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Three undervalued small-cap buys

Three companies have adopted a sensible approach to navigating through the Covid-19 crisis, and provide potentially lucrative value opportunities to exploit

The directors of aircraft leasing company Avation (AVAP:132.5p) held a reassuring investor conference call this week to highlight the initiatives put in place to help both their airline customers and the company to successfully navigate through the Covid-19 crisis. Their commentary inspired a great deal of confidence and adds significant weight to my buy recommendation (‘Deep value buying opportunities’, 8 April 2020).

To date, all bar four of the 19 airline clients who lease Avation’s fleet of 48 aircraft across Europe, Asia Pacific and Australia have taken up the offer of deferring some of their lease payments, generally for upto six months, with repayment terms of six to nine months. All airlines continue to pay maintenance reserves and cash rent. The sums deferred equates to only 7 per cent of pro-forma annual revenues of $133m.

Although Virgin Australia entered voluntary administration on 21 April, Avation is not overexposed. That’s because the debt of $45.9m (£37m) associated with 13 aircraft leased to Virgin Australia represents a small sum in relationship to the $159m book value of the planes. Moreover, Avation holds security deposits and maintenance reserves of $8.2m. The objective of Virgin Australia’s administrator is to sell the airline as a going concern and it has a 15 May deadline for first bids from interested parties. The airline is still flying around 64 routes.

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