Critics may argue, with some justification, that he focuses solely on numbers. However, in the long run, this approach usually proves superior compared to nearly any other pundit.
Yet, in my view, his recent article on Amedeo Air Force Plus (AA4) contains fundamental errors. I believe he has been misled by entirely unreliable sources. These errors are so significant that they don't merely undermine his investment thesis; they completely change the perceived risk level.
Nevertheless, I wouldn't be surprised if it takes quite some time before investors catch on and realise the precariousness of their investment.
On 19th May, the Investors Chronicle issued this 'Alpha' research report which delved into the investment thesis of Amedeo Air Force Plus (AA4), across 21 pages.
AA4 is a fund managed by Amedeo that specialises in long-term leasing of wide-bodied aircraft to Emirates and Thai Airways.
AA4 is being marketed as a deeply undervalued investment with very high dividends. I myself invested in a similar fund during the height of the pandemic called Doric Nimrod, and I regularly shared my journey on The Lemon Fool DNA3 board. It turned out to be a highly profitable investment.
However, AA4 is a completely different proposition from DNA
Aircraft Valuation
This chart is taken from the Investors Chronicle article.
The claimed value of the A380s is $185 million each. This is an utterly fantastical figure.
Aircraft valuations are determined by demand, and there is absolutely no demand for these aircraft outside of Emirates. Industry sources, such as Iba.aero, Air Journal, and numerous others, provide readily available aircraft valuations. Additionally, analysing the data from Doric Nimrod/Emirates would offer valuable insights. Furthermore, Emirates recently purchased an A380 for scrapping purposes at a mere $30 million. I have written about this on the DNA3 board.
Aircraft valuations are determined by the average of three assessors. Historically these assesors have valued the A380 at significant different levels. They are far from in agreement.
The practical value of the A380 aircraft lies in its scrap value. Disposing of an aircraft in today's society actually costs more than one might imagine. A reasonable estimate for the net scrap value is $5 million per A380.
In other words, the A380 aircraft fleet are worth over $1.0 billion less than stated in the article.
Residual Loans Post Lease
Unlike Doric, Amedeo structured their fund in such a way that the income generated from leases is insufficient to repay the aircraft loans at the end of the lease. They must be able to sell the aircraft at lease termination to cover the outstanding debt.
The article describes the amount needed for each A380 at lease termination:
"...the residual debt owing on Amedeo’s A380s at the end of their leases to Emirates is $35 million to $40 million per aircraft, but if Emirates doesn’t extend the leases, it needs to return the aircraft in full-life condition or pay a return lift condition payment of $17 million. This means Amedeo would need a residual value per plane of $18 million to $23 million to meet junior debt obligations from the sale of the 12-year old aircraft when the Emirates leases expire."
In summary, at the end of the lease, Emirates has three options: extend the lease, return the aircraft in full-life condition, or make a payment to Amedeo to relinquish the aircraft. Since there are no future customers for the aircraft, returning them under full return conditions would be unwise. It would cost Emirates approximately $50 million per aircraft, only for Amedeo to scrap them. On the other hand, a half-lease life return condition allows the airline to avoid spending excessive amounts on returning the aircraft, while Amedeo receives some cash.
However, even in this scenario, Amedeo would still face a shortfall of around $100 million. Their only real hope is to extend the lease, but even that wouldn't solve their problems entirely. Even if Emirates agrees to extend the lease, the value would be based on the present worth of the aircraft. In this case, a serviceable flying airframe holds more value than scrap, and the industry currently values it at around $25-30 million per aircraft. Assuming a lease income of $0.25 million per year, even if extended for five years, it would only amount to $1.25 million in lease receipts. At best, this would cover the outstanding loan interest. The article seems to suggest that the re-leases will be long-term and generate the same income, but that won't be the case.
Moreover, one must question whether Emirates would even want to extend leases on these particular aircraft. They only require enough to compensate for the delay in Boeing and new aircraft deliveries.
Now, let's discuss the A350-900s. According to the article, these aircraft, which are over six years old, are valued at $96 million. Based on actual sales of similar six-year-old aircraft, prices have been closer to $90 million. However, I acknowledge that there is demand for these aircraft, especially since Emirates operates them. Hence, $96 million seems like a reasonable figure.
As for the B777-300ERs, if anything, they are undervalued in my opinion. However, there is still an outstanding loan of $10 million to be repaid after the lease. The article attempts to reconcile two conflicting notions: one implying demand for the aircraft, which, if true, would warrant full return conditions for re-lease or sale; yet, in the same breath, it suggests a half-life return condition will be paid.
Unlike the A380s, there should be a market for the B777-300ERs, which makes a mockery of the aircraft valuation. Common sense tells us that if there are no customers for an A380, but there are for a B777-300ER, then how can the valuations be reversed?
There are other concerns I have with the article, but those are minor points.
Unlike Doric, AA4 is a more complex and significantly riskier investment. If the fund is agile, they might navigate through these challenges. However, the net asset value (NAV) currently fails to reflect reality, and it may be prudent to anticipate a dividend reduction in the near future.
Genuine aircraft leasing companies nearly always hedge against interest rates and currencies. They also ensure that when placing new aircraft on lease the loans are fully repaid at end of lease, which Amedeo has neglected to do.
Summary
Getting an attractive 16% yield is not without risk but given the timescales involved, holding on for a year or so may be worthwhile before others start to see the risks.