A hidden stock about to secure its dividend for a decade

The airline industry nose-dived during the pandemic, but is now firmly in the ascent. Industry-wide revenue is forecast to bounce back to 93 per cent of pre-pandemic levels this year, buoyed by strong growth in international travel and the re-opening of China’s borders. It is driving a strong profit recovery, too; the International Air Transport Association (IATA) predicts an annual net profit of $4.7bn (£3.7bn) across the industry.

This is good news for Asian airlines. It’s also good news for a UK aircraft leasing fund, Amedeo Air Four Plus (AA4:45.5p), which owns a fleet of 12 widebody aircraft purchased between 2014 and 2018 for $2.74bn (£2.1bn) and leased on 12-year terms to Dubai-backed Emirates Airlines (six A380s and two B777s) and Thai Airways (four A350s). Emirates has made all its payments to date and is expected to honour all its lease obligations. The airline recorded a $2.9bn net profit in its 2022-23 financial year. The Thai fleet leases have been extended by six years as part of that airline’s financial restructuring.

Amedeo’s results in the 2022-23 financial year were mainly inflated by favourable exchange rates, but in a normal year it earns around £34.7mn sterling lease rental payments on the eight Emirates planes after paying all debt service costs on the entire fleet of 12 planes. That sum comfortably covers the £21mn annual cost of the dividend, operating costs of £1.8mn and management fees of £3.1mn. The eight planes in Emirates fleet have between three and five remaining on their leases.

So, it’s reassuring to note that having grounded its 121-strong fleet of A380 long haul aircraft during the pandemic, Emirates should be flying planes to 50 destinations by the end of the summer, restoring the network to close to 90 per cent of its pre-pandemic level. Emirates management expects to have 100 per cent of the fleet back in service by the end of 2023 such is the strength of the rebound in international air travel.

Boeing and Airbus production issues force Emirates to extend A380 leases

Moreover, Emirates is doing more than just restoring the fleet, the carrier has abandoned retiring its A380 aircraft altogether due to an impending aircraft shortage in its fleet caused by delayed deliveries of new aircraft from manufacturers Boeing and Airbus. Emirates President Tim Clark says that the airline now wants to “retain” all of its A380s “probably until the mid-2030s”, and it has started a retrofit programme to upgrade the entire interior of 67 of its 121-strong A380 fleet.

The decision of Emirates to extend the life of its A380 fleet could have major positive implications for Amedeo. If Emirates doesn’t extend the leases it needs to return the aircraft in full-life condition or pay a return lift condition payment of $17mn which would clear half the residual debt of $35mn to $40mn outstanding on each aircraft at the end of their leases.

However, if Emirates extends the lease term on Amedeo’s fleet of A380s until 2035, then it will secure an additional seven to nine years of leasing income per plane and Amedeo will not need to sell them in the secondary market to meet its junior debt obligations. The additional income earned would enable Amedeo to pay off the residual junior debt outstanding on the six A380s (due from September 2026 to April 2028), secure the 15.5 per cent dividend yield for another decade and create additional shareholder value.

Amedeo’s shares are flying below the radar of investors (Alpha Research: ‘In the ascent for a profitable recovery’, 19 May 2023), but if Emirates extends its A380 leases on the fund’s aircraft, as seems likely, the 59 per cent share price discount to book value will significantly narrow. Buy.