Avation (AVAP) - ATR Fleet Sale

[muckshifter]

Thanks for the explanation Carcosa. You have more or less confirmed my expectations about interest rates and their potential effect on AVAP. My understanding was that the purchase interest rate would be fixed, and would match the first term of the lease to airlines, after which, if interest rates were higher, it would strengthen AVAP's hand in negotiating further leases. Presumably the secondary leases would benefit greatly in terms of profitability from the cost of purchase having completed, slightly offset by higher refurbishment and maintenance costs, with perhaps a further offset if fuel efficiency continues to improve on new aircraft.

In this respect, the average lease outstanding was quoted as 7.6 years at the AGM, which to me meant that it shouldn't be too long before some aircraft begin to reach that secondary lease point - perhaps a year or two, which will probably mean that interest rates are higher. Presumably the Fokkers sold recently are very low "weighted" aircraft within that 7.6 years weighted average and won't change it much?
Regards.

[Carcosa]

I did the calculation re revised weighted average age and it barely changed the fleet metrics, as you suggested.

The Thomas Cook/Condor A321 lease expires in April 2018 and that aircraft has been up for sale for over a year now.
The five (soon to be six) Vietjet A321 aircraft are on 12 year leases
Air Berlin A320 lease expires in five years
No idea about the Skywest A320
The Air France A320 had a lease extension in May 2016 but for how long, I don't know
Most of the ATR fleet are on 6 years plus an option of another 6 years

Of some concern are the 7 Virgin Australia ATR's that they want to get rid of. Avation appear to be quite sanguine about this saying that they have a contracted lease arrangement with VA. So I am left assuming its up to VA to find homes for these aircraft or there are large penalty payments. Am really not sure.

Overall the fleet leasing length is probably better than the 7.6 years mentioned.

All maintenance costs are the responsibility of the operator and the aircraft have to be returned to a certain condition, including life remaining of various parts etc. Original engines have to be re-installed and other original items have to be returned to the aircraft also (albeit to the minimum serviceability standards). That's all down to the airline. ATR's and to a lessor extent B737/A320's have minimal airline configurable options hence a bit easier to find new homes for them. Widebodied aircraft have significant variations in their specifications and internal configurations and changing them to a specific airline's liking leads to quite a bit of debate between lessors and lessee's.

I suspect however that given the very small fleet size, Avation will continue to pursue a fleet of very young aircraft unless the idea I have about acquiring portfolios of aircraft assets and selling them on comes to fruition.

The fuel efficiency argument is an interesting one. Many old aircraft find there way to obscure parts of the world because although fuel costs maybe high the initial acquisition costs are very low. But perhaps that's a subject for another day.

[Carcosa]

Avation's delivery of A321-200, Regn VN-687 (MSN 7454) was made today. This delivery completes the current series of aircraft contracted by the Company with Vietjet.

Nice to get ahead of an RNS release... Hopefully a penny on the share price today (Although for the life of me I don't really understand why the share price went up yesterday when logic says it should have gone down following the F100's being sold...)

Carcosa

[camerongd53]

This board has been very quiet for over a month and there has been no announcement regarding the fleet sale. The share price has shown little movement either.
I would have thought that a few spreadsheets etc should have allowed the directors make a decision within a couple of weeks.
Should this silence be interpreted as there being a bid for the company (and resulting due diligence) or that there is a bidding auction for the fleet? Either of these could be beneficial for the share price.
Anybody got thoughts?

[Carcosa]

Am personally confident that we are unlikely to hear anything for another week or two. Had Christmas, New year and now Chinese New year holidays ongoing and some of the management returned to UK plus potential bidders were also not available.

We know there have been several expressions of interest and perhaps more have shown interest since the Fleet 'for sale' sign was put up. They have engaged a top quality aviation related external company to run through the numbers and options. The lack of news is something I take as a good sign otherwise it would have been called off at a much earlier stage had the proposed fleet sale been hogwash. However, that's my personal opinion.

Am still waiting for a statement from them regarding the two end of year ATR's mentioned in the annual report. I followed that up with Avation and they indicated a statement would be provided about now. They seem a bit lax on tidying up that particular loose end.

As regards a takeover of the company I think that is unlikely. At the end of the day the company is essentially nothing more than it's assets.

Carcosa

[camerongd53]

I agree except on the takeover
Buying the fleet only is a clean transaction and there are no legacy issues etc.
However buying the company means that someone buys all the contracts not just the ATRs and future contracts for planes in the pipeline and future not ordered plane purchases i.e. a long term pipeline of leasing business which someone would appear keen to acquire
I am hopeful like you that there will be a deal and It will interesting which it will be.

[Carcosa]

An interesting article from Aviation Week discussing the ATR market and future developments. Still a large backlog though.

Carcosa

[Carcosa]

Whilst their are some negatives in todays interims the overwhleming positive news is in this paragrapgh:

Update on Potential Sale of Turboprop Portfolio

In October 2016 Avation announced that it had received an expression of interest for 22 ATR 72 turboprop aircraft. As a consequence, Avation, through an appointed adviser, sought competing proposals from the market and received eight offers from a range of investors and lessors.

The bids received support a valuation of the portfolio at a premium to book value. The Company is still in discussion with a number of the bidders and best and final offers have yet to be received. At the current stage there is no certainty that any definitive agreement will be entered into nor that any transaction will materialise from the various discussions. The Board reiterates its position that any transaction would need to deliver shareholders a significant premium above book value.

Hence Avation remains crazily under valued IF the transaction goes ahead. As it is, its trading at P/NTAV of 0.8

Carcosa

[Carcosa]

Conference call (recording will be available on their website)

Likely to have a decision regarding ATR fleet sale in Q1.

Also seems likely to me that the premium required for the fleet sale is unlikely to be met however selling smaller tranches of aircraft may be more profitable in the long run.

Carcosa

[simoan]

Conference call (recording will be available on their website)

Likely to have a decision regarding ATR fleet sale in Q1.

Also seems likely to me that the premium required for the fleet sale is unlikely to be met however selling smaller tranches of aircraft may be more profitable in the long run.

Carcosa

Hi Carcosa,

I thought the results were OK overall but you are right that the elephant in the room is the ATR sale. What were the negatives you saw?

From the length of time it is taking, I believe you are correct that none of the bidders are prepared to meet the ATR fleet valuation set by the company. I'm not sure what an announcement that they were selling off the fleet in smaller tranches would have on the share price but my inclination is that it would not be positive. A clean sale of the lot would be better all round. Either way, I'm nearer to selling out than buying any more at the current price.

All the best, Si

[Carcosa]

I thought the results were OK overall but you are right that the elephant in the room is the ATR sale. What were the negatives you saw?

As time has gone on it seems apparent to me that their concern is that they wish to stay in the narrowbody market but valuations are very high now and the idea of buying ready made replacement fleets is not as easy as they initially thought. Therefore the loss of revenue and profits over the years it will take them to increase the fleet size again means that a massive premium would be required on the fleet sale. with 97% of their loans at fixed rates that alone is a powerful argument to keep things as they are in a rising interest rate environment (next 5 years). Given the ATR fleet growth is going to be pedestrian and the yields on the jet fleet are relatively smaller then perhaps it is wise to keep the ATR fleet unless someone came up with a huge premium. Given that half the company assets are up for sale then Avation were duty bound to seek out other potential investors; part of good corporate governance; but their heart is really not in it IMO.

However they are into aircraft sales and selling a few ATR's, perhaps the older -500 series is in line with normal trading.

So it's all good for the company and the business but given the share price appreciation when the ATR sale was first announced I am certain there will be a meaningful fall in the share price if they announce the fleet sale is not going to happen; perhaps mitigated if at the same time they have secured sales on only part of the ATR fleet.

As a consequence I have sold about a third of my holding today and may sell some more over the coming days. However long term I'll probably be a buyer following the announcement because plugging various numbers into my finance model shows that full year profits are going to be good and I believe in this company over the long term.

Carcosa

[simoan]

I thought the results were OK overall but you are right that the elephant in the room is the ATR sale. What were the negatives you saw?

As time has gone on it seems apparent to me that their concern is that they wish to stay in the narrowbody market but valuations are very high now and the idea of buying ready made replacement fleets is not as easy as they initially thought. Therefore the loss of revenue and profits over the years it will take them to increase the fleet size again means that a massive premium would be required on the fleet sale. with 97% of their loans at fixed rates that alone is a powerful argument to keep things as they are in a rising interest rate environment (next 5 years). Given the ATR fleet growth is going to be pedestrian and the yields on the jet fleet are relatively smaller then perhaps it is wise to keep the ATR fleet unless someone came up with a huge premium. Given that half the company assets are up for sale then Avation were duty bound to seek out other potential investors; part of good corporate governance; but their heart is really not in it IMO.

However they are into aircraft sales and selling a few ATR's, perhaps the older -500 series is in line with normal trading.

So it's all good for the company and the business but given the share price appreciation when the ATR sale was first announced I am certain there will be a meaningful fall in the share price if they announce the fleet sale is not going to happen; perhaps mitigated if at the same time they have secured sales on only part of the ATR fleet.

As a consequence I have sold about a third of my holding today and may sell some more over the coming days. However long term I'll probably be a buyer following the announcement because plugging various numbers into my finance model shows that full year profits are going to be good and I believe in this company over the long term.
Carcosa

Hi Carcosa,

Thanks for your thoughts on AVAP, as always. I sold half my holding following the bump up today as my reading was that the risk is now to the downside following today's update. I will listen to the conference call and make a decision on whether to keep the rest, for the time being, or sell out completely.

All the best, Si

[janebolacha]

Interesting post on "seeking alpha" on AerCap, giving several metrics for four aircraft leasing companies.
Avation beats on most of them.

I can't post the link but the article is worth reading, recommended.

[janebolacha]

Carcosa, I have been trying to get a handle on the likely market values of the Avation fleet of ATR72 aircraft.

As one would expect, there seems to be very little information publicly available.

I did find a presentation by Ian McBain of Skyworks, given at the ERA Regional Airline Conference 2015. I can't post the link but you can find it online. If not, let me know and I could send it to you privately through Stockopedia.

On page 5, market values for the ATR72, as at August, 2014 and from the Ascend database, are given.

That was two-and-a-half years ago. I have no idea how depreciation in that time may have been compensated by manufacturers' price increases or by tightness in the market or by the reportedly high demand in China for short-haul regional turboprops.

Asuming all those factors cancel one another out (????????????????.............), I reckon that your thoughts on there being a surplus on sale of perhaps 15&-20% of the book values at December 31, 2016 would be pretty close to reality.

I saw on your Stockopedia profile that flying is one of your passions. Do you have access to present market values of the ATR72 so that the likely surplus on an eventual sale could be worked out more accurately?

Terima kasih dan jumpa lagi!
Jane.

[Carcosa]

Hi Jane,

I replied with a (very) long response but when I came to post it on this board I had been logged out and hence lost the lot!

So a brief reply instead.

The data to which you refer is qualified, during a time of high lease demand and is Europe based. I find it hard to give his $20m any credence. $18.2m as a top valuatoin is more like it.

ATR Acquisition costs can be found in the Avation Annual reports. Note that it is the airlines that negotiate the cost with ATR directly. Avation 'just' facilitates the finance. There can be considerable differences between airlines as to the true cost of the aircraft because ATR may give airlines various credit notes upon delivery which will not be seen in Avation's accounts.

Market values are actually used in the Avation reports nowadays.

My calculations show:
Current NAV/Market price
ATR72-500: 2011: $16,536,000*
ATR72-600: 2012: $18,368,000
ATR72-600: 2014: $18,731,643
ATR72-600: 2015/16: $19,300,027 Depreciation runs at around $2.23m/year

* I believe this is 'top dollar' price. real market price is $12-14m. I do not know why I have such a discrepancy with AVAP's numbers the aircraft configurations are pretty standard; but there again after years of trying to sell these aircraft maybe that's the reason!

Hope that helps a bit!

Carcosa

[janebolacha]

Carcosa, thank you.

Taking market values of $13m for the ATR72-500 and $19m for the ATR72-600, that would give:

ATR72-500 6x13m $ 78m
ATR72-600 18x19m $342m

Total $420m

NBV, 32.12.2016 $390m

Surplus $ 30m

To which there might well be a premium due to the reportedly very high demand in Asia for short-haul turboprops
and the manufacturers' order backlog and long delivery dates, as well as the interest in aircraft leasing as a financial
instrument, perhaps evidenced by there being eight expressions of interest,

Even the $30m, about £23m, represents a "hidden asset" of about 18% of the present MC and would bring the P/BV ratio to around 75%.

Whether or not this transaction goes ahead, the SP is way too low, imo.

Best wishes,
Jane.

[Carcosa]

Whether or not this transaction goes ahead, the SP is way too low, imo. Jane.

I agree! and in fact it's somewhat re-iterated in this recent interview.

I do feel the reason for the relatively low share price is that Avation are relatively small in the leasing world and perhaps listed on the 'wrong' exchange and Richard Wolanski alludes to that in the interview.

I am firmly of the belief that the ATR fleet sale will not complete and that will offer investors a good opportunity to acquire shares at a cheaper rate than today's current share price.

[simoan]

I am firmly of the belief that the ATR fleet sale will not complete and that will offer investors a good opportunity to acquire shares at a cheaper rate than today's current share price.

Hi Carcosa,

I also believe it will probably no longer go ahead now. It's difficult to see why it's taking so long otherwise and I am scanning the 7am RNSes awaiting the news. If so, it seems likely the share price will fall back, although probably not back to where it came from given that the proposed transaction has made the value of the ATR fleet and discount to TBV apparent to a wider audience. I will be one of those looking to buy shares lower down because I still like the story here.

All the best, Si

[Carcosa]

So we have our answers wrt the Avation ATR fleet sale and it's pretty much as I expected.

..,proposed sale of six existing leased ATR 72 aircraft.

(I am assuming these are the ATR72-500's?)

Assuming the transaction completes, as it remains conditional, the outcome is at a price above the Company book value for these aircraft and releases approximately $31 million in net proceeds

There is no special dividend under consideration in relation to this transaction.

For me, this is a very good outcome for the company. However i really have no idea how the market will react to it!

My rough calculations (if its the -500's) is that they got about 7% above book value for these 6 year old aircraft.

Carcosa

[Carcosa]

I have had it confirmed from Avation that the deal is for the -600's.

Carcosa