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Avation PLC: THE INVESTMENT CASE

Avation ready to fly as it prepares to invest in its fleet

In the past year, the firm has lowered the average age of its fleet, increased the average lease term and it’s now looking to add to its portfolio of planes
plane in the sky
INVESTMENT OVERVIEW: AVAP The Big Picture
The firm rents out aircraft to airlines around the world, including Thomas Cook and Virgin

Avation PLC (LON:AVAP) has told investors it is getting ready to splash some big cash on freshening up its current plane fleet.

The firm – publicly listed for more than a decade – rents out aircraft to airlines around the world, including Thomas Cook Group (LON:TCG) and Virgin, and it currently has a fleet of 40 planes.

It said it is in discussions to sell off six of its ATR 72 planes “at a premium to book value”, which should raise around US$31mln in net proceeds.

Assuming the talks go as planned, the deal is expected to go through before the end of June and Avation has received US$3mln as a refundable deposit.

The transaction has been structured so as to reduce the impact on current year revenue and earnings, while it will allow Avation to diversify and grow its current portfolio of planes.

In fact, the company is already on the lookout for ways to update its fleet with the money to be received, and said it is “assessing a number of aircraft for acquisition in the short term”.

Positioned in the market to succeed

The firm focuses on narrowbody commercial jet and turboprop aircraft, which it rents out on long term leases. Narrowbody aircraft are used by the majority of the global fleet.

For the aeroplane initiated out there (and I suspect there are many), single aisle, twin engine planes such as the Airbus 320 and the French-Italian ATR 72 600, are used by 75% of the world’s carriers for short-haul trips and the latter makes up two-thirds of the company’s fleet.

The Avation business model is rather like the one employed by property firms.

Avation, and firms such as its US rivals Airlease, Aircastle and Avolon, buy an aircraft then lease it out – the airline will then take care of all the maintenance, rather than Avation.

Avation finances its acquisitions using 75% senior, secured bank debt. A typical plane might be leased on the basis of repaying back to Avation around 144% of the acquisition price over 12 years of a typical contract.

Even when that lease is up, the plane can then be leased out for another 12 years, albeit at lower rate than a brand new airliner.

Avation mitigates the risk posed by a sharp rise in interest rates by borrowing over the term of the lease, rather than over two or three years and constantly refinancing.

Young fleet, long lease

The proposed sale of its ATR 72s might have something to do with the company’s desire to keep its planes fresh.

Avation wants a fleet with a low average age and long average remaining lease term and generally tries to sell mid-life and older aircraft to redeploy capital to new assets and keep a low average fleet age.

At the end of September last year, the average age of its fleet was 3.2 years (5.4 years in 2015), and that’s only been helped in the months since with the sale of its five last remaining Fokker 100 planes which were more than 20 years old.

The remaining lease term as a weighted average was 7.4 years compared to 5.9 years as at September last year, while all of its 40-strong fleet was in use.

Contracted unexpired lease revenue for the fleet, as at 30 September 2016, was US$752.5 million (30 September 2015: US$550.6 million).

Since then, Avation has delivered another two aircraft to Vietjet as part of its leasing deal with the Asian airliner as well as leasing out a couple of others, which has obviously increased lease revenues even more.

Latest results

It’s due to update the market on its first half performance for 2017 in the coming weeks, but as last year’s final results underscored, the UK-quoted plane leasing specialist is being successful in scaling up its business.

In the 12 months to 30 June 2016, it reported a 25% increase in lease revenue (the amount brought in via leasing out the aircraft) to US$71.2 million, compared to US$56.9mln in the same period last year.

Total profit after tax flew 37.6% higher to US$18.3 million compared to US$13.3mln in 2015, while the yield to the firm from renting out the fleet was 12.3%.

To put that in perspective, a landlord in London renting out their two-bed flat can expect a yield of between 3-5%.

Significantly, EPS (earnings per share) increased 42.5% to 34.2 cents (2015: 24.0 cents), while shareholders will welcome an interim dividend of 3.25 US cents against 3 US cents last year.

That way it always knows it will receive more in lease payments than it pays to the banks.

They, meanwhile, are keen to finance leasing deals because a new plane appreciates in value when it is leased out.

Japan Credit Rating Agency likes ‘stable’ outlook

Earlier this month (March), the Japan Credit Rating Agency (JCR) issued a note giving Avation a long-term issuer rating of BB with a “stable” outlook.

In a news release, JCR said: ”The rating on Avation reflects its logical strategy toward customer diversification, steady growth with good cash flow visibility and conservative financial policy.”

The agency concluded: “Thanks to low administrative expense, return on asset is 2.6%, albeit with a small size and lack of economies of scale. JCR thinks the company will show steady growth in next 2 to 3 years in both revenue and profit in line with fleet asset growth.”



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Avation PLC Timeline

Article
February 16 2017
Video
February 15 2017
CN Research
February 03 2017
Newswire
January 17 2017

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March 16 2017
In the past year, the firm has lowered the average age of its fleet, increased the average lease term and it’s now looking to add to its portfolio of planes

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