- Net debt reduced to 59.7 per cent of total assets
- Two new aircraft slated for delivery in fourth quarter
- Potential to refinance debt at lower interest rates
Shareholders in aircraft leasing company Avation (AVAP:113p) have endured a turbulent period of trading in the past four years, but there are signs the company is on the right trajectory.
True, operating profit nosedived 50 per cent to $17.5mn in the first half, but this was mainly because the prior period benefited from one-off gains including $6.9mn on equity investments, $3.2mn on a finance lease and $3.2mn of distributions paid to creditors of Virgin Australia. In the latest six-month period, revenue of $42.7mn was slightly ahead year on year, and both administration expenses and finance costs were flat.
The underlying pre-tax loss of $4.8mn was half the reported figure once you adjust for one-off items, mainly the $2.9mn loss booked on the repossession and subsequent disposal of an ATR 72-500 aircraft. It had been leased to an Indian airline and was not in contractual physical return condition when repossessed. In the coming weeks, Avation expects to complete the sale of an 11-year old ATR 72-600 aircraft at a far higher price, and to conclude a lease on the one remaining off-lease aircraft.
Balance sheet strength underpins fleet rebuild
Moreover, with net debt of $699mn reduced from 62 to 59.7 per cent of total assets, Avation’s balance sheet is in better shape for the company to rebuild its fleet and release some of the $88mn value embedded in purchase rights across 28 ATR 72-600 aircraft. Two planes are scheduled for delivery in the final quarter of 2024, albeit the original delivery date was pushed back by the manufacturer due to supply chain issues.
The ATR 72-600 accounts for half the 35-strong fleet, with the balance made up mainly of Airbus A220 and A321 aircraft. The fleet is mainly focused on fuel-efficient new aircraft, which have an average age of 6.9 years and remaining lease term of 4.6 years, and the customer base is diversified across 15 airlines in 13 countries to mitigate risk.
The move back into profit should also get a tailwind from lower interest rates. Traders in the money markets are betting that the US central bank will make its first rate cut in June and then push through three more cuts this year. This will enable Avation to refinance existing debt at keener rates as well as secure lower funding rates for new aircraft deliveries.
Understandably, investors are cautious, hence Avation’s market capitalisation of £80mn (113p) is 56 per cent less than book value of £182mn (256p). However, with the aviation market in a strong post-pandemic recovery, the company’s fleet strategically well placed to benefit from growth in demand for low-CO2 fuel-efficient aircraft, and the second-half underlying pre-tax loss set to halve to $2.4mn, this looks like a bottom fishing opportunity.
The share price rallied 20 per cent after I covered the annual results (‘It's worth waiting for this company’s 62% discount to narrow’, 2 October 2023), before giving up some of the gains. Buy.
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