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Doric Nimrod Air Three (DNA3)

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Carcosa
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Doric Nimrod Air Three (DNA3)

#326997

Postby Carcosa » 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.


Image

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:


Image


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.

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Re: Doric Nimrod Air Three (DNA3)

#327730

Postby abtan » July 21st, 2020, 4:15 pm

Hi Carcosa
Thanks for sharing your thoughts on DNA3, I found them very insightful.

May I ask whether there was any reason to choose to invest in DNA3 instead of say DNA2?

From what I can see DNA2 has sooner lease termination dates (2023), a higher yield and more assets, so presumably the payback will be higher and quicker than DNA3.

I was also slightly put off by DNA3 not actually planning to wind down until the end of 2026, rather in 2025 when the leases expire.
I must admit to never really looking at these kind of investments before, so perhaps I am misunderstanding something.

Thoughts appreciated!
Abtan

Carcosa
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Re: Doric Nimrod Air Three (DNA3)

#327824

Postby Carcosa » July 22nd, 2020, 6:55 am

Hi abtan,

Thanks for your comments/question.

There are no overriding factors as to why DNA3 was chosen over DNA2.

The ask/bid spread on these shares is huge so in reality the yield between the two is essentially the same over a period of time. It's just on a particular day, one may appear different to another.

DNA2 has a slightly more complex class of shares than DNA 3. Shouldn't really be a problem but those 'administrative' shares do not feature in DNA3

DNA2 has 7 aircraft compared to DNA3 which has 4. Gut feel says this is preferable.

My feeling is that by the time DNA3 is scrapping the aircraft the value of those aircraft will be higher than when scrapping DNA2 aircraft. Also there is a greater chance that leases could be extended compared to DNA2 aircraft Purely a subjective view on my part.

Overall there is no compelling reason to choose one over another, in my opinion.

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Re: Doric Nimrod Air Three (DNA3)

#327964

Postby abtan » July 22nd, 2020, 3:21 pm

Hi Carcosa

Thanks very much for your response, most appreciated.

Cheers
A

Carcosa
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Re: Doric Nimrod Air Three (DNA3)

#333581

Postby Carcosa » August 16th, 2020, 12:16 pm

In this article form the Economist titled 'What’s an A380 worth?' it contained the following statements

"...The oldest models have been flying for 12 years or so. At that age, aircraft have typically lost half their value. Given each costs $250m-300m to buy when kitted out, airline accountants might have hoped for $125m. But even before covid-19 appraisers suggested between $75m and $100m. Now some a380s are fetching half what they used to be worth, says Usman Ahmed of Aircore Aviation, a consultancy. The slump is borne out by the accounts of investment funds that own planes and lease them to airlines. A fund called Doric Nimrod Air One recently cut the accounting value of its sole asset, an a380 leased to Emirates, by 51% in dollar terms.

The share prices of listed a380-owning funds suggests the residual values of the planes once the leases expire are between $10m and $15m, says Matthew Hose of Jefferies, an investment bank. Given regular maintenance overhauls of each of the a380’s four engines can cost $6m, existing motors in decent nick are, in principle, worth at least that much. Add the landing gear, also in principle reusable, and that would make the airframe itself worthless. It also signals that even the spares—which in modern planemaking are always aircraft-specific and useless for other models—may not have much value."


Overall I thought the article was pretty pi** poor. It failed to mention that some airlines planned on retiring the aircraft at 12 years of age at the time they were originally leased, that the leasing companies would have paid off the cost of the aircraft around the 10-12 year mark, that the list prices is not the purchase price, that practically any aircraft type has minimal scrap value for it's fuselage, that it was not only Doric Nimrod One cut the aircraft valuation by a substantial amount (and some leasing companies are strangely maintaining high valuations), that share price is not a direct reflection of the residual value, the engine valuation they give are end-of-life-use and reflect material scrap value and, oh... it's an A380 not an a380.

In real life the value of leased aircraft is related to the return conditions (as I think I mentioned in an earlier post). So a 'current' valuation of $10m to $15m would, in absolute worse case scenario, be what you may get from the scrappers but you need to add in a hell of a lot more after end of lease return conditions are met.

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Re: Doric Nimrod Air Three (DNA3)

#333645

Postby flyer61 » August 16th, 2020, 4:30 pm

Carcosa,

I fear you are grasping at straws with this one. Residual values will now be negligible for A380 airframes. Clever leasing arrangements work both ways. Without clarity on this issue then 'related to return conditions' may not result in 'a hell of a lot more'. In fact it maybe the opposite.

Good luck!

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Re: Doric Nimrod Air Three (DNA3)

#333670

Postby 88V8 » August 16th, 2020, 6:45 pm

I bought DNA2 in 2017 at 162p.
Now 60p.

Investing in aircraft leasing has a long history of dodgyness. Dependent upon residuals which at the end of the day aren't there.
Post-Covid this looks like it was a particularly bad idea.
Fortunately I only had a dabble, and they are still paying the divi.
Oh well.

Won't be buying DNA3.

Good luck.

V8

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Re: Doric Nimrod Air Three (DNA3)

#348078

Postby abtan » October 15th, 2020, 6:49 pm

Hello intelligent people

I see that DNA2 - Market Cap $132m - have released an update today (sorry, I'm not allowed to post links for some reason - needs a www).
rns-pdf.londonstockexchange.com/rns/2433C_1-2020-10-15.pdf

My summary:
1) Emirates have no cash issues and will likely continue to have no cash issues due to their backers (especially the Emirate of Dubai):
"The press release stresses that “Moody’s believes the A380 will remain relevant to Emirates’ fleet strategy”. Irrespective of the challenges the coronavirus means for the airline and the Company, the rating agency continues to expect timely payments of interest and scheduled principal on the Certificates."
NOTE: 72p dividends expected over the next few years = $124m

2) The 7 remaining aircraft each have a part out value of $50m = $350m.
"For its rating considerations Moody’s assumed a part-out value for the A380 of about 50 million USD per aircraft."

3) 1) + 2) = $474m = 270p per share = 350% higher than the current share price

4) If I instead use DNA2's lower assumption that their aircraft have actually decreased in value by 75% vs March 2020 appraisal value, this will result in a total capital return of 123p per share ie. +60% on today's share price.


In summary it appears as though that total return over the next 2-3 years is somewhere between 60% and 350% based on today's closing price.

I bought at 66p so I am a happy holder and, for now, things look too good to be true...but knowing next to nothing about the aviation industry and being purely focussed on the numbers presented before me, I'm wondering if I am missing something.

Any thoughts would be most appreciated.

A

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Re: Doric Nimrod Air Three (DNA3)

#348151

Postby Carcosa » October 16th, 2020, 7:35 am

A,

"For its rating considerations Moody’s assumed a part-out value for the A380 of about 50 million USD per aircraft.
There is little reason to suspect that Moody knows anymore than anyone else. As they say this is for rating's purposes and not real life valuation. Better to look at valuers and actual market transactions for that data.

By there very nature Moody's 'should' be valuing the aircraft significantly lower than real life.

As can be seen from this presentation dated 29 Sept 2020 (slide 15) engine valuations, which make up a large part of the residual value, have declined 40-51% pre to post COVID times.

As I indicated in my 18 July 2020 post the reason why I invested into DNA is because of my firm belief that lease payments would continue to be made (or at least made up by end of term lease) which would result in a good profit even if the aircraft are scrapped at zero $. So any residual scrap value would be a very thick layer of icing on the cake.

To date that theory is holding up. And despite the huge spread I'm up over 20% todate, and I guess you have seem similar returns over the same period.

Aircraft leasing is a very unknown quantity amongst UK retail investors and the vast majority do not understand the business. I've had over 30 years experience in the subject having leased aircraft and engines. DNA/Emirates is offering a wonderful opportunity. Had it not been Emirates then the risk would be substantially greater.

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Re: Doric Nimrod Air Three (DNA3)

#348364

Postby scottnsilky » October 16th, 2020, 7:29 pm

All 3 Doric Nimrods are ex-directory on October 23rd, all paying 5%+.But not for me I tbink....

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Re: Doric Nimrod Air Three (DNA3)

#348375

Postby scottnsilky » October 16th, 2020, 7:57 pm

Ex-dividend obviously. The auto-correct(?) is slightly annoying. Doric originally came out as Doris, I noticed that one.

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Re: Doric Nimrod Air Three (DNA3)

#348379

Postby abtan » October 16th, 2020, 8:35 pm

Thanks Carcosa, especially for that link.

So assuming:
$4.5m selling price per engine (as per the IBA presentation)
*
50% further reduction in price
*
4 engines per plane
*
7 planes
= $63m

+ $124m in dividends, which look likely to be paid over the next few years
= $187m TOTAL RETURN

vs a current market cap = $138m

So a 35% premium even on the current share price.

There are of course a few assumptions in there, and hopefully they are conservative enough to show a decent baseline return at the current price.




Scott,
The yield is 5% per quarter, ie 20% per year on the current share price, though dividend payments will last less than 5 years, so if anyone is looking for upside from the current price, it appears to be all about any residual value from the planes themselves when the leases expire

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Re: Doric Nimrod Air Three (DNA3)

#348491

Postby flyer61 » October 17th, 2020, 3:50 pm

Be a real bugger to find out these A380's and their engines are not actually assets but millstones.....

The Dubai government will do what suits when it comes to paying. If it doesn't, the fountain will be turned off.

Inshallah.......habibi's

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Re: Doric Nimrod Air Three (DNA3)

#348495

Postby ReallyVeryFoolish » October 17th, 2020, 4:12 pm

flyer61 wrote:Be a real bugger to find out these A380's and their engines are not actually assets but millstones.....

The Dubai government will do what suits when it comes to paying. If it doesn't, the fountain will be turned off.

Inshallah.......habibi's

My bold, I think that's a very real possibility. The Emirates A380 fleet is by far the world's biggest. Other airlines are handing back their A380's. The four engine monster plane, much as I like travelling on them are simply not an economic proposition any more. It's a very real possibility that rather than the aircraft being worth something at the end of their lease, they may find themselves paying to dismantle and recycle them for scrap. What an awful thought. But it has to be a real possibility in today's landscape.

RVF


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