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Avation in the ascent

Aim-traded aircraft leasing company has reported an eye-wateringly good set of annual results, and has hidden value in its balance sheet, too.
September 9, 2019

Aircraft leasing company Avation (AVAP:299p) has reported an eye-wateringly good set of annual results, vindicating my decision to rate the shares, at 270p, a buy ahead of the release (Avation primed to make new all-time highs’, 15 July 2019).

In the 12 months to 30 June 2019, Avation increased its fleet assets by more than a fifth to $1.27bn (£1.05bn), adding 12 aircraft to the fleet including six ATR 72-600s, five Airbus A220-300s and its first Boeing 737-800. The company also sold two narrow-body aircraft for 10 per cent more than their book value, booking a $10m net profit and highlighting the significant hidden value in the balance sheet. The segment accounts for 48 per cent of total fleet assets and includes seven valuable Airbus A321-200 and two Airbus A320-200 aircraft. Mark the narrowbody planes to their open market values and there could easily be $50m (£40m) of hidden value in Avation’s balance sheet, a hefty sum in relation to the company’s market capitalisation of £191m.

That’s not the only part of the risk profile that’s improving. The customer base continues to diversify, increasing from 13 to 17 airlines, thus reducing financial risk in the event of any one airline getting into financial difficulty. Virgin Australia, the largest customer, now only accounts for 20 per cent of Avation’s revenue compared to 66 per cent in the 2015 financial year. In total, company’s 48 aircraft generated a record $118m of lease rental income, up by a fifth in the 12-month trading period, and three times higher than in the 2013 financial year. The increased scale of the operation is being recognised in the debt markets (weighted average cost of debt on borrowings of $1bn improved from 5 to 4.6 per cent), as is the relatively young age of the fleet (average of 3.4 years) and the strong visibility offered to future cash flow by a stable average lease length of 7.5 years.

So, with the fleet growing, and the cost of borrowing declining, profits have accelerated skywards to record levels, too. Annual pre-tax profits rose by 35 per cent to $25.7m to deliver earnings per share (EPS) of 40.2c (33p), the latter representing a thumping 26 per cent beat against WH Ireland’s forecast, a performance that also enabled the board to maintain their progressive dividend policy by declaring a 45 per cent hike in the payout to 10.5c (8.5p) a share.

The plan for the new financial year is to focus on growing the fleet and adding new airline customers. Bearing this in mind, eight ATR 72-600 aircraft are on order for delivery between 2020 and 2022, and the company has options over a further 25 of these turboprop aircraft, all of which are held on the balance sheet at nil cost. Each option could be worth $1m on the open market given their scarcity value – ATR only manufactures 85 planes a year and demand from China, India and Iran is tightening the regional aviation market for these fuel-efficient aircraft. Avation’s reported net asset value of $240m, or 374c (304p) a share, significantly understates the true value of the company’s assets.

That’s not being lost on investors as Avation's shares have posted a total return of 100 per cent, including dividends, since I first advised buying them at 159p ('Get on board for blue-sky gains', 11 September 2014). However, they are still only trading on 10 times historic earnings, and offer a 2.8 per cent dividend yield – the 8.5c (6.9p) final payout goes ex-dividend on 3 October – a modest rating that offers clear blue sky to WH Ireland fair value target of 352p. A chart break-out above the March 2019 record high of 299p is firmly on the cards. Buy.

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