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Avation (AVAP)

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Carcosa
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Re: Avation (AVAP)

#445590

Postby Carcosa » September 27th, 2021, 1:18 pm

This industry data suggests the ATR72 valuations have stabilised over the last 12 months and for new aircraft have actually increased.

With the turboprop’s environmentally friendly characteristics, low fuel consumption and significantly lower CO² emissions it is the right aircraft for the time. However I am seeing the Q400 being leased for about 70% the cost of an ATR although it remains a [expletive deleted] aircraft...

Image

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Re: Avation (AVAP)

#452871

Postby Carcosa » October 25th, 2021, 11:08 am

This is what I anticipate fleet changes to be during 2021/2.
Sale of A220 (already done)
Sale of three VA ATR72-600's (announced)
Sale of a further two ATR 72-600's (hinted at by Avation)
Sale of of one A320-200 (Jet sale hinted at by Avation)

However these aircraft are relatively old, except for the A220 and represent around $100.7m in NBV with an accompanying reduction in debt of $43.8m giving rise to an increase of $56.9m in liquidity and a gain of $10m in profit for selling those aircraft.

In lease income terms there would be a reduction of about $17m compared to pre-COVID times but compared to last results a decrease of around $11.7m.

On the upside however is the reinstating of the Philippine Airlines B777-300ER income in its various forms (Power by the hour, full lease rates and claw back of missed payments). That could total around $9.7m (compared to pre-Covid $13.9m).

Then we get to the interesting bit namely the Virgin Australia voluntary administration claim. This could range from $7.2m minimum to $37.7m maximum. Whilst the legal actin has yet to be filed I expect investors can keep track of its progress here: https://www.comcourts.gov.au/public/esearch

Incidentally there is quite a bun fight going on legally with the Administrators over leasing terms. Under normal circumstances an aircraft lessor always ranks highly in priority claims so am not surprised at all that Avation intends to commence litigation action. It should be noted that all relevant leasing companies appear to be doing the same which suggests that resolution of this matter could take a considerable time; and I presume all the litigation cases will be rolled up into one with the inevitable appeals. Maybe come back in 2-3 years time??

Assuming the $7.2m is paid out and the balance to be decided at a later date then Avation could see an additional $56.9m in cash arising from aircraft sales, PAL claw backs and VA payments.

So to summarise I see things as:

Image

In reality Avation will probably use this excess cash to pay down debt and procure more aircraft. Nevertheless the current share price is very attractive.

Translating all of the above gives me the following for FY 2022:

Image

I went through all of Avation's aircraft by tail number one by one and it is clear that the vast majority are back in service and what's more are being flown regularly. That's not to say airlines are making any profits in this very high fuel price environment and I still think there are significant risks with the PAL aircraft producing a reliable income. Overall though, even from anecdotal experience in Asia (Where I live) things are rapidly improving in aircraft utilisation.

Avation have done a stellar job to get through this and they are even now more attractive to a third party. Procuring distressed aircraft from other out of business /struggling lessors provides the company with some great opportunities in my opinion. Two years from now I fully expect Avation to have a share price and dividend well north of the current levels.

Summary:
Even with aircraft sales, actual lease income will remain steady
NAV will grow
Debt will reduce
Potential for unsecured debt cost to reduce via bond purchases
Significant improvement in Net Indebtedness/ Total Assets ratio and other credit rating ratios
Potential for some impairment losses to reverse
Company is on a better footing than nearly all other leasing companies
Opportunities lay ahead t expand the fleet

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Re: Avation (AVAP)

#452901

Postby abtan » October 25th, 2021, 12:34 pm

Hi Carcosa

Thanks for sharing your notes.

I have developed my own approximate cash flow forecast for the current year and it was pleasing to see a few of our numbers tie up.

I'm unable to post pictures (too complicated for me), so I hope the following makes sense:

CASH INFLOWS
- Lease Income: $126m

CASH OUTFLOWS
- Admin: ($12m)
- Interest Payments: ($51m)
- Capital Repayments: ($129m)

Just those figures alone give me a cash drain of $67m. for FY21/22.

For transparency my capital repayment figure is based on the October 2026 due date for the 8% bonds (so $340m debt/5 years) + other debt, which is due 2031 (so $610m debt/10 years) = $129m capital repayment per year for at least the next 5 years.

Of course, some of this debt will be paid off as aircraft sales are made so hopefully annual capital repayments will not be so high going forward.
I must admit to not following the recent aircraft sales very closely, so perhaps the capital repayment figure is not something that I should be concerned about after this year.

No position yet, but thank you for sharing your thoughts - they are most appreciated.

Cheers
Abtan

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Re: Avation (AVAP)

#453114

Postby Carcosa » October 26th, 2021, 9:49 am

Greetings Abtan,

Good post, thanks.

Whilst we are broadly in agreement with Lease revenue the reality is that in the last results there was a provision for credit losses (used to be called provision for doubtful debts) of $25.4m mostly attributable to Virgin and PAL which was and will not be collected. Also in respect of deferrals the calculation is not that simple as various arrangements were adjusted as the pandemic last longer than most people expected.

Whilst those credit losses for Virgin will mostly disappear next year there will still be a hefty credit loss, as I indicated in my last post.

However at this time I think its appropriate to look at the 'bigger picture' rather than try to work out precisely what the figures will be in a years time. Overall I see it as being a very positive year going in the right direction...There can always be negative surprises; I often worry about interest rate swap breaks; something I not fully understand, for example.

These are the numbers I used for the aircraft sales FYI:
Image

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Re: Avation (AVAP)

#453782

Postby Carcosa » October 28th, 2021, 9:02 am

The 2021 Annual Report has now been published and, as ever, it contains a lot more information.

I spent a while going through the 2020 and 2021 AR's to see where the fleet stands in terms of asset impairment compared to pre-COVID. By carefully reviewing the commentary and figures plus a few educated guesses I came up with the following table. The one glaring anomaly is the A330 valuation. Even before COVID the A330-300 world fleet was rapidly going downhill in value and COVID has hit aircraft valuations even harder than the B777-300's.

On the positive side, Avation picked up this aircraft not as new but as a two year old aircraft from IAP Group Australia Pty Ltd who are, to say the least not exactly the world's best leasing company. Anyway Avation picked it up for $98m which was at a significant discount to the valuation at the time. Clearly, to me, the benefit of having our Australian CEO. Anyway, it could be possible that is why the aircraft has not had much of an impairment but nevertheless at a current valuation of $72m I still think its largely overvalued, hence I expect to see an impairment on that aircraft in the future.

The B737 is an old aircraft anyway and has been owned by a myriad of leasing companies in the past. At $27m its probably a tad over valued. Similar story with the A320-200

The bulk of the A321-200 depreciation arised form the ex Thomas Cook aircraft; $9m depreciation on those two alone.

Image

The above was largely compiled from these figures:
Image

I hope that some of the impairments will reverse in a year's time and that may balance out some further expected impairments; also a few aircraft will have been sold by then too.

Some other useful snippets from the AR:

Group sold a nine-year old ATR 72-500 and a one-year-old ATR 72-600 aircraft recognising total losses on sale of US$6.9 million
- That is quite a 'hit' I would assume the bulk of that is with the -600

An impairment loss of US$28.7 million was recognised in relation to a widebody aircraft on lease to Philippine Airlines.

Impairment losses of US$28.4 million were recognised in relation to 11 aircraft formerly leased to Virgin Australia
It always strikes me that impairment's arise from operating difficulties, should they not be wholly independent of that?

Expected credit losses include US$12.3 million in relation to receivables from Philippine Airlines, US$6.2 million in relation to receivables from Virgin Australia and US$3.1 million in relation to receivables from Vietjet.
Good to quantify where the income shortfalls are. However I am VERY surprised that VietJet is a problem customer. So surprised that I think this be more associated with some disagreement (ex Thomas Cook aircraft?) than their ability to pay

Other expenses in the current period include aircraft repossession costs of US$0.6 million and maintenance costs of $1.1 million resulting from the default of Virgin Australia.
That is remarkably low repossession and maintenance costs. Nice to have these sorts of numbers in the 'back pocket' for future use

Other expenses also includes US$2.9 million of pre-delivery payments in connection with a restructuring of the Company’s contract with ATP
Seems a bit harsh to me.

interest rate applicable to the notes was revised to either 6.5% cash and 2.5% payable in kind or 8.25% payable in cash only from 25 March 2021. The choice of interest rate is at the option of the Company at each semi-annual coupon payment date.

Summary
On balance, expect further depreciation this time next year. Lease revenue collection should improve and perhaps credit losses on receivables will be more than halved.

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Re: Avation (AVAP)

#456442

Postby Carcosa » November 8th, 2021, 8:22 am

From today's AGM Notice it is apparent AVAP are seeking a fund raise at some point in the not too distant future (Pre-emptive rights disapplied).

In my calculations if everything was to go perfectly in terms or aircraft sales, depreciation, lease revenue then H1 could be a small profit but perhaps more likely around break-even.

So the question is how much are they planning on raising.

Last reported Total Equity was $157,010,000. From the Articles of Association

102.2 The Board shall restrict the Consolidated Total Net Debt... shall not ..exceed an amount equal to five times the Total Equity.


And it is exactly that Article the AGM is seeking to suspend. Technically it has already bust through that at 5.9x. That may be lowered to 5.4x if they actually sell some aircraft which I have in my financial model; and potentially a smidgen lower depending on what they do in reducing debt in other ways.

Nevertheless any meaningful fund raise would be a significant capital raise compared to the market cap and therefore likely a notable discount to the prevailing share price.

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Re: Avation (AVAP)

#457476

Postby Carcosa » November 12th, 2021, 7:17 am

A320 Sale
Yesterday Avation announced the (predicted) sale of an A320 series aircraft.

Specifically it was an unencumbered aircraft sold for ~US$ 16.6m. Cost of $28.9m via a Special Purpose Company (see P76 2016 AR ) with a depreciation of ~$10.9m since purchase. Bit of a shame really because it was a reliable wet lease aircraft generating over $3m annual income. Sold simply to reduce debt. (Figures are mostly my own).


Expected Credit Loss - VietJet
In Post #453782 I commented that I was very surprised to see a $3.1m expected credit loss (ECL) in relation to receivables from Vietjet. It turns out that the ECL charge in the accounts was based on estimated probability of default (PD) x estimated loss given default (LGD). The ECL provision for Vietjet was $3.1m which will be written back in the not too distant future.

Sometimes (often) I question Avation putting a shine on various figures etc but estimated a probable loss against VietJet is/was a joke. Way too conservative and inappropriate IMO. Anyway... makes for positive news going forward.


VA Claim
Virgin Australia voluntary administration claim; I keep checking http://www.comcourts.gov.au/public/esearch and have yet to find any filings by or for Avation. Now my understanding is that it could take another couple of months for filing. I would guess these things take considerable time once a claim has been filed to complete (2+ years?) but will wait and see.


Valuations
Some good news is that I am seeing aircraft valuations starting to inch up. I would suggest this would be a primary factor as to whether or not Avation seeks to raise funds from the markets. In one respect I wish they would do a major placing; I think the major institutions would see it as getting Avation back on a level footing more quickly and enable the company to take advantage of market conditions for better long term performance. Again, wait and see where we are 6 months from now.

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Re: Avation (AVAP)

#498095

Postby Carcosa » May 3rd, 2022, 7:28 am

Today Avation released this RNS stating that

Creditors' Trust that its claims against Virgin Australia and associated entities in its administration had been adjudicated by the Trustee and admitted for the combined sum of AUD 101.4 million ("Claims").


There was some litigation going on trying to increase this amount but it failed.

The thing that finds me less than enthusiastic about Avation (something I have mentioned before) is that quite often there RNS statements appear to be designed to be factual but incomplete to the extent that they are misleading. Often by keeping up with the company over a long period of time you might be able to piece together the clues to arrive at what investors may regard as being the 'true' facts.

AUD101.4m is ~ US$72m; a value that could easily and justifiably positively affect the share price; It's a lot of cash to get!
BUT
Originally the Administrator advised in December 2020 of an expected pay-out of 9.5-13 cents on the dollar. Thereafter in November 2021 the Trustee advised that unsecured claims had increased from initial estimates provided by the Administrator by AUD1.7 billion to AUD5.8 billion in total.
THEREFORE
The amount of money Avation may actually get could be around US$4m...Significantly less that the implied figure of US$72m today!

Why does Avation not come clean?

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Re: Avation (AVAP)

#501202

Postby Carcosa » May 18th, 2022, 10:46 am

Avation hit a 9 year low in it's share price yesterday; 61.5p valuing the company at £42.5m against a NAV of around £172p (my figures).

It would not be unreasonable to ask why the share price is this low as most investors 'need' an explanation to justify the current share price, even though, sometimes, share prices move up or down for no apparent reason.

There are some issues though.

As indicated in earlier posts, Avation management have been much more coy about what is happening over the last 18 months than ever before. Not so transparent in a number of their dealings and I would say outright misleading toward retail investors who are not as sophisticated as most institutions.

Subsequent to the Dec 2021 results the company continued to face refinancing risk for its senior secured debt, with balloon payments of $103.2m in February 2022

What is a major driver for all aviation lessor companies are its long term debt bond ratings

The last Fitch Rating maintained the Rating Watch Negative (RWN) on the 'CCC' Long-Term Issuer Default Ratings (IDR) of Avation PLC and its subsidiaries Avation Capital S.A. and Avation Group (S) Pte. Ltd. Subsequently Fitch withdrew all of Avation's ratings. A predominant aspect of this related to the restructuring of Philippine Airlines.

In headline terms PAL is now operationally profitable but it is far from perfect health. For Avation they hold a promissory note and revised (much lower) lease payments are due to be received.

The bondholders got their £29m cash payment due to them on 15 May 2022.

Then Avation bungled the bondholders maturity extension exercise. They tried to blame it on the FCA. There are approximately 5.5 million Bondholder Warrants in issue and the warrants have an exercise price of 114.5 pence per ordinary share in Avation. Now, somewhat late those new warrants are expected to be on the Main Market on 30 May 2022.

Furthermore, with the ratings being poor the cost of debt refinance will be increasing significantly and against a backdrop of rising interest rates the days of cheap money are over and interest rate swaps are probably sky high too.

Avation will have minimal liquidity headroom with liquidity coverage of debt maturities and purchase commitments meaningfully below 1.0x.

Although it cannot be characterised as a fire sale they are selling ATR's around $2m below book value, still have a B737 sitting idly on the tarmac plus another ATR waiting sale completion and yet have to finance new ATR's in the near future.

So I would suggest the share price is where it is because level and cost of debt is increasing along with decreased income. They have long time broken liquidity ratio's and a failed attempt at getting a meaningful cash payment from the Virgin Australia Claim.

So as a company they are struggling big time with liquidity. So what to do about it?

Taking on more debt is probably not a great idea; coming to the markets to raise liquidity that way is a possibility but for it to be a meaningful sum of money would anyone want to invest? Selling a LOT more aircraft would be achievable; that would help tremendously.

Or,

As has happened several times in the past; accept a fleet sale from a third party. That could lead to 100-150% increase in the share price.

To continue as they are would likely lead to bankruptcy.

In many ways it would be better for all concerned to do another 'strategic review'.

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Re: Avation (AVAP)

#506088

Postby jaizan » June 9th, 2022, 3:50 pm

I had a brief look at AVAP recently. The key attraction seems to be the discount to NAV, with the share recently trading at 40~50% of NAV.

However, with the gearing, the valuation of the planes only needed to be about 10% out for that entire discount to NAV to disappear.

I have no obvious way to verify the valuation of the planes. It appears there are companies which specialise in aircraft valuation, but I'd need to identify a reliable one and pay a subscription. This puts large organisations with people who specialize in the sector at an advantage & me at a disadvantage.

I can look at their plane sales, but these don't provide enough data & certainly not enough to verify the valuations.
So I'm left having to trust the audit, which is not a good basis for investing.
Or look for substantial director buys. There are none for over a year. Despite the company running presentations telling us how undervalued the company is.

I obviously decided not to touch it.

I am interested if anyone else has any ideas on how to verify plane valuations and is this a sector where the small investor is at a disadvantage ?

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Re: Avation (AVAP)

#506229

Postby Carcosa » June 10th, 2022, 9:13 am

If you look through my past posts then you get an idea of valuations.

IBA are a good source of information and looking at reports from other leasing companies provides data as well. Occasionally investment banks provide actual data too. For similarly spec and age of aircraft some airlines provide the data in their reports; As it's a worldwide industry, statements from USA airlines are a good source.

You can find the acquisition cost of each aircraft via the Avation Annual Reports; so I know exactly how much they have paid for every aircraft by serial number and work out the applied depreciation rate. Similarly the selling costs of the aircraft can be worked out from the Annual Reports.

Avation do however, as I have hinted at a few times in the recent pass, become economical with the truth. For example the last RNS about lease extension for Easyjet omits several factors. Prior to Easyjet the aircraft was on lease with Air Berlin until the airline went bust; so Avation were a distressed seller and the lease payments went down accordingly creating an impairment charge on the aircraft of $8.0 million. That left the book value at $19.8m for this aircraft and from that you can work out lease payments.

Furthermore this aircraft is very old at 13 years. It has limited resale value and you can bet your bottom dollar Avation took a further lease payment reduction securing the 4 year extension agreement. Also bear in mind this aircraft has been on the market for sale for some 4 years now.

A bit similar to the Boeing 737-800NG; what ever happened to that?

However, in fleet NAV terms Avation can't massage the numbers to any great extent because aircraft valuers know the value of every aircraft worldwide. It's not really within Avation's ability to make significant changes with the auditors. I have long taken issue (see past posts) about the ATR option valuations. To me they should be practically zero and in some ways are a liability because Avation have to order new aircraft (or sell on the option) as part of the contract with ATR or else loose those options. So really it's a liability in my view, not an asset. However Avation will 'spin' this when the new ATR's come along as proof that all is well in the ATR world; Those aircraft are getting expensive to order now and that will push some airlines to finding cheaper alternatives. So it will be interesting to see what lease rates Avation will get for new aircraft.

There is no doubt in my mind that the NAV is 'real' and I would be looking for a reasonable uplift in the next set of figures. what I cannot reliably estimate is the effect of Bank Rate hikes, interest swap rate derivatives. The NIM on aircraft leasing was relatively poor for Avation because they never achieved a low cost of funding due to their small size/credit risk. a 1% increase in costs on a billion dollar asset is a big number!

I still think the way out is for all their assets to be sold or once again start a strategic review but this is the CEO's baby. He has worked exceptionally hard to get where he is and I suspect will accept sticking it out for another 3-5 years and rebuild the finances of the company. Unless a compelling offer was to come his way I don't think he will easily let go... and why should he?

My original thesis for owning Avation was that its an industry I understand quite well, asset backed and provided a very healthy and growing dividend. Covid changed all that and its going to take time to get back on track.

I think Avation can be part of a personal portfolio of companies but not in the large proportion that I had!

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Re: Avation (AVAP)

#515185

Postby Carcosa » July 18th, 2022, 7:34 am

Last week Avation issued their Trading Update

Overall Avation continue to follow their apparent policy on putting good 'spin' on the story through providing specific facts in a way that unless you are really close to the story you don't realise what is actually being said.

"Avation is in the process of completing the sale of two ATR72 aircraft that were formerly leased to Loganair. The sale of these aircraft is expected to be completed during July and August 2022.". So it's taken 10 and 11 months to sell them. i.e. practically one year with nil revenue. (Originally these were signed for end of lease in 2024).

These aircraft are about 7 years old and I somewhat doubt there will be any great profit to be made on the sale of these aircraft.

"On 4 March 2022, the Company advised of the completion of a Letter of Intent to lease an ATR72-500 to a new customer. The lease is signed and the aircraft is being prepared and is expected to be delivered to the new customer in July."

Just to be clear, this is not a new aircraft it's an ex Virgin Australia Airlines aircraft, 11 years old; possibly MSN 978, to a TBA Asian airline. Might bring in $1.4m revenue or so.

The Boeing 737-800NG which through its life has been owned by a myriad of leasing companies, still has to find a home after coming off lease in January with no positive indication other than vague 'by end of the year' term. However it is another 11 year old aircraft, procured on the cheap and contributed around $3.4m recenue/year. Aircraft valuation should hold up well. Freeing this aircraft should help the finances a lot as I think it's unencumbered (am not 100% sure).

Fleet Valuation Review. No surprise whatsoever that fleet valuations will see an increase. That might catch the attention of retail investors.

Operationally, things are going very well and they have navigated through COVID impressively.

What I continue to be concerned about and prevents me from investing is the financial position. US$118.9 million in cash is a nice number but when most of that is likely restricted cash it somewhat becomes a meaningless statement for my purposes. The phrase "...confirms that it is current with all senior loans" is of concern too. I presume they are still out of their original covenant compliance with their own Net Debt to Equity ratio.

The story seems to be good and perhaps there is a case to buy a 'starter position' in the company but overall I would want more clarity on the financial situation and and costs in re-financing existing aircraft considering Fed Rate increases.

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Re: Avation (AVAP)

#520258

Postby Carcosa » August 6th, 2022, 6:15 am

S&P Global Ratings raised Avation PLC's long-term credit rating to 'B-' from 'CCC' last week. They also raised the issue rating on its unsecured note to 'CCC+' from 'CCC-'

For a full list of where those rating appear in the pecking order of S&P Ratings see this Wiki page

Avation obtains financing at reduced costs the higher up its ratings are, which is why ratings are so important. Additionally, it provides institutional investors with legitimacy to invest in Avation.

A 'B' grade is not investment grade, it is speculative, and the company is considered to have financial capacity to meet its obligations. Avation's ability to meet its financial obligations will likely be impaired by adverse business, financial, or economic conditions. Avation crept into the 'B-' rating though.

Prior to the upgrade the rating was 'CCC' which meant Avation was dependent upon favorable business, financial, and economic conditions to meet its financial commitments. I think any reasonable bystander would logically agree with those sentiments.

From memory, Avation has never been able to achieve Investment Grade status. Avation must have worked hard to keep any S&P ratings after losing Fitch Investment ratings and one of the Japanese rating agencies! It is positive that the grades are moving in the right direction for Avation, but I will be even happier when/if Fitch starts to cover the company again.

Numerous reasons have led to the changes:

*Extension of the maturity date on its US$128.7 million aircraft warehouse loan facility by four years making annual debt maturities not exceeding US$70 million over the next three years.
*Liquidity sources sufficiently covering its uses over the next 12 months.
*Maintain positive free operating cash flow with planned aircraft sales over the next few months
*Re-compliance with its financial maintenance covenants (Although this is mostly due to asset revaluation rather than net debt reductions)
*EBIT to turn positive, exceeding US$50 million over the next two fiscal years

Downsides are:
*A shrinking asset base and growing fleet age. Anyone who has followed Avation over the years knows that the company has always made a point of stating how young their fleet is... or was.
*Poor credit quality of airlines and concentration risks

S&P say 'We view an upgrade to be unlikely over the next 12 months'

Overall, and this should come as no surprise to anyone, it will be a slow and steady return to pre-pandemic times, but the risks will change from airline operational issues to diminishing assets (fleet size,distribution and age). The company needs to begin expanding its fleet and acquiring new customers as soon as possible.

Personally I maintain the view that selling all the assets en-bloc is the best outcome for investors and should Jeff want to start all over again with a clean sheet of paper/finances I would be willing to back him.

The full S&P note can be read here.

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Re: Avation (AVAP)

#525179

Postby Carcosa » August 25th, 2022, 12:26 pm

This chart shows the changes in Monthly Aircraft Lease rates from this CNBC article.

The data is attributed to IBA data which I have often relied upon.

Image

Unfortunately for Avation I doubt they have been able to take advantage of this situation as they are divesting themselves of aircraft and not written any new leases for quite some time. However, it does reinforce the argument that aircraft valuations (as previously discussed), are very likely to be revised upwards this year (June 2022 valuations) as will continue to increase in 2023, especially given inflation rates and the positive effects on sterling holders' exchange rate changes since last year (about 12%).

Must admit I would not be against becoming a buyer once more in this company, as I initially suggested in my July 18th, 2022 post.

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Re: Avation (AVAP)

#533548

Postby Carcosa » September 30th, 2022, 6:45 am

Avation issued theirResults for YE June 2022

Since July, I have been cautiously been turning into a re-buyer of Avation shares (see prior posts) and am happy to see these results.

Highlights were

· Profit after tax of $17.1 million (2021: $84.9 million loss);
· Earnings per share of 24.7 cents (2021: Loss per share 131.2 cents);
· Net asset value per share increased 63% to £2.68 (2021: £1.64);
(Note given change in exchange rates that is now ~£3.00 (versus share price of 100p)
· Profit before tax (before non-cash loan modification charges) of $34.9 million (2021: Loss before tax $120.5 million).

So headlines are very good indeed. The NAV is a tad lower than I had anticipated but I can only see this number increasing for the interims based on the fact that aircraft revaluations will continue upwards because of inflation and continual reversals of impairments.

On Aug 6/22 I said:
The company needs to begin expanding its fleet and acquiring new customers as soon as possible.

To which Avation have clearly laid out with plans to focus on Airbus NEO and A220 series in addition to ATR 72 aircraft (one delivery this year and another for 2023).

I still maintain the view that the ATR72 options should not be valued in the manner that they are, but I've been going on about this for years. Basically if they can't provide customers for the aircraft they lose the option at cost. However given Avation are a big customer of ATR it seems the manufacturer has indicated they are happy to be flexible with aircraft production scheduling.

"Avation has reviewed the values of aircraft in its fleet and reversed some of the previous impairment charges and increased the overall value of the fleet. The increase in valuation represents a small proportion of the impairments taken during the pandemic. The review resulted in $3.7 million of impairment being reversed in the six months ended 30 June 2022 with a further $17.5 million recorded as an increase in the asset revaluation reserve. The value of aircraft purchase rights has also increased."

How the options can have a near total reversal in value without a similar level of improvement in the ATR fleet is a bit odd to me. Just goes to show how divorced Options are from real world assets. Nonetheless there is obvious scope for further and significant improvements in the fleet asset values to improve.

Most positively are the following improvements in the calculations I do relating to the Ratings Criteria
Net Debt to Equity < 4 (Company) = 3.5
EBITDA to Interest Ratio >2 (Company) = 2.34
EBIT Interest Cover (>1.5) (Credit Agency) = 1.54
Funds From Operations to Debt (> 7-9%)(CA) = 10.3%

These are significantly improved and within 'limits' for the first time since 2019/2020

Also Loan to Fleet Value of 71.6% which is the lowest since 2017! This brings it more into line with typically traditional worldwide LTV's. This may be a consequence of prudent activities within an increasing debt cost environment and clearly helped by aircraft/options valuation uplifts. Seriously, this is good. Note, the 71.6% calculation excludes cash which is a typical measure outside of Avation. I much prefer to use this measure as an indicator of what's really going on operationally because it excludes cash sitting on the balance sheet.

They now have a minor equity stake in Philippine Airlines. Share price can be found here: https://www.marketwatch.com/investing/s ... trycode=ph but the AUD / USD exchange rate has not helped either. Seems the valuation is around $3.5m

I asked several questions during the investor calls;
What is the situation regarding selling the company (as was the plan prior to COVID) - Receives enquiries all the time every 2 weeks but not well formed. Brokers and advisors deal with them. Not seeing much M&A in the sector due to coming out of COVID and turbulence in the finance market

Jeff wants to continue with AVAP Not start anew or be second fiddle to a takeover. Seems to be looking forward to taking Avation further.

Inflation affects the residual values. At time of the Results they were using a 2% inflation rate. Going forward this will undoubtedly increase

Spare engine lease support; seems to be getting out of this business as its problematical unless done in large size

Expect further upward revisions to the fleet valuations. Appears things were going too fast during the auditing for this years results which meant that H1 aircraft valuations were not as high as they could have been. More scope for upward valuations in H1.


Post Finals:
B737 expected to be sold by XMAS (unencumbered)
Myanmar ATR already to be transitioned next month
$5.5m already received (Aug) from Virgin. Another $1m expected
Have already paid $3.5m pre-delivery payments for two ATR's

Should be noted that interest rates do not really affect leasing business. It's the spread between debt cost rate and lease rate that is important. In other words Avation is not impacted by rising interest rates.

I fear investors may runaway with the idea that all is great now. Reality is that things are very very good in terms of NAV and will likely improve a great deal over the next two years. However profitability for 2023 is on a knife edge. It is the revaluation of the Options that made things look great on this metric. That will not happen in H1/FY 23. As things stand at the moment I calculate a very small profit is likely to be had.

Therefore Avation need to continue to do what they are doing. Namely sell the B737 (unencumbered), create new business with A320/220/ATR's. They have the ability to take on a lot more debt and secure new business to get back to growth.

Overall with a 3-5 year time horizon buying Avatino shares is not a bad idea especially with the ever present possibility of being taken over.

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Re: Avation (AVAP)

#545063

Postby Carcosa » November 9th, 2022, 8:58 am

The latest annual report was published on 4 November. As discussed before this is an opportunity to find out how much they bought and sold aircraft for which can then be applied to the remainder of the fleet to estimate fleet valuations etc., To get a comprehensive an investor would need to look back at several annual reports.

Meanwhile as things stand at present we await news of the B737 disposal (am expecting a loss on the transaction) due by end of year. Also awaiting news of repositioning the ex Golden Myanmar ATR72-600 aircraft which is now under a temporary registration and appears to be stored in Yangon (may have moved elsewhere and I just haven't found it).

As things stand at present I can't see Avation producing much in the way of cash profit from existing revenue stream for H1 ending December 2022. However that is not the end of the story.

There should non-the-less be some very positive improvements in fleet NAV. The A220 is really powering ahead now. Right aeroplane at the right time. In prior posts I have discussed just how great this aircraft is for a company like Avation but I do start to fear they may have missed the best opportunities if they don't get a few more A220's on their books in the next 18 months or so. But, it will be a challenge.

If you want some more background on the A220/320 argument see this video on the Royal Aeronautical Society YouTube page (don't agree with all that is said but overall thrust of the argument is valid)

What investors might not appreciate is how Avation can generate further liquidity from it's existing fleet. It does not have to rely solely on revenue derived from leasing the aircraft.

As an example of such a derivative is an asset-backed security which is a transferable financial instrument created around a pool of illiquid cash flowing assets. Securitization allows the Issuer (Avation) to raise funds from otherwise illiquid assets.

More details can be found here from a KPMG article

The assets used can be the unencumbered aircraft, currently only two ATR72-600's plus, I think, the value of the amortised senior debt for the rest of the fleet.

Another potential source of funds could be the mark-to-market value of the interest & currency rate swaps which this last year alone showed a gain of $35m (AR, p112). Those swaps are going to increase in value as interest rates increase. Should interest rates start to decline in 2023 it may prove useful to realise those swaps for real cash to pay down debt.

What all this means to me is that Avation has a lot of tools to deploy should they wish to.

Having said that, Avation is a risk averse company, within the world of aircraft leasing, and giving up on their swaps and/or entering into asset back securities may be seen as something of last resort.

Would be interesting to hear other views, expecially from financiers regardng the above.

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Re: Avation (AVAP)

#545077

Postby dealtn » November 9th, 2022, 9:37 am

Carcosa wrote:Another potential source of funds could be the mark-to-market value of the interest & currency rate swaps which this last year alone showed a gain of $35m (AR, p112). Those swaps are going to increase in value as interest rates increase. Should interest rates start to decline in 2023 it may prove useful to realise those swaps for real cash to pay down debt.
...

Would be interesting to hear other views, expecially from financiers regardng the above.


It might not be "in their gift" to crystalize and profit on their derivatives (ie. turn an accounting gain into a cash one). This is likely dependent on the underlying financier (who might also be the counterparty of the derivative). In simple terms it might be a condition of the loan (or bond) that the borrowing is on a fixed rate, or not be higher than a coupon with a relationship to income etc. The ability to swap out fixed for floating debt (or low fixed to high fixed) will be dependent on the agreement of the lender. That agreement wouldn't be automatic.

Your wider points remain valid, however.

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Re: Avation (AVAP)

#554505

Postby Carcosa » December 13th, 2022, 7:59 am

Avation issued their AGM RNS today which, as usual, is an Operational Update RNS.

Seems many things have been delayed:
- B737 sale
- ex LoganAir 2x ATR's transition
- Two new ATR's scheduled for Q2/22 delivery pushed back to Q2/24 (although can be brought forward if customer demands)
- Golden Myanmar aircraft transition

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Re: Avation (AVAP)

#567606

Postby Carcosa » February 11th, 2023, 11:20 am

Nothing really pertaining to inventors but a bit of trivia nonsense ;)

Image

Twitter Link

I believe the aircraft had previously been located in Subang Airport (The old Kuala Lumpur International Airport), which is located about 7m from my home.

It is unlikely the ex-Garuda aircraft will be stored in Seletar (Singapore, about 12 mile from Changi) for any length of time and more likely it will be undergoing maintenance for delivery to its new owner/operator; somewhat later than originally envisaged . Possible will get an RNS about it shortly.

This 12.5 year old aircraft is probably worth around $25m and is unencumbered.

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Re: Avation (AVAP)

#570934

Postby Carcosa » February 25th, 2023, 7:01 am

Avation issued a "pre Results Trading Update RNS" in which they stated:

"Due to a combination of factors such as lower than anticipated aircraft transition costs, lower administration and legal costs, improvements in finance income, recognition of gain on an investment in a listed airline and other variances, the Company expects its financial performance for the full year ending 30 June 2023 to be significantly ahead of market expectations."

It was met with a near 8% increase in the share price. Somewhat unjustified in my opinion.

The aircraft leasing business is poorly represented on LSE; excluding investment trusts/funds, Avation is the only 'pure' aircraft leasing business listed. The principle of aircraft leasing is simple. Finance an asset that is leased out for a higher rate of return than the finance cost. However as I have written many times over the years it is a lot more nuanced than that. This perhaps explains why I have started to see many ridiculous posts by retail investors associated with not only Avation but also Doric Nimrod 2 & 3 in recent weeks (see viewtopic.php?f=33&t=24434 for 2/5 years of my thoughts - or just read the very first post I made there).

Because investors are seeing rapid passenger growth by airlines it is assumed this is fantastic for leasing companies#. Leasing companies do not get any additional rewards if the leased aircraft is flown intensively. There is no extra income*, no 'bonus' payment. Nothing. In many ways the perfect leasing customer (airline/operator) is one who never flies the aircraft, looks after it over and above the legal/contract requirements and pays their lease charges on time. Come end of lease you then have a much more desirable aircraft to re-lease or sell as opposed to an aircraft that has had a hard service life.

(# Airline return to growth does positively impact leasing companies in terms of reducing income risk and hence credit risk, increasing aircraft valuations through increased demand for newer aircraft but potential reduction in values of older technology types).

*for clarity there are usually contract clauses specifying unusual flight hours/utilisation/cyclic rates that cover extreme scenarios but most of these clauses relate to maintenance reserves and do not have any substantive finance meaning for lessors).

Getting back to the Avation RNS; lets look closer.
"lower than anticipated aircraft transition costs" The obvious reason for this is because by HY year end (31 Dec 2022) they had planned to divest themselves of the following aircraft:

B737-800NG (MSN30146 ex Garuda)
ATR72-600 (MSN 1568 - Golden Myanmar)
ATR72-600 (MSN 1260 - Logan Air)
ATR72-600 (MSN 1277 - Logan Air)
MSN = Manufacturers Serial Number

NONE of theses aircraft were transitioned! In March 2022 it was announced an LOI was signed for the Golden Myanmar and the two Logan Air ATR's. Given that was twelve months ago I can only surmise that those proposed deals fell through and they are not expecting much to change before 30 June 2023.

The B737 was only transitioned in February 2023; outside last years results deadline.

So rather than being a positive piece of news the lower than budgeted for transition costs is in fact poor news.

The "lower administration and legal costs" probably also relate to the above. Under normal lease return conditions it is usual to include a delivery airport and often flight crew to fly the aircraft to a pre-arranged destination. In Avation's case they will almost certainly have to arrange flight crew, maintenance crew, inspectors and others to retrieve the Myanmar aircraft which is still, as far as I am aware, located in Sittwe Airport, Myanmar. Give that airport and the political situation don't be surprised to find that aircraft has been what is called in the industry a 'Christmas Tree'. Others would have stolen parts from it. Getting access to the aircraft, making it serviceable and flown out of Myanmar with all of the corruption involved too would not be a trivial task. Who knows, it may even be written off although hopefully insurance may cover that.

"improvements in finance income"
I assume this is largely related to the Virgin Australia initial expectation ~$3.4m now being $6.5m being received. However, other finance gains/losses are always a possibility relating to swaps; can't really comment much more than that.

"gain on an investment in a listed airline "
Perhaps a surprise to some but this relates to a stake in Philippine Airlines as a consequence of the airline going bust. Here is a PAL share price chart. Previously thought to be valued at $3.5m am not to sure eyeballing the share price and exchange rate movements there is much to shout about here. Maybe they sold at an optimal time???

"other variances"
Could be maintenance reserve releases, airlines paying back their debts faster than anticipated, yet another revaluation of the ATR72 options or some other matters.

Overall the market seemed to like the phrase "the Company expects its financial performance for the full year ending 30 June 2023 to be significantly ahead of market expectations."

Did you see what they said there? Spot it? "full year ending 30 June 2023" Not the Half Year results due to be announced next month! In other words, forget about the poor HY they are going to announce and consider our yet to be delivered FY results (ending 30 June 2023).

So what are those market expectations? There 3 Feb 2023 trading update was met with investors and analysts savagingly cutting their expectations. Personally I too was somewhat surprised how bad it was and on 30 Sept 2022 I wrote " I fear investors may runaway with the idea that all is great now. Reality is that things are very very good in terms of NAV and will likely improve a great deal over the next two years. However profitability for 2023 is on a knife edge.... As things stand at the moment I calculate a very small profit is likely to be had"; a view that that I still maintain.

Subsequently analysts saw a loss being reported, visually you can see how bad it is here:

Image

Perhaps scraping into profit for the full years represents "significantly ahead"

Valuation
I think retail investors can decide to value Avation based on profits or NAV. Obviously most of the NAV is tied to the aircraft and I would estimate 280+p would be a fair baseline for the fleet and it is this which as I have said for a long time, makes Avation an ideal takeover candidate.

Those with a finance background are probably better equipped to assess Avation than most.

Summary
Avation has a history of being phrasing their RNS's in a positive light, they do not lie but it's up to the reader to carefully consider the meaning. The bigger picture is that they are not acquiring new aircraft; indeed the two ATR's expected this year have been pushed out another year or two. When there is a depreciating asset its very important to replace the fleet to bring the average life down.

I mentioned in my end of year twitter report that I would likely buy Avation shares between HY and FY reports. I still think that is the right strategy for now.


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