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Avation (AVAP)

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arctic
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Re: Avation (AVAP)

#278989

Postby arctic » January 21st, 2020, 4:19 pm

For what it's worth, and admittedly that's not a lot, I've been pondering the takeover/merger situation.

From what Carcosa suggested a couple of weeks ago i.e. the interested party being Chinese owned and Ireland based, the likely candidate would be Avolon, owned by Bohai Leasing. I don't know if this Sky High Leasing has anything to do with them, information is sparse.

Looking at the Avolon website it seems clear that their appetite for risk is far racier than Avations'. Just look at the jurisdictions in which they trade. Any takeover would lend a little more security to their operation.

What does stand out however is that out of their claimed fleet of 925, there are no ATR's. Avation's little fleet of them would be an easy resolution to this.

It's noteworthy that Avolon appear quite busy raising funds, coincidental perhaps. They are quite exposed to the Boeing Max scandal.

Any rate there you have it, this could of course be totally wrong, I have no inside information. If anyone knows different then all well and good.

Regards,

Carcosa
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Re: Avation (AVAP)

#279306

Postby Carcosa » January 23rd, 2020, 5:56 am

Arctic, You raise some interesting points and you may well be right.

There are however maybe 150+ leasing companies out there but perhaps only 40 or so realistically sized companies that may have the ability to take on a relatively large deal.

When it comes to Avalon i think they are just too big to have any interest in Avation.

Perhaps regional type lessors are more likely? Perhaps someone like Truenoord or Chorus Aviation (who bought many ATR's from Avation in the past). But there are many others. There could also be Private Equity finance houses that want the assets. Essentially there are just too many potential interested parties to identify which is the likeliest.

My earlier reference to Sky High Leasing came about because of a report I saw associated with the ex Thomas Cook aircraft.

Whilst the popular/financial press and Private Investors on other bulletin boards seem to think the company is going to be bought out I am still firmly of the view that will not happen.

A little observation
Now would be an interesting time for leasing companies to consider adding B737MAX aircraft. Costs should be very low and years from now their valuations will have been substantially increased, assuming they dont kill anyone else. Remember its the engines at the end of the day which are the valuable asset.

Finally a correction:
I have subsequently been informed by another PI that the CFM engine that Avation initially did a SALB on has fallen through over a proposed change of terms. Meaning the PW127M is now currently the only spare engine with Avation. In terms of capital cost and revenue it has about as much effect on Avation as buying a new desk. Maybe one day I will write up a piece on engine leasing (something that I actually know about from first hand knowledge!)

arctic
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Re: Avation (AVAP)

#279511

Postby arctic » January 23rd, 2020, 7:47 pm

Carcosa, Hi! All I've been doing is adding 2+2 and probably getting 5. It all depends on whether one moves away from the China/Ireland scenario or runs with it.

So let's for the sake of argument run with it a while. Why would I as the goliath Avolon be interested in little Avation?

Firstly, and probably the least compelling reason is by taking over Avation my competitors can't get their hands on it.

Secondly, it's a young fleet very much in line with my own, big or small the additional fleet would be complimentary.

Thirdly, I may not be overly bothered about the fleet, but if I had say, an existing customer, on my case to lay hands on a few new ATR's, then the options held by Avation would be really really handy.

If we move away from the China/Ireland scenario, then the above is little better than hogwash.

You also could well be totally correct about Truenoord or Chorus.

I would say however, that from mooching around the web, and that's all I've been doing, you know nothing intense, I don't get any feeling or sense that either of these companies are players at this time, but what do I know.

Either way hopefully, we'll soon find out and like as not it'll be me looking vaguely foolish.

Regards,

PS. You make an interesting point about the B737MAX, I wouldn't want to be a salesman making that pitch though.

Carcosa
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Re: Avation (AVAP)

#282092

Postby Carcosa » February 4th, 2020, 8:22 am

The Coronavirus is the latest in a long list of external shocks to the airline industry, but how will this affect Avation?

Should be remembered that similar instances have occured due to SARS, N1H1, Bird Flu, Swine flu, Zika virus, MERS, Ebola, 9/11,Volcanic Eruptions and now Coronavirus.

There is no doubt that a sharp fall in passenger flights is occuring, most notably in S.E.Asia. Previous experience has shown that:
Image

So it can be seen that typically the largest reduction in pax traffic occurs 2-4 months after the start of the 'crises'. By then low airfares are established and low hotel rates are in place to attract tourists.

So if the the severity of the current situation is similar to SARS, airlines will then move to a “cash conservation” mode and defer or slow down any incremental fleet growth. What may be 'different this time' is that a lot of low cost carriers that have established in the last 5-10 years have very thin balance sheets and not a lot of liquidity. History says that things return to normality quite quickly.

However most of the impact is going to relate to international carriers, especially in S.E.Asia and especially those with a large percentage of their business related to China.

For leased aircraft already with lessors rental payments will continue right up to the point of an airline going bankrupt. So where does that leave Avation?

Nearly the entire ATR fleet serve domestic routes and not international routes. Those that are International do not operate in S.E.Asia. There is a possibility that increased domestic travel may occur for some operators as people prefer to not venture overseas; however I think this will have limited effect.

The A321 fleet is essentially all with VietJet (Vietnam) whose operations are affected by what goes on in China. However Vietjet is all but in name a government airline and any short term operational cash problems should be easily resolved. Financiers are not going to pull the rug under the airline for a short term problem.

The A220 fleet are all with AirBaltic; again a government owned airline and principally operating throughout Europe.

The A330 is with EVA air (Taiwan). If any of Avation's airlines is going to be at risk then I'd say this is the one. The world's 3rd safest airline should be able to weather a short lived crises though. Lets hope so.

The B777 with Philippine Airlines. PAL was severely affected by the 1997 Asian financial crisis. In one of the Philippines' biggest corporate failures. From those days it has been trying, with some success, to become a premier Asian carrier. Other than cancelling flights to China it seems to be doing okay but perhaps a bit too early to say.

Furthermore, as a consequence of the Coronavirus, Jet A1 fuel prices have plummeted; reducing the biggest cash cost for airlines. The ATR's, A220's and A321's are pretty much best in class for low operating costs; The B777/A330 less so

Undoubtedly many airlines are going to suffer in the short term (2020) but I see no reason as to why lease payments to Avation are going to stop. Lease costs are, for the most part, fixed and an essential requirement for an airline to remain in business.

Airlines will be contractually obliged to fulfill their purchase agreements for aircraft due for delivery over the next few weeks/months. Defferals are hard to do when the aircraft is already in production. However, Avation have so far announced that only ATR's are to be imminently delivered to Braathens (Norway) so we do not seem to have a lot of aircraft on our books to be delivered.

For Avation shareholders however the real reason to be invested in 2020 is the current corporate review (i.e. M&A/Part fleet sale) which will be conducted in relation to NAV's as discussed in an earlier post. When pricing a deal for assets that have 20+ years of economic life remaining then the current Coronavirus is inconsequential.

Carcosa
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Re: Avation (AVAP)

#284850

Postby Carcosa » February 17th, 2020, 8:54 am

Further reasons why Avation is not being sold. (Again, speculation on my part)

From prior posts it will be obvious that in my opinion Avation will be heading sown the road of major M&A activity rather than a sale of the company. Subsequently two further pieces of the jigsaw have come to light.

Next week, 25th and 26th February, Avation are doing a Roadshow to institutional investors. This is not usual practice when a company is considering to be be up for sale but is frequent practice for a company that is changing in a big way, such as M&A activity.

Another piece of the jigsaw is that in today's RNS they have joined the Aviation Working Group (AWG). This group is a not-for-profit entity comprised of major aviation manufacturers, leasing companies and financial institutions that contribute to the development of policies, laws and regulations within Aviation. The AWG members are 'big hitters' i.e. Boeing, Airbus, GE Capital, Avolon etc. Avation is a minnow; perhaps the smallest company of all in AWG.

If Avation was being sold off am sure management would not be bothered about wanting to join this group. The fact they have been accepted infers that they want to have a place at the table and to do that they need to be a 'big' player; not a minnow as they are now.

I do fear though that the benefits of a M&A will not be reflected in the immediate aftermath of an RNS announcement and shareholders may feel disappointed. Such M&A activity may not show the benefits until 2-3 years afterwards.

All speculation on my part....

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Re: Avation (AVAP)

#285939

Postby arctic » February 21st, 2020, 5:28 pm

As always you make interesting points, and I certainly wouldn't bet against them.

Sale, merger or whatever we are overdue an update on proceedings. I was impressed by the presentations made by Richard Wolanski, being clear, open and concise. The forthcoming roadshow is an ideal opportunity to tell the story to a considered audience, whatever the news.

Does anyone by any chance, know how long the application process is for the Aviation Working Group? If it's relatively quick, then indeed we could read something into the membership application. If it drags on for weeks and weeks, then this application may have been made well in advance of the current scenario.

Regards,

Carcosa
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Re: Avation (AVAP)

#286000

Postby Carcosa » February 22nd, 2020, 4:05 am

The RNS stated '... has joined the Aviation Working Group' and the AWG website has them listed as members. Hope that helps.

I expect an update RNS without commercial terms this coming week, along with the H1 results.

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Re: Avation (AVAP)

#286066

Postby arctic » February 22nd, 2020, 12:08 pm

Actually no, not really. That wasn't what I was getting at.

I was responding to your point about 'not bothering' to apply for membership if they were selling the company.

I read the RNS, and I visited the AWG website, and I understand the situation regarding membership.

My query was simply if it takes weeks/months to obtain the membership that they now have, then the application would have had no bearing on any possible sale, taking into account that possible sale may not have even been on the agenda when the application was made.

So returning to my original question:

Does anyone by any chance, know how long the application process is for the Aviation Working Group?

Regards,

Carcosa
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Re: Avation (AVAP)

#287310

Postby Carcosa » February 28th, 2020, 8:07 am

Avation H1 results to 31 December 2019 out today.

Unfortunately I am in hospital at the moment so can't write too much.

Overall results are as I expected (see earlier posts) . However the major headline results are the result of an unrealised gain on ATR options.This results in a gain of $37.0m or say 49c/share. This is something that Simon Thompson has been banging on about forever.

The reason for doing this is debatable however along with the other commentary regarding Strategic options which again align with my view that I posted earlier demonstrates the real value of the company is considerably higher than the current share price.

Notwithstanding COVID 19 I remain a holder of Avation as I believe the Strategy review will result in a significant share price gain (although I do worry about it going to Private Equity)

Sorry can't write much more. Later maybe.

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Re: Avation (AVAP)

#287325

Postby simoan » February 28th, 2020, 8:46 am

Carcosa wrote:Avation H1 results to 31 December 2019 out today.

Unfortunately I am in hospital at the moment so can't write too much.

Overall results are as I expected (see earlier posts) . However the major headline results are the result of an unrealised gain on ATR options.This results in a gain of $37.0m or say 49c/share. This is something that Simon Thompson has been banging on about forever.

The reason for doing this is debatable however along with the other commentary regarding Strategic options which again align with my view that I posted earlier demonstrates the real value of the company is considerably higher than the current share price.

Notwithstanding COVID 19 I remain a holder of Avation as I believe the Strategy review will result in a significant share price gain (although I do worry about it going to Private Equity)

Sorry can't write much more. Later maybe.

Hi Carcosa,

Sorry to hear you are unwell - hope you get better soon. Like you I was a little surprised by the sudden inclusion of the unrealised gains for the ATR options. I'm not keen on this kind of thing... it's all a bit "Burford" isn't it? :-)

Anyway, I'm happy to keep buying given the recent sell off in the panic. I agree it's looking very undervalued down here; management are very competent and well motivated to maximise shareholder value from the strategic review.

All the best, Si

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Re: Avation (AVAP)

#287432

Postby Clitheroekid » February 28th, 2020, 1:01 pm

Carcosa wrote:Unfortunately I am in hospital at the moment so can't write too much.

As a fellow holder, who very much appreciates your input I was also sorry to hear you're in hospital, and hope you'll soon be better.

Carcosa
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Re: Avation (AVAP)

#287450

Postby Carcosa » February 28th, 2020, 2:16 pm

Like you I was a little surprised by the sudden inclusion of the unrealised gains for the ATR options. I'm not keen on this kind of thing... it's all a bit "Burford" isn't it? :-)


Previously most of the ATR options value were not included in the results as they were so far in the future that auditors disallowed them. Now, a portion of these are up for sale hence their valuation is now on the balance sheet.

Now whether or not you believe that is their real intent is open for debate. What it has done is put them on the balance sheet which provides an example to the market and presumably interested parties, that this is one of a number of 'hidden value' examples. So now would be an ideal time to take such action. I see it as a financial 'trick' but a useful and timely one for the strategic review.

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Re: Avation (AVAP)

#287970

Postby Carcosa » March 2nd, 2020, 8:46 am

Having taken a closer look at the H1 Results I see some interesting snippets.

Seems as though the US-Bangla (Bangladesh) ATR aircraft were sold at $20m each compared to Braathens ATR which were sold at $18.8m a piece (Finance lease). That clearly reflects the credit worthiness and risk of the airlines involved. Also allows a shorter term lease to US-Bangla Airlines on an Operating Lease. Good income for Avation

The ATR options (Purchase Rights) lead to a hefty tax bill as it is outside the Singapore ALS tax scheme (8% tax). I expect this to be resolved by FY end by getting those Purchase Rights included in ALS, so expect $4m to reverse out of that. That's worth about an additional 4.5p EPS Tax payable would be deferred.

As expected the two ex-Thomas Cook aircraft placed with VietJet are up for sale. As I mentioned in an earlier post, these aircraft are not subject to European export credit agency finance which can provide credit insurance and financial guarantees to protect Avation's interests. Given the return conditions on these aircraft their value could be somewhat attractive.

It was interesting to hear in the H1 earnings call that Avation could have placed these aircraft with a number of airlines; so going to VietJet may have been a strategic move too.

The ATR options valuation of $37m are based on future cash flows, cost of debt and delivery schedules. If that $37m is applied to 25 options that's worth $1.4m per aircraft. It also infers the existing ATR valuations may increase. Accounting for those aircraft on Finance leases and their age that may be an uplift of some $16m in the ATR fleet or an additional 20p NAV. However this is an argument related to the Strategic review and the FY results may in fact not reflect that in audited results.

Downside is the A330 and possibly B777. A prior post of mine indicated the valuation of the Avation A330 has likely plummeted and indeed this is reflected in the H1 results indicated a lower residual value and an increase of $1.8m depreciation charge for both these aircraft per annum totalling $28m. I suspect that may have further to go over the years to come although perversely the now low Jet Fuel prices will be a help.

Aircraft fleet revaluations are done at FY end so any gain on ATR fleet may be wiped out by the wide-bodied aircraft. However the A320's and A220's should be valued even higher given capacity constraints arising from the B737MAX fiasco.

Interest Rate Swaps I suspect are going to make another big loss on fair value. Already a loss of $0.5m in H1. Last FY it was a loss of $18m. Given plummeting LIBOR rates post COVID-19 I assume that could easily breach $18m loss again for this year. However, I really do not understand the implications of these swap rates. I think it only becomes a real issue if there is a forced sale of an aircraft. Am really not sure.

Looking forward with the known aircraft deliveries, I get forecast FY results of:
Revenue $135.4m (+14%)
Profit Before Tax $52m (+103%)
EPS $0.75 (+90%)
P/E 4.4
Yield 3.5%
NAV $4.88
P/NAV 0.78

Additionally potential to continue refinancing the fleet at a lower interest rate exists following expected FED interest rate reductions.

COVID-19 I believe that whilst challenging for many airlines and some mega-leasing companies the effect on Avation's existing business is going to be negligible. Potential slowdown of Jet aircraft placements is possible but Avation has no publicised Jet orders anyway. Shorthaul and domestic routes which dominate Avation's business historically has less downturn than long haul operations. We will just have to see what happens in practice.

But clearly the interest remains the strategic review and 'if' the company was sold I still believe a price north of 500p is possible but my money remains on M&A type activity.

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Re: Avation (AVAP)

#288686

Postby Carcosa » March 5th, 2020, 12:32 pm

Today Flybe entered administration. Two Avation ATR's, G-FBXA (MSN 1260) & G-FBXB (MSN 1277), were recently sub-leased by Flybe to Loganair who are expanding their network due to the demise of Flybmi who went tits up last year. One of the two ATR's is already in operation with Loganair and the second one was being readied for Loganair commercial operations. Both had already been granted the Air Operators Certificate (AOC) a few days ago.

The upshot was that both aircraft had completed their sublease transfers to Loganair.

Avation issued an RNS today entitled "LEASE TERMINATIONS" which made my heart sink and prompted a fall in the share price. This RNS title was terrible!! Something along the lines of "Flybe ATR leases transition to Loganair" (without all CAPS) would have been more accurate and less emotive.

The RNS tells us a few things (and is also written a bit backwards IMO):

Company has exercised its rights to step into the sub-lease with Loganair who will become a direct customer of Avation from today.
Lease documents are complex beasts with many provisos. In this case it's a reflection of standard practices and Avation were in control.

The sub-leases are on market-standard terms for aircraft of this type and age.
Both aircraft are just over four years old. This would be reflective in the lease rate. I suspect Flybe were paying the full lease rate whereas under the sub-lease Loganair would be paying a lease rate reflective of the four year age of the aircraft. Now Avation would only be getting the lower lease revenue. I estimate that formally Avation were receiving $1.86m per annum per aircraft. Now I estimate they get $1.54m per annum. A combined reduction across both aircraft of $650k per year. Not material in the scheme of things.

The Company holds security deposits and maintenance reserves from Flybe in relation to the aircraft.
So, as is normal, this is out of reach of Flybe. It may also give rise to a small exceptional gain; as has been seen on other aircraft lease changes over the years.

I also guess (hope) that no Interest rate swap breaks have arisen from this action. Given LIBOR rates have crashed that would have lead to a horrendous loss.

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Re: Avation (AVAP)

#288729

Postby simoan » March 5th, 2020, 3:17 pm

Carcosa wrote:T
Avation issued an RNS today entitled "LEASE TERMINATIONS" which made my heart sink and prompted a fall in the share price. This RNS title was terrible!! Something along the lines of "Flybe ATR leases transition to Loganair" (without all CAPS) would have been more accurate and less emotive.

I'm glad it wasn't just my heart that sunk then! I assume they were compelled to say something and the RNS was hastily (and rather shoddily!) put together. As you say, it is a really terrible heading given the nature of the RNS contents.

All the best, Si

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Re: Avation (AVAP)

#289006

Postby Carcosa » March 7th, 2020, 9:48 am

The following is my personal view as to the risk of airline collapse within Avation's customer base over the next 6 months.

Air France
Post COVID-9 Comments: Air France-KLM has more profitable options for summer redeployment than most of its rivals. “We do have many scenarios we can look at should this virus continue,” Smith said. The group currently plans to expand its network by 2-3% in 2020, with low-cost carrier Transavia expanding by 4-6%. Net Debt/EBITDA 1.5x

Air India Regional (Alliance Air)
Domestic operations. Expanding fleet and routes. Maybe best of India's domestic operators. Large government shareholding. Subsidiary of Air India. Govt Writing off large debts. Nothing new there...

airBaltic
80% Government owned. Seen as national strategic asset. Airline rapidly expanding.

Braathens Regional Airways AB
Large Swedish domestic airline and operating regionally. Large fleet growth. Believed to be financially healthy(?)

Danish Air Transport A/S (DAT)
Danish. Operating scheduled, chartered passenger and cargo flights mostly domestic. Again, believed to be financially healthy(?)

easyJet
Financially strong Net Debt/EBITDA 0.6

EVA Air (Taiwan)
Taiwanese international carrier. Already hurt by US/China trade war. Probably really suffering due restrictions in China/HKG/Macau operations and until recently Philippines. May require Government intervention?

Fiji Airways
Has severely reduced international flight schedules. ATR is used for Domestic ops. Limited options for airline to persist long term with COVID-19 effects

Galistair
(Wet Lease Specialist) Business may increase(?)

Garuda Airlines
Indonesian National carrier. Has always relied on Government for support & will continue to do so. Long haul operations significantly affected. Regional/Domestic still hurting but not so bad.

Golden Myanmar Airlines
Only has 3 ATR's (entire fleet). Lower fuel costs and the market they serve probably gives them an edge this year.

Loganair
Beneficiary of competitors failing (Flybe & Flybmi).

Mandarin Airlines
Taiwanese regional airline based in Taipei, Taiwan, whose parent company is China Airlines (Taiwan). Suffering similar yo EVA Air and may require government assistance

Philippine Airlines
Philippine Airlines recorded the biggest loss in its corporate history last year due to what its chief described as “unsustainable long-term debt and lease obligations billions of US dollars, ” aggravated by the Taal volcano eruption and the ongoing Covid-19 crisis. Airline can expect further Government support but real problem of no pax for international operations may be too great to escapre unless COVID 19 under control in the short/medium term Net Debt/EBITDA 40x (!)

US-Bangla Airlines
Privately owned Bangladeshi domestic airline that has a habit of killing passengers is unlikely to be affected by COVID19 in a meaningful way.

Vietjet Air
Affected by flight cancellations/restrictions to certain countries. However expect government assistance. Expecting positive pax growth this year (yeah, right...)

Virgin Australia
Airline expects to 'lean on' domestic operations (ATR's) however rest of airline is struggling and collapse is being mentioned but cash pile and credit ratings are used as a rebuttle. Australian bush fires affected the airline before COVID 19 Net Debt/EBITDA 6x

Risk of airline collapse: (my view)
High Philippine Airlines
Moderate Virgin Australia, EVA Air, Mandarin, Fiji
Low All others

Chinese operators have re-introduced all but 6% of flights back into operation already. History suggests lowest number of PAX's occurs 3-4 months after the crises starts. If that occurs with COVID 19 then likely Avation's lessees will get through this patch.

It's unfortunate that I see Avation's B777 and A330 operators as being most at risk. Those aircraft provide a meaningful income stream.

Avation has a large and increasing cash pile and can easily absorb loan payments on customer defaults. Whats more, the value of the aircraft remains as is no matter what (save normal market fluctuations) so will have limited impact on NAV.

Personally I am playing a game of 'chicken' between wanting to buy more Avation shares but timing it until just before the Strategic review is announced. When will that be? No idea but am guessing around June/July? If I can acquire Avation shares at a much lower price (which with certain negative industry news yet to come is practically certain) then the dividend yield will be nice to have even if the strategic outcome is to put things on ice until next year. However, given ever lower interest rates (and the swap rate is near zero!!), surely the case for an acquirer of Avation is more compelling than earlier this year??

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Re: Avation (AVAP)

#289012

Postby dspp » March 7th, 2020, 10:31 am

Carcosa wrote:The following is my personal view as to the risk of airline collapse within Avation's customer base over the next 6 months.


Loganair
Beneficiary of competitors failing (Flybe & Flybmi).
=

Chinese operators have re-introduced all but 6% of flights back into operation already. History suggests lowest number of PAX's occurs 3-4 months after the crises starts. If that occurs with COVID 19 then likely Avation's lessees will get through this patch.
=


Personally I am playing a game of 'chicken' between wanting to buy more Avation shares but timing it until just before the Strategic review is announced. When will that be? No idea but am guessing around June/July? If I can acquire Avation shares at a much lower price (which with certain negative industry news yet to come is practically certain) then the dividend yield will be nice to have even if the strategic outcome is to put things on ice until next year. However, given ever lower interest rates (and the swap rate is near zero!!), surely the case for an acquirer of Avation is more compelling than earlier this year??


1. Can you explain what the relationship between Loganair and Flybe was, as I've never really understood it. They seemed to simultaneously codeshare on a number of routes, yet compete for the public regulated contracts. When getting one of the relevant routes I've never been sure whose plane I was actually going to get on until it taxied into the gate (or windswept airstrip).

2. I do a lot of business in China. My colleagues are still not supposed to travel between cities, due to gov rules rather than company rules. Intercity truck transport is extremely difficult as well. Both directly affect the UK business I run. I'm not quite as sanguine as you are.

3. Can you tell me/us all clearly when the sweet spot moment arrives. I might be tempted to join you.

regards, dspp

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Re: Avation (AVAP)

#289021

Postby Carcosa » March 7th, 2020, 11:18 am

Loganair has a long and colorful history. See https://en.wikipedia.org/wiki/Loganair for a full explanation relating to your query

China. I lived there for a few years (Xiaman and Changdu) supporting several airlines. The aircraft leasing market in China is like no other. In the last ten years or new local leasing companies have moved in and non-Chinese lessors are essentially absent. The PRC government will not allow airlines to fail but may well encourage some consolidation. It's probably the safest aircraft leasing territory there is; except foreigners have no practical access to it. Am not in the least worried (or bothered) about that market. Am not sure how many private airlines there are anymore, maybe one or two?

The sweet spot? You mind timing the market? As I mentioned earlier, June/July time is my gut feel; based on wild assumptions that strategic review will take that long (partially based on the length of time it took for Chorus approach to be dealt with in 2017), the airline industry hurting for real and a handle on the COVID 19 situation and the markets getting a grip on valuations. All guesswork.

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Re: Avation (AVAP)

#296866

Postby Carcosa » April 2nd, 2020, 9:49 am

Well, in some ways not a lot has changed since my March 7th post. Mostly because Avation have been silent on all issues, lessors, finance and corporate action. Whilst I appreciate the situation with lessors is changing by the day it seems that having no RNS addressing the business environment has been a failure on the part of management.

The share price decline has mirrored other lessors, declining 50-70% since the outbreak of COVID-19.

In terms of NAV, aircraft valuations have, I suspect, broadly declined some 20-40%. Widebodied aircraft at the upper end of that range and narrowbodied/turbo-props at the lower range. However if you take the long term view i.e. the economic life of the aircraft then those valuations are lower but not too different to pre-COVID times, making long term investors the likely winners; as hard as it is to imagine. As such I have been making new investments in the sector of which I discuss later.

In almost unprecedented action the larger leasing companies are negotiating with their customers over revised lease payments. They are forced down this path not only because of the industry downturn but also they are on the hook, to a large extent, with a backlog of new aircraft to be delivered over the coming 2-3 years. In Avation's case I can only imagine that some lessors are getting payment holidays, reduced payments whilst others remain at full payment. Again, one advantage for the long term is that Airlines tend to favour those who have helped them in the past when seeking new business.

One of the major drivers for airlines renewing their fleet is lower costs. Operationally, flight crew and fuel are major drivers. Should lower fuel prices persist over the next 2-3 years and the almost certain lower employee costs the demand for new aircraft will be muted. Pre-COVID there was something of a glut of mid-life narrow-bodied aircraft being replaced with more fuel efficient models; those aircraft are more likely to remain in service for longer than originally planned and lease rates should hold up relatively well albeit soften for new leases.

With respect to Avation, as with many leasing companies, the short term surrounds whether or not the lessors/airlines will remain in business. To a large extent that in turn depends on what national governments can do to support the airlines, and how quickly airlines can get flying with useful load factors again.

It seems logical to me that countries will see domestic operations re-commence first (good for most ATR operators) and then followed by International operations which I think in many circumstances could be many months after domestic operations recommence

In summary, Avation's ATR aircraft are likely to be the first aircraft type to see a pick-up in operations... 3 months away???

Avation have more than enough un-restricted cash to continue paying interest on their loans for perhaps 2 or more years should all lessors stop payments today. However their will also be security deposits, maintenance reserves that Avation can draw upon after a default

I do however harp on about what that means in terms of potential costs to Avation on their swap contract breaks. As I have said in the past, this is a subject I do not understand. Could it be enough to sink the company??

Although I have previously mentioned significant reductions in aircraft valuations there is also a more problematical short term issue. Should a lessor default then, with current restrictions, it will be practically impossible for Avation to recover the aircraft records, obtain permits, perhaps file legal papers and physically recover the aircraft. Even if they did do then it's going to be very difficult to place the aircraft with another customer. For the smaller lessors they may just 'walk away' and without documentation, storage procedures etc the aircraft may be worth little more than scrap value. Often if prolonged inadequate preservation is done then the airframe has to go for majr checks and the engine returned to shop for strip down inspection at a time when all overhaul shops will be stuffed full of work. That applies to bascially brand new aircraft as well.

Therefore, as an investor, I can only see 'responsible airlines' taking care of their aircraft properly, of which Avation have many, but not all, such customers. It would behove Avation to 'pay' the most at risk airlines to do aircraft preservation and prepare documentation acccordingly to at least protect their physical interest. (I also note there are reports of a worldwide shortage of inhibiting oil for aircraft engines).

Longer term investors must consider government schemes to protect airlines as a saviour. Avation have a number of such customers whose governments have pledged support.

I would guess. US Bangla, Fiji and Philippine Airlines are currently high risk lessors for Avation at the moment.

On the Corporate front, Long time founding investor Oceanwood Capital Management have been drip feed buying most days since March 9th. Nothing in any size though but they have incrementally increased their holding to 25.6% of the issued shares.

Similarly Avation have not said anything about the ongoing(?) Merger talks; which is highly disappointing. I am wondering if management are going to make a land grab for the entire company though... If it was possible to refinance all the loans (given current interest rates) then that would be a huge potential boost to the income stream. However not sure at what cost (Penalties?) that would be at.

Taking a longer (2 year plus) view, current share price seems to be a screaming buy but until Avation updates the market and states potential 'unexpected' finance/penalty costs it's hard to 'pull the trigger'. I have maintained a view that I would wait until mid April before reconsidering buying Avation shares but the RNS silence from the company has me concerned.

Am not too fussed about a temporary (2 years) reduction in lease income. A number of Avation's aircraft are unencumbered anyway and as I mentioned earlier they have more than enough cash to cover interest payments. What I don't want to see is news about abandoned aircraft. I am unaware of any financial protection in that scenario.


DORIC
I did mention another industry related share purchase I have made recently. Actually it was brought to my attention by a reader when the share price was double the current Ask but it was not until last week I invested. This is in Doric Nimrod 3 (DNA3), something I would never have contemplated until recently. Doric is a Trust

The asset is one A380 airliner leased to Emirates until 2025. The trust can expect a simple stream of leasel payments to fund its dividend, guaranteed to be paid provided the airline remains solvent. What put me off investing in the past was that the returns also relied upon a scrap value, or lease extention after 2025. Not anymore.

The A380 is perhaps the most unwanted aircraft in the world. It only makes sense if you have a large fleet of them and fuel prices are low and you have major passenger traffic. It's hard to make money with these aircraft at the best of times.

In fact the lease arrangement is to 2023 with a two year option, which if Emirates do not want they have to pay Doric anyway. Thus it can make sense to not take the option and pay-off Doric if the aircraft continue to lose money.

But the key is.. Will Emirates remain in business? Well, it is Government owned and this week the Government said they would bail Emirates out.

There are 24 quarterly payments of 2.0625p until end of lease. That's 50p/share income. Currently shares can be bought for 36p (Note there is a 20-25% spread recently!). On top of that I have seen a scrap value valuation of around 178p per share! However I think this is wildly wildly wildly optimstic and I have used a value of just $14m (for various reasons; although I can also see a reasonable case for $24) equivalent to 6p/share. Have also netted off $12m for Doric admin etc. This leaves a potential profit of ~50% over 5 years. Not stunning but returns do come in as an income stream every quarter.

Further potential upsides are; Emirates not renew in 2023, they extend after 2025 (yielding 23%/annum), or scrap value is much higher than I think it will be. Also, as with all leases for 'young' aircraft, Emirates is under contract to return the aircraft in “re-leasable” condition and as there is unlikely to be a secondary market then Emirates could pay a cash sum of $15-$30m (5-10p/share) at lease expiry.

It all boils down to a belief that the Airline will remain solvent and honour its contracts. Given that it is Emirates/Government owned then I cannot see that being an oversize risk.

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Re: Avation (AVAP)

#299000

Postby raggedtp » April 8th, 2020, 2:22 pm

Hello Carcosa. I normally see your posts on the Stockopedia board, but I've followed you here now, as I do appreciate your postings on £AVAP. I too am a prett long term holder, have been very happy with their strategy, but and worried by the global swoon and its impact on Avation. What do you think of yesterday's update? I think they are managing as best they can, but the days of 300p+ seem far away. Trouble is, who is going to buy in now except someone ready to do a cheap takeover, which would be resisted by the Board.

By the way, I still have some DNA shares. I was foolish enough to think the A380 a place with a future, and the DNA lease doesn't have quite as long to run as DNA3. My aircraft engineer friend was never convinced. I should have listened, but I guess buying in at this price has less risk to it. Trouble, I did at about 100p five years ago. OK, divs nice so far, but not far enough!


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