Aircraft leasing company Avation (AVAP:288p) has delivered the bumper set of half year results I had anticipated when I suggested buying the shares a couple of months ago ('Avation’s hidden value', 10 December 2018).
More importantly, investors have been warming to the investment case which is why the shares, at 288p, are now trading at an all-time high and have posted a total return of 92 per cent since I first advised buying at 159p ('Get on board for blue-sky gains', 11 September 2014). However, they are still only priced in line with a conservative looking net asset value, so it’s realistic to expect the ascent to continue given the hidden value in the company's balance sheet being realised.
In the six months to end December 2018, Avation almost doubled its pre-tax profits and EPS to $14.2m and 21.6¢, respectively, a result that included a $5.2m gain on the $52.9m disposal of one of its narrowbody Airbus A321-200 aircraft. The company owns a further seven Airbus A321-200s, and the narrowbody segment accounts for 43 per cent of the $1.02bn carrying value of Avation’s total fleet, the implication being that there could be around $50m (£38.5m) of hidden value in the balance sheet if you mark the A321-200 aircraft to their open market value. That’s not an insignificant sum in relation to Avation’s market capitalisation of £185m.
The other major points worth noting are that Avation continues to diversify its lessor base and reduce customer concentration to mitigate risk – it now has 14 customers operating in 11 countries; visibility of cash flow continues to improve – contracted revenue of $837m covers Avation’s net borrowings (that are secured on 32 of the 41 aircraft in the fleet); and the aircraft leasing company is maintaining a young fleet (average age of 3.6 years) with a stable average remaining lease length of 7.5 years in order to optimise future cash flows.
This strategy appeals greatly to bond investors, which is why Avation reduced its weighted average cost of debt from 5 to 4.9 per cent in the second half of last year, and had no problem tapping the bond markets to expand the fleet. In fact, the company plans to take delivery of four Airbus A220-300s (12-year operating leases have already been signed with AirBaltic) and three ATR 72-600 turboprop aircraft by the June 2019 financial year-end, has ordered a further eight ATR 72-600 aircraft for delivery by 2022, and has options on a further 25 of these turboprop aircraft. These options are held on the balance sheet at nil cost, highlighting additional hidden value. I maintain my view that each option could be worth north of £1m on the open market given their scarcity value – ATR only manufactures 85 planes a year and demand from China, India and Iran is tightening the regional aviation market for these fuel-efficient aircraft.
Since the results, analyst John Cummins at WH Ireland has upgraded his full-year pre-tax profit estimate by $1.5m to $23.2m, up from $18.9m in 2018, to produce EPS of 31.7¢ (24.4p). Having paid an annual dividend of 7.25¢ a share (5.5p) in October 2018, the board has just declared an interim of 2¢ (1.5p) a share, so shareholders can realistically expect another decent dividend hike for the full year. Buy.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.
