- Operating profit down from $90.1mn to $70.6mn
- Pre-tax profit of $13mn on revenue of $99.3mn
- Net borrowings reduced from $793mn to $731mn
- NAV up 4 per cent to 341¢ (280p)
The decline in aircraft leasing company Avation’s (AVAP:107p) operating profit in its 2022-23 financial year can be explained almost entirely by the movement in the unrealised gains on aircraft purchase rights.
In the previous financial year, Avation booked a $38.2mn gain whereas this time around the gain was $20.5mn. In aggregate, the group’s purchase rights on 28 commercial aircraft with manufacturer ATR have a balance sheet valuation of $85.8mn, accounting for 35 per cent of Avation’s net asset value (NAV) of $241.6mn (280p a share).
Having agreed to sell or lease both of its remaining off-lease aircraft, the fleet of 36 aircraft is now fully utilised for the first time since the start of the Covid-19 pandemic, servicing 17 airlines across 14 countries. The directors are now targeting organic growth and plan to take up orders on two ATR 72-600 aircraft due for delivery in April and May 2024, funding the aircraft with senior secured debt. They expect to be able to arrange leases for both aircraft given the ongoing rebound in global air travel, and the move to more energy-efficient planes.
It’s an important step, and one that shareholders who have endured a turbulent ride over the past three years will welcome. An organic growth strategy should also help to highlight the value on offer given that the shares are trading on a hefty 62 per cent discount to book value at current exchange rates. Or put it another way, NAV of $241mn (£199mn) is 165 per cent more than Avation’s market capitalisation of £75mn.
True, there’s no dividend for shareholders and movements on the valuation of purchase rights and the fleet can have a material impact on the value of their equity in the company. But with the balance sheet in a better place – 96 per cent of borrowings are hedged at a fixed interest rate of 6.1 per cent – previous impairment charges being reversed, and Avation even recording a $7.5mn gain on its shareholding in Philippine Airlines, which resulted from the airline’s restructuring in December 2021, then the quality of the group’s assets has a more solid look, too.
So, although the shares have underperformed the market since the annual results (‘An aircraft leasing company with plenty more to offer’, 6 March 2023), there is recovery potential. Hold.
■ 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 at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.
