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Avation PLC: THE INVESTMENT CASE

Avation freshening up the fleet (as usual)

A bit like Doctor Who, the company likes to regenerate periodically
Single aisle aeroplane
INVESTMENT OVERVIEW: AVAP The Big Picture
Avation specialises in narrow-body single aisle aircraft

Dr Who is not the only one keen on regular regenerations; Avation PLC (LON:AVAP), the commercial passenger aircraft leasing company, has been doing the same for a decade or more.

In March it told investors it was getting ready to splash some big cash on freshening up its current plane fleet.

READ: Avation signs long-term leases for four aircraft

The following month it confirmed the sale of six ATR 72-600s to Chorus Aviation Inc (TSE:CHR) for US$31mln – a premium to book value.

In June, it issued loan notes to finance the purchase of a new ATR 72-600 aircraft.

That little sequence of events “nutshells” what the company’s business model is.

The firm – publicly listed for more than a decade – rents out its aircraft to airlines around the world, including Thomas Cook Group (LON:TCG) and Virgin.

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

I shall be re-leased

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.

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

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

Positioned in the market to succeed

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

For those of you who aren’t aeroplane nerds (these nerds do exist, judging by the traffic jams I inadvertently run into occasionally when air shows are on at Duxford), 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 Avation’s fleet.

WATCH: Avation Plc into a new year with a new set of growth challenges

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 – hence the recent recycling of stock.

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.

Record results

In the year to the end of June, a higher lease yield helped to push up revenues by almost a third to US$94.2mln (2016: US$71.2mln), while pre-tax profits jumped by 18% to US$21.4mln.

That allowed Avation to increase its dividend by 85% to 6 US cents (2016: 3.25 cents).

“Fleet metrics have improved with lease yield rising to 12.8%, while the average age of the fleet has reduced and the average remaining lease term for the aircraft portfolio has increased.

“The company has ended the year with a substantial cash balance, lower leverage and has an improved credit rating, which are features that support the funding of further fleet expansion,” said executive chairman, Jeff Chatfield.

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Single aisle aeroplane
September 14 2017
A bit like Doctor Who, the company likes to regenerate periodically

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