Avation PLC

Written by Ed Stacey

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%.

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.


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