- First-half pre-tax profit of $6.7mn reverses $15.8mn loss last year
- Net debt slashed from $793mn to $747mn
- Only two aircraft currently off-lease
- Net asset value per share up from 268p to 282p
Aircraft leasing company Avation (AVAP:139p) returned to profitability in the first half of its 2022-23 financial year, although reported pre-tax profit of $6.7mn did benefit from a $6.8mn gain on its listed shareholding in PAL Holdings (PAL:PHS), which resulted from the successful restructuring of Philippine Airlines. There was also a £1.8mn gain on aircraft purchase rights that more than offset a £1mn unrealised loss on the disposal of aircraft, £0.3mn impairment charge on aircraft, and £0.25mn of credit losses.
Nonetheless, it was a very positive outcome and one that shows that the business is clearly heading in the right direction. This has not been lost on investors; Avation’s share price has rallied 36 per cent since I rated the shares, at 102p, a recovery buy at the annual results (‘On a positive trajectory’, 29 September 2022). There should be more upside to come as the shares are still priced on half net asset value (NAV) of 282p even though management has been reducing investment risk, leasing or disposing of off-lease aircraft, and cutting net borrowings by 6 per cent to $747mn, or 62.9 per cent of total assets of $1.19bn.
Having sold off two ATR 72-600 aircraft in the six-month trading period, Avation has subsequently completed the sale of an off-lease Boeing 737-800 plane and signed a lease with a new airline customer for an ATR 72-600 aircraft previously leased to Myanmar. Avation only has two off-lease aircraft in its fleet, both of which are expected to be sold or placed by the financial year-end (30 June 2023). The current fleet of 36 aircraft is leased to 17 customers across 13 countries and, with an average age of six years, is relatively new.
The profit recovery has also been supported by a 12 per cent reduction in first-half overheads, making the operation a leaner proposition that should benefit from a prudent strategy of regrowing the business. Two new ATR aircraft are on order for delivery in 2024 and Avation has purchase rights on a further 28 aircraft. In aggregate, purchase rights have a balance sheet valuation of $67.2mn, accounting for 28 per cent of Avation’s net asset value of $237.6mn (282p a share).
At this stage of the recovery, the best metric to value the group on is in relation to book value, which largely consists of the net equity held in aircraft, free cash on the balance sheet, the valuation of purchase rights and the net working capital position. On this basis, a 50 per cent share price discount is unwarranted. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous 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 £3.95 [UK].
Promotion: Subject to availability, the books can be purchased for the promotional price of £25 plus £5.75 postage and packaging.
They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential.
