On a recovery mission

Like many aircraft leasing companies, Avation (AVAP:78p) had to act quickly and decisively at the start of the Covid-19 pandemic so that the business could navigate through the unprecedented market turmoil.

Debt has been restructured, support agreements were put in place with 14 airline customers, and aircraft returned by financially distressed airlines have been repositioned. That process is nearing its end as results for the six months to 31 December 2021 highlight.

The group’s reported pre-tax loss of $15.9mn was a vast improvement on the $60.5mn loss in the same period of 2020, and included $9.9mn of non-cash impairments relating to off-lease aircraft including six ex-Virgin Australia ATR72s, three of which are in the process of being sold to Aegean Airlines for $24mn. In addition, Avation has entered letters of intent to lease another ATR 72-500 aircraft that was returned from Virgin Australia to an Asian airline, dispose of two ATR 72-600s, formerly on lease to Loganair, and transition one ATR 72-600 from Golden Myanmar Airlines to a new customer.

Assuming all the above transactions complete, Avation will only have three unutilised aircraft remaining from the 20 aircraft that were returned or repossessed during the Covid-19 pandemic. Cash collection rates are now 91 per cent across Avation’s fleet of 42 aircraft with agreements in place with airlines for the rental deferrals. The $1bn portfolio of planes produces a 10.3 per cent lease yield.

With net indebtedness of $851mn, borrowing costs are therefore critical to the group’s profitability. Bearing this in mind, the weighted average cost of total debt was stable at 5.4 per cent in the six-month period, but prior to the pandemic it was far lower at 4.5 per cent. Sensibly, the directors are now in position of strength to look at alternatives to deleverage the balance sheet and lower the cost of debt, the impact of which will be to improve profitability.

Net debt currently equates to 70.5 per cent of the group’s $1.2bn total assets and will be reduced by the cash proceeds from the sale of the three aircraft to Aegean. Also, Avation believes that 45 per cent of its A$101.4m (£54m) creditor claim with the administrator of Virgin Australia should rank above the A$5.8bn of unsecured creditors. The group is pursuing litigation to recognise its priority in the pecking order of creditors. In addition, Avation has five unencumbered aircraft and $28mn of valuable purchase rights on ATR-72s that could be traded to deleverage the balance sheet.

So, although Avation’s share price has fallen in line with the FTSE Aim All-Share index since my last article (‘Geared for airline industry recovery’, 18 October 2021), the company is far better positioned to return to growth and profitability than current market pricing implies even with the oil price at 14-year highs. Rated on a 53 per cent discount to book value of 164p a share, bottom fishers should be rewarded. Buy.

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