Q1. What stood out for you in Avation’s recent H1 trading and update?
In our view, the stand-out is the progress to a more normal post CV19 business. We think this was visible in a number of developments where we believe momentum will build further, including;
(1) Increased fleet utilisation (with further potential improvement to come) which means more productive money earning assets and the prospect of improved return on investment (in aircraft assets);
(2) Visible signs (per AVAP’s comments) of rising lease rates for the ATR72 especially;
(3) reduced operating costs in recurring areas such as administration costs that potentially bolster future profit potential;
(4) Further cash generation and reduced net debt – which we think creates more potential value for shareholders (as less company value is absorbed by debt);
(5) Further clear evidence that the ATR purchase rights have an increased value in a market where commercial aviation demand in recovering, new order prices are rising but where the Company has existing rights to purchase; and,
(6) Potential for the fleet mix to move further towards more sustainable, lower CO2 aircraft, e.g the ATR72EVO.
Q2. The airline industry is in recovery with global tourism and business travel on the rise again. How does that impact the Company?
We believe there are growing signs of a wider (east Asia) and deepening (business travel recovery following tourism) aviation recovery, even though we think many airlines are struggling to fully staff-up – so in many cases industry supply remains below 2019 levels. For consumers lower supply means higher air fares, potentially. For airlines we see prospects of strong profit margins (despite higher fuel costs) though a risk in the long-term that this burns off some demand (US airline United has recently seen weaker than expected demand). For Avation we believe there are number of net positive impacts , including:
(1) Rising interest rates will likely constrain airlines’ ability to self-fund new aircraft, likely further increasing their use of leases (while the Company has its debt at almost 95% hedged/fixed rate as at H1-23);
(2) We think higher demand for new aircraft but more restricted financing opportunities for still highly indebted airlines likely increases demand for new fleet, and achievable lease rates on those assets. We also think leasing companies can become more ‘picky’ about the credit quality of their customers, so reward/risk in lease contrast will likely skew more to the leasing company, and allow more rapid deployment of unutilised or underperforming fleet;
(3) We see signs of rising aircraft values and lease rates – which impacts profit potential and potential asset value for fleet;
(4) Airline investments, such as AVAP’s shares in PAL (derived from the PAL 777-300ER lease contract rebasing during CV19) will potentially see improved upside potential and liquidity;
(5) Maintenance and overhaul facilities face more pressure so this may delay lease transitions – but this reflects a healthy industry backdrop.
(6) We see a growing chance of further industry consolidation – both in airlines (e.g. IAG/Air Europa) but also within the leasing industry (Standard Chartered reported to be seeking a disposal of its aircraft leasing division). This implies that if this builds momentum, then leasing shares (like AVAP) might start to price-in a chance of M&A multiples, rather than usually less high stand-alone multiples.
Q3. Are there any other share price catalysts?
To us, key other catalysts include (but are not limited to):
- Buying back debt at a 13% discount to par (as at COB 20/03/2021).
- Closure of the NAV discount vs peers as Avation potentially delivers more ‘show me’ profit progress.
- Reduction in listed peers discount to NAV as industry demand has scope to improve further and harden asset values.
- Increased focus on minimising environmental impact of Avation (favouring ATR EVO programme and Avation).
- Macroeconomic outlook – as airline demand typically has grown (long-term) at 1.5-2x GDP.
- Changes in interest rates and costs of debt.
- Changing FX rates (Avation is a US$ company but with a GBP based share price).
- Geopolitical events (wars, sanctions, terrorism, and other geopolitical impacts on industry demand).
Avation PLC (LON:AVAP) is an aircraft leasing company, headquartered in Singapore, owning and managing a fleet of commercial passenger aircraft which it leases to airlines around the world.