicted to double every 15 years. Airbus forecasts that over 37,000 aircraft (replacement and growth) will be required over the next 20 years, of which 43 per cent are expected to be in Asia Pacific, 19 per cent in Europe, and 17 per cent in North America.

Avation’s fleet was valued at $1bn at the end of June 2018 and included 12 Airbus A220, A320 and A321 narrow-body jets, Boeing 777-300ER and Airbus A330-300 twin-aisle jets, 19 ATR 72 twin engines turboprop aircraft and five older Fokker 100 jets. The fleet has an average age of only 3.2 years. Since then, Avation has added a further two ATR-72s to its fleet, both of which are leased out to Danish Air Transport, and an A220-300 aircraft leased to airBaltic, the Latvian hybrid carrier.

The point being that the terms of the latest aircraft disposal suggests that the narrow-body fleet is being conservatively valued in Avation’s accounts. Moreover, the company holds options over ATR-72s that represent about a third of the manufacturer’s annual global production of 85 planes, all bar two of which were held on its balance sheet at nil cost in the 2018 accounts. They could be worth millions of dollars if traded in a new-build aircraft market.

There is clearly value in Avation’s lowly rated shares, which trade on a forward PE ratio of 9 based on Canaccord Genuity’s EPS forecast of 35¢ (27p) for the 12 months to the end of June 2019, falling to a PE ratio of 8 the year after, based on EPS estimates of 40¢ (31.2p). The broking house’s June 2019 NAV forecast of 389¢ equates to 300p a share, but this excludes any uplift from the aforementioned aircraft sale.

For good measure, expect dividends per share of 8¢ (6.2p) and 9¢ (7p), respectively, for the current and 2019-20 financial years to further enhance the return on shares that have generated a total return of 69 per cent since I first advised buying at 159p ('Get on board for blue-sky gains', 11 Sep 2014). A target price closer to 330p is now in order and I rate Avation’s shares a strong buy.

■ Simon Thompson's new book Successful Stock Picking Strategies can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source and is priced at £16.95 plus £2.95 postage and packaging. Simon's second book Stock Picking for Profit has been reprinted and is available to purchase online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. Details of the content of both books can be viewed on www.ypdbooks.com.