Doric Nimrod Air Three (DNA3)
Posted: July 18th, 2020, 9:57 am
Thanks to a reader on TLF/Avation thread a few months ago, this company was brought to my attention.
A quick overview
- Doric Nimrod Air Three Limited (LSE Ticker: DNA3)
- Possesses four Airbus A380's all acquired from the factory in the H2 2013 and leased for twelve years to Emirates Airlines
- Distribution Policy is to declare four interim dividends of 2.0625 pence per Share.
- The Company intends to return to Shareholders the net capital proceeds if and when the Company is wound up.
- The Winding up date is scheduled to be coincidental with the aircraft completing their leases with Emirates Airlines and selling the aircraft, thats around 2025 or about five years from now.
- Worthwhile income and capital return is possible
Some More Detail
The purpose of this company (and similar DNA's) was to acquire four A380's for leasing to Emirates Airlines for a twelve year term. For shareholders, they get a quarterly revenue stream via dividends derived from the lease receipts. At the end of the leasing period the aircraft are then sold off and the money returned to shareholders by winding down the company. As with all aircraft lessors, all maintenance, repair, modifications,insurance etc i.e operating costs are the responsibility of the airline. So other than to maintain the books and inspect the asset there is not a lot to be done by Doric. Pretty simple in theory.
To be successful it requires two things to happen. First the lessee, Emirates, have to pay the lease rentals in full and on time and at the end of the lease period the residual value of the aircraft has to be realised. In an ideal world this would mean the aircraft would be sold off to another airline operator. In the 'real world' the likelihood is that the aircraft will be scrapped.
Or put more simply. Shareholders are betting on Emirates paying their bills.
When these shares were initially issued at 100p I had no interest in buying them, for various reasons, not least of which was that the returns also relied upon a high residual value, or lease extension after 2025. Not anymore.. Now the shares are trading around the mid 30's and this makes things very interesting...
Most notably the dividend rate is now in excess of 20%
The remaining lease term is 5 years, but in fact the lease arrangement is to 2023 with a two year option, which if Emirates do not want they still have to pay Doric anyway. Thus it may make sense for Emirates to not to pay-off Doric if the aircraft is commercially unsuitable.
So, that's a dividend income of 46p meaning a profit of 35% over five years is to be had.
But of course there is the scrap value to consider. This is where it gets tricky but not overly so. I say scrap value because it is highly unlikely the aircraft will find another customer.
For similar life aircraft I have seen recent appraisals of as high as $141m for a 12 year old aircraft. In my view I think that's an insane amount of money given today's market and the medium term outlook. Utterly crazy, but if demand for the aircraft returns in a few years then not impossible. A recent sale of an A380 achieved $60m
But first, as with all aircraft leases there are predefined 'return conditions'. Basically this means the aircraft is returned to the lessor in a serviceable state and, most importantly it has to have a useful remaining life. The biggest associated cost is that of engine refurbishment (as major parts are life limited). That could easily cost $15-$30m per aircraft, representing 20p to 40p per share. Having said that, it would be foolish to spend that amount of money to then go ahead and scrap it, so the airline may well come to an arrangement with Doric to return the aircraft 'as-is' and pay a nominal amount in so doing, perhaps equivalent to 5p per share.
Realistic valuations.
When the aircraft were first delivered the expected end of lease valuation for the four aircraft fleet was $556m. The hey day of supreme optimism. In more recent times (pre COVID) the valuation decreased to $498m. Post COVID the valuation is now $241m or $60.25m per aircraft. These valuations include cost of disposal. So, practically 50 % reduction in appraisers valuation. In terms of pence per share the change in valuation is shown below. The variability up to March 2020 reflects the change in exchange rates.
The bulk of that valuation will be for the engines and landing gear. Engines with a scrap value of $12.5m each seem a bit high to me but if they could be sold on and used, it would be very cheap! (there is no direct secondary market, but perhaps a small opportunity for the engines/landing gear to be used by Emirates in lieu of repairing their own, depending upon condition/commercial arrangements).
So for sake of us investors let's assume the aircraft are actually scrapped at a 75 percent discount i.e. $15m per aircraft or $60m for the fleet. Representing around $2.75m per engine, plus landing gear, APU and Avionics. That level of return is readily achievable in my opinion.
That represents 22p per share which when added to the quarterly income stream of 46p represents an almost 100% return. I have provided more detail below, including 50% discount estimates. Of course, if there is no discount to current appraisal values then the returns would be remarkable:
Emirates Airlines
Naturally everything hinges upon Emirates. The airline is the national carrier owned by The Investment Corporation of Dubai based in Dubai, United Arab Emirates
On the 31 March 2020 the Dubai government restated its continued support of Emirates with a promise of an equity injection. Crown Prince of Dubai and Chairman of The Executive Council of Dubai announced that the Government of Dubai is fully committed to supporting Emirates airlines in the current critical period. As a shareholder of Emirates airlines, the Government of Dubai will inject equity into the company, considering its strategic importance to the Dubai and UAE economy and the airline’s key role in positioning Dubai as a major international aviation hub. It is the first time in the airline’s 35-year history that such a measure has been taken, and it shows the government’s commitment towards Emirates.
There are also many other statements issued by Emirates saying they will maintain a core number of A380's going forward.
However I do note that other Lessors have been asked by Emirates to vary the terms of the leases and whilst those discussions are ongoing Emirates have continued to pay all lessors the full lease rates and on time. It would not be surprising to hear from Doric that some amendments to the lease agreement are to be implemented but either way I fully expect Emirates to honour their obligations throughout the lease. So there is a risk of reduced income forthcoming but generally a leasing company would expect to recover this at a later date.
Given that we are looking long term i.e. 5 years out the aviation sector will appear very different from where it is now. One thing is for sure is that airlines are unable to raise finance at reasonable costs but leasing companies are.
Either way, seems to me there is an awful lot of risk mitigation when investing in DNA3 which makes it an attractive proposition for this sector. Whilst holding the shares investors will get quarterly dividend returns.
A quick overview
- Doric Nimrod Air Three Limited (LSE Ticker: DNA3)
- Possesses four Airbus A380's all acquired from the factory in the H2 2013 and leased for twelve years to Emirates Airlines
- Distribution Policy is to declare four interim dividends of 2.0625 pence per Share.
- The Company intends to return to Shareholders the net capital proceeds if and when the Company is wound up.
- The Winding up date is scheduled to be coincidental with the aircraft completing their leases with Emirates Airlines and selling the aircraft, thats around 2025 or about five years from now.
- Worthwhile income and capital return is possible
Some More Detail
The purpose of this company (and similar DNA's) was to acquire four A380's for leasing to Emirates Airlines for a twelve year term. For shareholders, they get a quarterly revenue stream via dividends derived from the lease receipts. At the end of the leasing period the aircraft are then sold off and the money returned to shareholders by winding down the company. As with all aircraft lessors, all maintenance, repair, modifications,insurance etc i.e operating costs are the responsibility of the airline. So other than to maintain the books and inspect the asset there is not a lot to be done by Doric. Pretty simple in theory.
To be successful it requires two things to happen. First the lessee, Emirates, have to pay the lease rentals in full and on time and at the end of the lease period the residual value of the aircraft has to be realised. In an ideal world this would mean the aircraft would be sold off to another airline operator. In the 'real world' the likelihood is that the aircraft will be scrapped.
Or put more simply. Shareholders are betting on Emirates paying their bills.
When these shares were initially issued at 100p I had no interest in buying them, for various reasons, not least of which was that the returns also relied upon a high residual value, or lease extension after 2025. Not anymore.. Now the shares are trading around the mid 30's and this makes things very interesting...
Most notably the dividend rate is now in excess of 20%
The remaining lease term is 5 years, but in fact the lease arrangement is to 2023 with a two year option, which if Emirates do not want they still have to pay Doric anyway. Thus it may make sense for Emirates to not to pay-off Doric if the aircraft is commercially unsuitable.
So, that's a dividend income of 46p meaning a profit of 35% over five years is to be had.
But of course there is the scrap value to consider. This is where it gets tricky but not overly so. I say scrap value because it is highly unlikely the aircraft will find another customer.
For similar life aircraft I have seen recent appraisals of as high as $141m for a 12 year old aircraft. In my view I think that's an insane amount of money given today's market and the medium term outlook. Utterly crazy, but if demand for the aircraft returns in a few years then not impossible. A recent sale of an A380 achieved $60m
But first, as with all aircraft leases there are predefined 'return conditions'. Basically this means the aircraft is returned to the lessor in a serviceable state and, most importantly it has to have a useful remaining life. The biggest associated cost is that of engine refurbishment (as major parts are life limited). That could easily cost $15-$30m per aircraft, representing 20p to 40p per share. Having said that, it would be foolish to spend that amount of money to then go ahead and scrap it, so the airline may well come to an arrangement with Doric to return the aircraft 'as-is' and pay a nominal amount in so doing, perhaps equivalent to 5p per share.
Realistic valuations.
When the aircraft were first delivered the expected end of lease valuation for the four aircraft fleet was $556m. The hey day of supreme optimism. In more recent times (pre COVID) the valuation decreased to $498m. Post COVID the valuation is now $241m or $60.25m per aircraft. These valuations include cost of disposal. So, practically 50 % reduction in appraisers valuation. In terms of pence per share the change in valuation is shown below. The variability up to March 2020 reflects the change in exchange rates.
The bulk of that valuation will be for the engines and landing gear. Engines with a scrap value of $12.5m each seem a bit high to me but if they could be sold on and used, it would be very cheap! (there is no direct secondary market, but perhaps a small opportunity for the engines/landing gear to be used by Emirates in lieu of repairing their own, depending upon condition/commercial arrangements).
So for sake of us investors let's assume the aircraft are actually scrapped at a 75 percent discount i.e. $15m per aircraft or $60m for the fleet. Representing around $2.75m per engine, plus landing gear, APU and Avionics. That level of return is readily achievable in my opinion.
That represents 22p per share which when added to the quarterly income stream of 46p represents an almost 100% return. I have provided more detail below, including 50% discount estimates. Of course, if there is no discount to current appraisal values then the returns would be remarkable:
Emirates Airlines
Naturally everything hinges upon Emirates. The airline is the national carrier owned by The Investment Corporation of Dubai based in Dubai, United Arab Emirates
On the 31 March 2020 the Dubai government restated its continued support of Emirates with a promise of an equity injection. Crown Prince of Dubai and Chairman of The Executive Council of Dubai announced that the Government of Dubai is fully committed to supporting Emirates airlines in the current critical period. As a shareholder of Emirates airlines, the Government of Dubai will inject equity into the company, considering its strategic importance to the Dubai and UAE economy and the airline’s key role in positioning Dubai as a major international aviation hub. It is the first time in the airline’s 35-year history that such a measure has been taken, and it shows the government’s commitment towards Emirates.
There are also many other statements issued by Emirates saying they will maintain a core number of A380's going forward.
However I do note that other Lessors have been asked by Emirates to vary the terms of the leases and whilst those discussions are ongoing Emirates have continued to pay all lessors the full lease rates and on time. It would not be surprising to hear from Doric that some amendments to the lease agreement are to be implemented but either way I fully expect Emirates to honour their obligations throughout the lease. So there is a risk of reduced income forthcoming but generally a leasing company would expect to recover this at a later date.
Given that we are looking long term i.e. 5 years out the aviation sector will appear very different from where it is now. One thing is for sure is that airlines are unable to raise finance at reasonable costs but leasing companies are.
Either way, seems to me there is an awful lot of risk mitigation when investing in DNA3 which makes it an attractive proposition for this sector. Whilst holding the shares investors will get quarterly dividend returns.