Shield’s lead asset Feraccru is a novel and highly...
Avation is an aircraft lease company. The model is easy to understand, and has been very effective in recent years: Purchase new aircraft, which offer a lease yield of 13%, with asset depreciation of about 5% per year. Apply 75% debt financing, at an interest rate of around 5%. Total other cash costs net off to around 1%.
So to illustrate how this all adds up, on an investment of $100m, the first year’s net cash yield is around $8m ( = 13% * $100m, minus interest of 5% * $75m, minus admin etc. of $1m). Leveraging this $8m with 75% debt, the company can add $32m to gross assets. Netting off the 5% depreciation gives final gross assets of $127m after one year. This gets us to a doubling of assets (gross and net) every 3 years.
The table below shows that this is indeed how things have played out in recent years, with variances from year to year due to phasing of asset purchases. We believe conditions remain in place for very strong growth to continue into the future.
There are 10 listed independent aircraft lease groups globally – of which 3 in Hong Kong which trade on 1.2x book value, and 6 in the US which trade on 0.9x. We believe that Avation is under-valued due to being the only UK-listed name, and due its relatively small market cap at only £112m.
In addition to continue growth in the asset base, investors stand to gain from an expansion in the price/book multiple from its current 0.8x. We believe this is inevitable for a number of reasons. Firstly, as the company’s market cap increases (now above £100m), we expect the small-cap discount to be eliminated. Secondly, the company could crystalise some of its asset value via disposals (an unsolicited bid for 22 aircraft is currently being evaluated). Finally, if the share price remains at a big discount to its peers, we believe there is a likelihood that a bigger lease company could bid for Avation as a cheap (below book value) route to acquiring fleet. We conclude that there is scope for shareholder gains both from re-rating, and from continued fleet expansion.
These four charts provide further illustration of the growth characteristics of Avation (above) as well as some of the downside protection measures built into the group’s strategy.
The first chart shows Avation’s fleet growth over the last 6 years. This represents a doubling of the asset base every 3 years, and has been achieved by recycling and leveraging the lease cashflows generated by the fleet.
The second chart shows the group’s cash return on equity. This has averaged 31% over the last 6 years, and after taking into account depreciation of around 5%, this explains how the company’s growth rate has been sustained at above 25% average run-rate.
The charts below show the average age of Avation’s fleet of aircraft, and the average remaining lease term on the fleet. The fleet age, at 4.1 years as of June 2016, is low. Aircraft have a typical working life of 25 years, and the big flag-carrier airlines typically have average fleet age of over 10 years (e.g. British Airways, Air France, Delta).
The second chart shows the average remaining lease term. This has been steadily around 6 years, giving Avation good visibility for future cashflows.
Both of these measures are useful risk mitigation for Avation. The most liquid market for aircraft is at the low age end of the market, and aircraft are also generally easier to sell if they are under lease. Having a liquid asset base gives Avation the ability to adapt to any potential future changes of circumstance in the market. We conclude that the company has the ability to continue its very strong growth trajectory, but is also taking a prudent approach to managing risks for shareholders.
LEGAL NOTICE – IMPORTANT – PLEASE READ:
Proactive Research is a trading name of Proactive Investors Limited which is regulated and authorised by the Financial Conduct Authority (FCA) under firm registration number 559082. This document is published by Proactive Research and its contents have not been approved as a financial promotion by Proactive Investors Limited or any other FCA authorised person. This communication is made on the basis of the 'journalist exemption' provide for in Article 20 of The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and having regard to the FCA Rules, and in particular PERG 8.12.
This communication has been commissioned and paid for by Avation PLC and prepared and issued by Proactive Research for publication. All information used in the preparation of this communication has been compiled from publicly available sources that we believe to be reliable, however, we cannot, and do not, guarantee the accuracy or completeness of this communication.
The information and opinions expressed in this communication were produced by Proactive Research as at the date of writing and are subject to change without notice. This communication is intended for information purposes only and does not constitute an offer, recommendation, solicitation, inducement or an invitation by, or on behalf of, Proactive Research to make any investments whatsoever. Opinions of and commentary by the authors reflect their current views, but not necessarily of other affiliates of Proactive Research or any other third party. Services and/or products mentioned in this communication may not be suitable for all recipients and may not be available in all countries.
This communication has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Before entering into any transaction, investors should consider the suitability of the transaction to their individual circumstance and objectives. Any investment or other decision should only be made by an investor after a thorough reading of the relevant product term sheet, subscription agreement, information memorandum, prospectus or other offering document relating to the issue of securities or other financial instruments.
Nothing in this communication constitutes investment, legal accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate for individual circumstances or otherwise constitutes a personal recommendation for any specific investor. Proactive Research recommends that investors independently assess with an appropriately qualified professional adviser, the specific financial risks as well as legal, regulatory, credit, tax and accounting consequences.
Past performance is not a reliable indicator of future results. Performance forecasts are not a reliable indicator of future performance. The investor may not get back the amount invested or may be required to pay more.
Although the information and date in this communication are obtained from sources believed to be reliable, no representation is made that such information is accurate or complete. Proactive Research, its affiliates and subsidiaries do not accept liability for loss arising from the use of this communication. This communication is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, such communications are prohibited.
This communication may contain information obtained from third parties, including ratings from rating agencies such as Standard & Poor's, Moody's, Fitch and other similar rating agencies. Reproduction and distribution of third-party content in any form is prohibited except with the prior written consent of the related third-party. Credit ratings are statements of opinion and are not statements of fact or recommendations to purchase, hold or sell securities. Such credit ratings do not address the market value of securities or the suitability of securities for investment purposes, and should not be relied upon as investment advice.
Persons dealing with Proactive Research or members of the Proactive Investors Limited group outside the UK are not covered by the rules and regulations made for the protection of investors in the UK.
Notwithstanding the foregoing, where this communication constitutes a financial promotion issued in the UK that is not exempt under the Financial Services and Markets Act 2000 or the Orders made thereunder or the rules of the FCA, it is issued or approved for distribution in the UK by Proactive Investors Limited.
Shield’s lead asset Feraccru is a novel and highly...
- A number of Tungsten developers, particularly in Iberia, are moving near to...