Avation (AVAP)

[Carcosa]

Annual Report
Avation issued their Annual Report last week. Always worth a look as it contains considerably more info than the RNS release.


ATR Fleet Impairments:
After I updated my own ATR fleet book value model to remove my perceived level of impairments and compared it against what Avation said the aircraft market value was I was some ~$40m over. Prior to COVID I was usually +/- 3% but to be ~15% off was a surprise.

The difference is that I had not really taken into account the current level of accrued impairment charges Avation have racked up over recent years.
Impairments for the ATR fleet commenced as a result of Covid and have been given as follows. The numbers given in parenthesis are the total number of ATR aircraft in the fleet at the time:

Nil in 2019 (25)
$19,735m in 2020 (28)
$41,582m in 2021 (28)
$2,394m in 2022 (26)
Reversal of $4,3m in 2023 (21)

Using the data I can create the following graph



Now, this is really crude because fleet composition changed over time and impairment is affected by whether or not an aircraft is held for sale and am not sure I am capable of going into that detail. However, I do believe that the given normal market conditions we can still expect notable reversal of impairments to continue. The only question I have is that given valuations are largely third party driven (Aircraft Appraisers plus Auditors) how have Avation management kept the reversals so low and if that is true, why have they done so? Is the fleet potentially worth ~30p/Share more than stated?

There is a $50,764m revaluation reserve on the books which I believe is Market value of the asset – book value of the asset (must also include the widebodies) but considering there is $34,392m in the 2019 accounts suggests I don't understand it Maybe because they are leased? Definitely need an accountant here!

If anyone would like to delve into this further then please share you findings/comments here but pending that I forsee reversal of ATR impairment charges continuing and potentially substantial.


FlyBig airline Termination.
On 5 October 2023 the Company terminated a lease agreement for the 12-year old ATR 72-500 aircraft VT-FBA (MSN 955) on lease with India's FlyBig airline. Then on 9 October 2023 the Company entered into an agreement to sell the aircraft aircraft to Buddha Air in Kathmandu, Nepal, which was completed by 27 October 2023. Aircraft value is probably around $8m with, I would imagine, most of the associated debt paid off and with a bit of luck a small amount of maintenance reserves might be released too.

Although Avation indicated this was the oldest aircraft in Avation's fleet, whilst technically true based on initial lease date it is incorrect based on first flight date. That belongs to VH-FVH (MSN 954) on lease with Hevilift which is 2.5 weeks older than the aircraft they just sold. Pedant.


ATR Re-lease
The Company entered into a lease agreement for a second eleven-year-old off-lease ATR 72-600 which is expected to commence this month. It may be the old Virgin Australia VH-FVN (MSN 1039) aircraft.


Major Shareholders
I have never been able to square off the AR principle shareholders listed in the AR against RNS declarations. According to the AR (Year ending 30 June 2023) Vidacos Nominees Limited is largest shareholder with 22.66%. According to Companies House the only 'Persons with Significant Holdings' is Citigroup Inc registered in Delaware USA but with a London registered office. So (and I am guessing here) Oakwood shifted its holdings through Vidacos Nominees?

Vidacos is listed twice in the AR showing Vidacos Nominees Limited holding 4.95% which is pretty much the level they had back in 2015.


Failed Finance Leases Are Good for Shareholders
A gain of US$2.8 million was recognised on derecognition of the finance lease for Golden Myanmar Airlines ATR72-600. The gain represents the positive difference between the outstanding value of the finance lease receivable and the broker valuation of the aircraft’s market value at the date of termination of the lease. That aircraft was initially procured for $19,815,500 (2019 AR) in June 2019.

The other two Finance Lease aircraft I am aware of are the two ATR's operated by Braathens Regional Airlines in Sweden that are on ten year finance leases. Whilst Braathens are undergoing are financial reorganisation, as I mentioned in an earlier post, I would be surprised if they divest themselves of these ATR's nor want to convert them into operating leases.


Philippine Airlines Holding Company
Following the re-organisation of Philippine Airlines we know have the accurate share holding Avation will have in the Holding company, which is 124,787,353 shares valued at $11,235,000 at FY end. Given changes in exchange rates and share price that's currently worth around $0.5m less. I would like to see Avation sell these shares asap which I believe can be done mid 2024.

Avation has $62.3m cash in Fixed term deposits. Typically they previously ran around $5-10m for the last few years.


Interest Rate Risk
As at 30 June 2023, 95.8% (2022: 90.0%) of the Group’s loans and borrowings are at fixed or hedged interest rates. Interest rate risk is not material and therefore no sensitivity analysis presented. Makes me wonder what the implications are when the interest rates decline.


Companies House Submission
During the previous year, the Company transferred Capital MSN 4033 II Limited from its subsidiary,
Capital Lease Aviation Limited to the Company. Last week Avation published a 37 page Registration of Charge (not for the first time) with Investec for OE-IZC (MSN 4033), the easyJet 14 year old A320-200. Am willing to be corrected but I think all this means is that Avation have taken a mortgage against the aircraft. Often it seems to be accountancy related. Other views welcome.

[Carcosa]

Major Shareholder

Oceanwood are winding down there business which lead to the initial RNS holding announcements at the end of September. Other than the continuing holding of Jeremy Raper since the initial announcement, it would seem that Christopher C. DeMuth Jr. has been continuing to add to his holding. Some of those shares are seemingly coming from a source other than Oceanwood.


Dates are when 'Threshold Reached'



Continuing to add at a much higher share price and some increased frequency too.

At a current 25.78% holding the hedge fund has more shares than the original Oceanwood holdings. Presumably they believe there is a lot further to go but to unwind that position at a later date could potentially be a difficult task (as Oceanwood found out to their cost). So is there something more on the horizon?

A hedge fund has, I imagine, no skills in running Avation so is it possible they are aligning themselves to another potential investor to takeover the company?

News Related to Avation
Not much to report that I can find associated with Avation although there is a notable increase in the industry with respect to narrowbody jets with multiple business transactions being announced per day. Not anything like the current level of news since the pandemic.

Conference
The Airline Economics conference is being held in Singapore this week with close to 2000 aviation attendees. Avation have been in attendance. I understand the social side has been very active.

[jwk88]

At a current 25.78% holding the hedge fund has more shares than the original Oceanwood holdings. Presumably they believe there is a lot further to go but to unwind that position at a later date could potentially be a difficult task (as Oceanwood found out to their cost). So is there something more on the horizon?

A hedge fund has, I imagine, no skills in running Avation so is it possible they are aligning themselves to another potential investor to takeover the company?

You may be interested in Jeremy's social media.

1. His tweets from 15th May 2023:

"Stonk too illiquid for me to get involved meaningfully but certainly a lot of value there if you think it gets broken up......and or Oceanwood pushes for a sale. That's how all these small lessors tend to end and indeed what $AVAP was going to do before COVID, after all."

https://twitter.com/puppyeh1/status/1658093603993055233?t=0Elgl-VhUpBXIU9v77pH1A&s=19 and https://twitter.com/puppyeh1/status/1658093605452656641?=AONvmMW2bmbvESUtyQ7OEg&s=19

2. Jeremy spoke for two hours on a podcast. He says that he is pursuing more active (rather than passive) investments and references his investment in Avation. https://youtu.be/tojyU3nyhTU?feature=shared

[Carcosa]

Thanks jwk88. I also picked up those items up earlier in the week after a twitter user @peedjster alerting me to this podcast. Good to know someone else is actively looking for these types of snippets!

Summary
- Largest Shareholder discusses Avation in a podcast
- Current ATR Valuations and Lease Rates
- Boom Times in the Industry

Major Shareholders (Again)
Lets kick off with this recent podcast/YouTube video with Jeremy Raper in relation to Avation (that jwk88 picked up on):

"So I raised an SPV recently and this is live, this is public disclosed. I've made the filing. So I'm, I'm not going to talk about the strategy or specifically the company. But you know, yeah I've raised, I've raised money and taken entities I manage have taken a 20 something percent stake in a listed aircraft leasing company in the UK called Avation, AVAP, this is, this is all public filings and you know my goal is to maximize value for all shareholders.

It's a very, it's a very, it's ostensibly a very cheap equity and I have a number of ideas to to kind of create value for all shareholders. And I think, I think having more bullets in the gun so to speak will be beneficial to to all shareholders of the company."

There is some indication that Jeremy held undisclosed shares in Avation in May 2023, so presumably it was not until he could get Christopher C. DeMuth Jr on board that he got the leverage necessary to move forward with Avation. It appears that Jeremy is managing the interests of Christopher C. DeMuth Jr/Rangeley Capital and he has a history of being somewhat of an activist; hence I doubt he will remain a silent shareholder.

Jeremy has shown interest in aircraft Lessors in the past. Indeed has had some association with AirCap. In an October tweet he noted the disparity between private and public market bidders for aircraft...even in the current interest rate environment selling assets at 1.25x gross asset value, 2x book equity value.

This probably stemmed from AerCaps Q3 earnings call

"For similar reasons, we also continue to see strong demand for our assets in the sales channel, with many bidders competing for our portfolios. This was reflected in both healthy quarterly sales volumes of $682 million, as well as gains on sales, with unlevered margins of 24%. As I’ve referenced in prior quarters this is equivalent to the near doubling of the equity held against those assets on a levered basis, compared to where our equity is trading in the public market at just over 80% of book.

So, in essence during the last quarter we sold aircraft at almost 200% of their book equity value to expert aircraft buyers and repurchased our book equity at 80% of book value in the public equity market. These gains speak to the deep embedded value in our portfolio, and the strength of our book values".

So if Jeremy is aiming to sell Avation's assets for twice book value then I would certainly take it! In reality I do not think it will be anything like that, as that is simply cloud cuckoo land. But given Avation's major shareholder may acquire some or all of the assets or indeed the company, or AerCap now they have the cash flow to buyback shares after integrating GECAS they could also acquire Avation as it would be a strategic stake.

Prior to COVID I believe, based on an earlier tweet from Jeremy, it was Oceanwood that was pressuring the Board to seek a sale of the company; now having a potentially more activist shareholder it must surely push the board to make another strategic review.

As I mentioned on my Oct 6/23 post I do not see Jeremy/Rangeley being long term holders forming a SPV tends to suggest interest is going to last months and not years, so hopefully this will get resolved one way or another over the next few months. If they have to walk away then its not going to do any favours for the share price.

Please bear in mind the above is largely speculative, gleaned from unconfirmed sources and I remain skeptical as to to the credibility of Jeremy being able to do this alone.


Aircraft Pricing Data
The following chart (supplied to be by Avation) shows new build aircraft and confirms a strong recovery in CMV's of late which 'should' pass down the line to further impairment reversals for the current Avation ATR fleet.



Furthermore the lease rates being quoted for the ATR's are less than that currently achieved by Avation (typically in the $2m range).


News Related to Avation

10+10 ATR72-600 Agreement
At the Dubai Airshow, Abelo, a 60+ aircraft turboprop Irish based lessor, and ATR, signed a Heads of Agreement for 10 ATR 72-600 aircraft and 10 options. Abelo's had previously announced in July 2022 an order for 10 ATR 72-600 and 10 ATR 42-600S aircraft. Delivery of the first new ATR aircraft from the 2022 order is expected before the end of the year, with additional deliveries scheduled from 2026 to 2028.

will this lead to the utilisation of some of Aviation's Purchase Rights? Or how about an acquisition by Abelo?

NB: Abelo was formed by the merger of Elix Aviation and ADARE Aviation Capital in 2021. Elix was owned by funds managed by Oaktree Capital Management, L.P. (“Oaktree”), which initiated the merger to enable further investment in the regional Turbo-prop sector.


Korea
This Korea Times article (also published in numerous other outlets) details ATR preparing for new orders from Korea, in anticipation of the country's plans to construct three new airports on islands. ATR's focus on the Asia-Pacific market is underlined by existing and projected growth in Japan, Taiwan, and China. Additionally, ATR anticipates the expansion of regional aviation in Korea, driven by the development of island airports and potential for new international and domestic routes.



There continues to be so much news relating to the aircraft leasing sector that it's clearly a boom time. For sure, the Dubai Airshow helped but there is so much more news from around the world with respect to Wide and Narrow bodied jet aircraft over the last month compared to the start of the year. The turbo-prop market is very small in comparison; after all there ATR is the only game in town for new aircraft production.

As an example, these are the headlines covering one day, 15 November 2023.
Asset manager comes to market with portfolio
Investec closes $104m financing
American Airlines to issue new debt
Vistara closes new financings
Macau SAR seeks to become aircraft leasing hub
Moody’s upgrades TAP by one notch
777-9 concedes more ground to A350-1000
Madagascar Airlines eyes E-Jet fleet
Lessors reclaim more aircraft from Vietnam
NordLB insists Voyager pays interest
SMBC AC finalises 10-aircraft deal
Gol extends leases “lessor by lessor”
Thai Airways details incoming leased aircraft through 2025
Brunei's Gallop Air talks down chances of a 2H24 launch
Sichuan Airlines to operate China's first A321 PCF freighter
Local campaign for control of Korea's Air Busan gains steam
United Airlines-backed expansion of Houston Inc’l stalls
Cubana resumes Tu-204-100 operations
US's iAero Airways pulls DOT application for extra aircraft
Ethiopian inks MOU for eleven A350s
Cargolux eyes firefighting aircraft - report
Spain's Binter Canarias opens Madrid base as E2 fleet grows
Italian CAA warns AeroItalia to respect PSO contracts
Air Serbia wet-leases two more A320s, four in summer 2024
Italy’s ITA Airways in talks for €300mn loan - report
Libya's Ghadames Air adds first B777
Armenia's Hayways takes first B737-400(F)
Greece’s Hellenic Seaplanes delays flight ops launch to 2Q24
Colombo to help pay down debt ahead of SriLankan sale
Fiji Airways capitalises on 6th freedom traffic through Nadi

[jwk88]

The AGM RNS suggests that Avation received a takeover bid in the summer but the suitor's financing package could not be satisfactorily verified. @Carcosa Any speculation as to the suitor?

[abtan]

...or the price offered?

I didn't get a chance to dial into the AGM this morning and am wondering whether they provided more details on the offer received.

[jwk88]

I listened to the AGM and I do not recall any further details regarding the potential takeover offer. There was a question about engagement with the new large shareholder and Jeff said that they have had minimal interaction as that shareholder is building its position.

Since the AGM was on Zoom, perhaps Investor Relations will send you a link to a recording of the meeting.

[jwk88]

The AGM RNS suggests that Avation received a takeover bid in the summer but the suitor's financing package could not be satisfactorily verified. @Carcosa Any speculation as to the suitor?

So as not to mislead anybody by mistake, the RNS stated "approached over the summer in relation to a potential takeover offer", not "received a takeover bid".

[Carcosa]

AGM Notice
The AGM Notice included the following:

"The Company is continuing to see strong levels of interest from airlines to buy or lease aircraft at sustainable lease rates, senior lenders willing to lend against aircraft assets and improved utilisation of aircraft".

And with reference to the two ATR's next year they "believe that the balance due on delivery can be funded with senior secured debt". No surprise there.

AGM Statement/Zoom Call
The AGM statement - which as usual contains an Interim Management/Trading update - included the following: "The Company's broker was approached over the summer in relation to a potential takeover offer, however, while the board diligently contemplated the proposal, the broker was ultimately unable to verify the funding package of the potential bidder and discussions were therefore brought to a close".

Technically 'Summer' ceased prior to the major shareholder change. Also, I do not beleive there are any LSE rules as to why Avation should even make this announcement. Plenty for conspiracy thoerists to get on with...

(Also, whoever is that "Analyst' asking dumb questions about the Airbus aircraft should be sacked).

I was somewhat disappointed that out of all the AGM attendees, of which there were many, no one, except me, asked a question via Zoom.

The question I asked was for comments regarding the new large shareholder(s) and the response was "..not particularly because they have been buying shares and they're following the rules and want limited interaction with the company until that program is completed. So, we're not really in a position to comment at the moment."

Again, more food for speculation. Personally I find it odd that little or no engagement have taken place between the new shareholders and the company. Am left disappointed and a little concerned although bolstered by the phrase "...until that program is complete" which may either be a throwaway remark or Jeff perhaps believes a move to the 30% threshold/takeover will be breached eventually...or maybe I am just beimg unreasonably enthusiastic.


Mark Shelton
Mark Shelton, Avation's Executive Director, the ex CEO of Skywest Airlines (plus CFO roles in a variety of industries) purchased £24,320 worth of shares in Avation. His previous holding was negligible although acquiring share warrants along the way. His last reported salary from Avation was $58,000/annum.

Avation only has two Exec Directors, the other being Jeff Chatfield. Is he being lined up for the CEO position in a couple of years?


Cash
Positive to see $6.3m arrears have been collected from Philippine Airlines(?) since 30 June 2023 and the company is expecting to receive a final distribution from the administrator of $0.6m from Virgin Australia in December.

Also worth noting that Philippine Airline's holding company share price has increased offering a gain of $0.15m since the Results. (Now totalling $12.1m)


Industry News Relating to Avation

Air Baltic
The airline converted thirty A220-300 options on its A220-300 programme and placed an option for an additional 20 aircraft. https://www.airbus.com/en/newsroom/pres ... -in-europe (Am only referencing Air Baltic A220's because they are an existing customer of Avation and earlier this year Avation bid for for further business from Avation).

[abtan]

Thank you Carcosa, your insights are much appreciated as always.
x

[Carcosa]

ESG
Within the aerospace industry there has been a marked increase over ESG issues these last 12 months or so. Indeed, as an example, last week the The Rocky Mountain Institute (RMI), in collaboration with six banks, BNP Paribas, Bank of America, Citi, Crédit Agricole CIB, Societe Generale and Standard Chartered, have been making progress on a measurement and disclosure framework over the last 18 months that defines a way to measure climate alignment for the aviation sector.

The parties have been developing a methodology to assess the emissions related to their aviation lending, with banks working with clients and third-party data providers to report emissions.

So that brings me to the AGM resolution which set an ESG budget of $100k. Customers report hours/cycles data on a monthly basis to Avation and the company issues fleet emissions data largely based on that. Whilst there are other factors at play I believe the driving force is to obtain cheaper green financing, which nowadays has a sliding interest rate scale depending on fleet changes across the term of the loan. Worth noting the company received an award for the first ever green loan for aircraft finance a few years ago.

Cash/Revenue
Since the results, total cash and bank balances increased by $23.8 million to $140.7 million. About $105m is restricted leaving around $35.7m unrestricted (my estimate).

Avation are collecting more cash from lease and maintenance arrears, plus the $0.6m Virgin Airways payment, cash from forthcoming ATR sales (~$5m) and the PAL equity value shareholding ($12m). So unrestricted cash of around $57m. That represents practically the highest unrestricted cash pile since 2016. We probably will not see that in the accounts as they intend to re-financef existing older aircraft and buy back outstanding unsecured notes in the coming months.

Outlook
The following is the first outright positive statement regarding the future of Avation that I have seen since the pandemic:

Listed lessors, like Avation, and some sovereign-backed lessors are expected to benefit in this environment. Conversely, lessors backed mainly by private equity or debt may face difficulties, as their investor return requirements could exceed what airlines can afford in lease rents. Public equity-backed operating lessors, such as Avation and its peers, are well-positioned to thrive in this environment.

This was not my understanding at all, because my belief was that without scale and investment grade credit plus lease unencumbered aircraft to sell, Avation would be on the backfoot.

Fleet NBV
I had a closer look at the impairments across the fleet which are summarised below. Should by magic the entire amount of impairments are reversed then looking at a Fleet NBV of $3.87 versus current $3.64. To maintain current NBV then somewhere in the order of $36m reversal would have to done. Not entirely impossible but unlikely IMO.

Note that this is fleet value and not the company's NAV which would also include cash etc.,



NBV's/Impairments can also change considerably depending upon the applied risk profiles/discount rates applied for each customer and whether an aircraft is transferred to/from an asset held for sale. So there is a lot of room for management to play tunes with the NBV's. So I think impairments can be considered a finance tool, within the constraints of accountancy rules, that are available to management going forward to protect the fleet NBV.

There are too many uncertainties in the above but what it does try to illustrate is that there are a lot of impairment reversals that can be applied. It should be noted that given the airlines that are Avation's customers there will usually be some level of impairment applied no matter what.


Industry News Relating to Avation.

Guernseys' Aurigny AirServices
Following a post of mine on 20 October it seems that UK regional carrier Aurigny AirServices is in the market for two additional lease ATR72-600's as it looks to simplify and standardise to an ATR only fleet. Not sure if they are looking for new or used ATR's but prior ATR72-600's were new. Transactions expected to complete mid 2024. Thereafter their two Do228-212(NG)s will be disposed of for another ATR72-600.

If they are new aircraft it will be interesting to see how they acquire them from a fully allocated production line.


Airswift
Philippines-based regional carrier Airswift took delivery of a new ATR72-600 for its fleet. It already operates two ATR72-600's and ATR42-600s.
Seeing an operator with 'vintage' ATR's acquiring new aircraft is a positive sign.

[conan1122]

Thank you for your insight and excellent update, Carcosa.

I think you are 100% correct that without scale and investment grade credit, and with the current high interest rate, it's not so bullish position as the management stated.

It seems the investment thesis of the company depends on the stance of the Rangeley/Raper..and so far, it seems they have limited communication with the management, as the management had mentioned in the AGM.

[Carcosa]

Thanks conan1122,

Do bare in mind that I am biased wrt Avation. Well thought out negatives (of which there are a few!) regarding AVAP are welcomed.

Speaking of which, I recently met Bruce Packard recently as he passed through Malaysia. Bruce is a regular writer for Sharescope and other publications. He agreed to look at Avation again over the holiday season. I know he is not a great enthusiast regarding Avation so it will be interesting to see his take on the company. Having an experienced analyst look over the company with fresh eyes will potentially reveal hidden risks.

Incidentally, Avation's H1/2024 draws to a close on 31 December 2023


News Relating to Avation

Other than the typical multitude of industry news regarding deals, deliveries and financing, there is not a lot that I see specifically regarding the sub-sector that Avation works in

NAC/ATR SAF's
Lessor Nordic Aviation Capital (Worlds largest Regional Lessor & owning 120+ ATR's) and ATR have launched a newsustainability initiative to provide a blend of 30% SAF to be used for one out of five deliveries of new ATR aircraft to NAC.

Being the eternal cynic on these matters I suppose it may assist with there own ESG reporting and access to lower finance charges...


Cebu Pacific
This ever popular and growing airline continues to make weekly news. Before the end of this year, the airline expects to receive responses to its request for proposals for 100 to 150 narrowbody jets, which would represent the largest ever commitment of any airline into the Philippine aviation industry. The airline is a current customer of Avation.


As an Aside...
I recall visiting Cebu Pacific as a courtesy visit when they were a start-up airline back in the 1990's. A few dozen people operating out of a large house, other than a couple of people they had no real industry experience but the staff were full of enthusiasm albeit chaotic. The almost exact same experience occurred with Indonesia's Lion Air - also operating out of a large house - where the CEO got me to join their frequent flyer programme ...with that sort of leadership I was confident they had a future! I even managed to unexpectedly lease them two MD-90's within a couple of months; an aircraft type they did not know existed!

[conan1122]

Thanks Carcosa,

The industry sees a shortage of aircraft, SMBC CEO expects the shortage will continue till 2026

However, Avation is not small player with limited resources. I know the data may be outdated, but the portfolio of the 30th largest leasing company, CCB Financial Leasing, had 132 aircrafts plus 110 in order.

And the Rangeley Capital LLC seems no further action, after the 10 November RNS.

So I guess we have to wait if any engagement between the activists and the management.

[Carcosa]

Hi Conan,

You may find ATR's aircraft forecast of interest which can be downloaded here from the ATR website

Do note that Avation is not able to compete in the US or Chinese markets. I would also suspect they would not bid for business in some other markets such as Russia, most parts of Africa and parts of the middle east. Japan would also be a tough sell as leasing is largely financed via JOLCO's.

With respect to Avation's size I would class them as small (but not tiny) here are some figures showing the top 50 lessors which Avation do not appear on. I think some years ago they were ranked around #57.

Top 50 by aircraft market value (Click on image to enlarge)


Top 50 by number of aircraft (Click on image to enlarge)



Impairment Recovery



Readers will be aware that I believe there remains a lot of impairments to be reversed by Avation. According to an ISHKA report presented at the recent Dubai Air Show it can be seen 5 year old ATR's have increased by 19% in Current Market Value terms between 2022 and 2023. The Avation ATR72-600 fleet has an average age of 6 years.

Unfortunately, the Philippine Airlines 6 year old B777-300ER remains considerably below pre Covid valuations and there is a similar story with the Mandarin Airlines A300-300 albeit Avation's aircraft is 8 years old. If Avation's accounts are in line with this data table then I can't justify in my own mind the higher value that Avation ascribe to the Jets (including the A220's). If on the other hand the impairments Avation have booked to date are a reflection of this data table then the assets are worth quite a lot more.

A320 Transition to Cebu Pacific
The long awaited transition of Avation's A320-200 to Cebu Pacific was delivered from Subang Airport (Malaysia) of 6 Dec 2023 and Entered into service 9 Dec 2023. Originally this 12 year old aircraft flew with Air France on a lease with Avolon but Avation quickly acquired the lease. The aircraft then went to Avion Express Malta, sub-leased to Eurowings (Genmany) before returning to Avion Express and then got stored by Avation before this latest delivery to the Philippines. Probably worth around $14m and generating around $1.2m in lease income; quite a substantial increase in the LRF historically. The aircraft is/was being held for sale by Avation.



News Related to Avation.

There is quite a lot of ATR related news and lease discussion the latest magazine issue from LARA (Search for 'ATR' withing the document)


Air Corsica
Air Corsica will take two new ATR72-600s from ATR in March and June 2024. The aircraft will complement Air Corsica’s fleet of five ATR72-600s that were delivered in the past year. Some, if not all, of their ATR fleet are leased from a range of lessors so maybe Avation are in with a shout.

COVID
Governments across Southeast Asia, especially Malaysia, Singapore and Indonesia are bringing back measures to limit the resurgence of respiratory infections, including installing temperature scanners at airports and encouraging people to wear masks again.

[Carcosa]

As is often the case with Avation, the company issues an RNS without much in the details.

"Avation PLC (LSE: AVAP), the commercial passenger aircraft leasing company, has successfully refinanced four leased aircraft. The four aircraft, a mixture of Airbus A320 and ATR turboprop aircraft, have been refinanced under a loan facility for a portfolio of aircraft provided by Investec Bank Plc. The interest rate on the loans has been fixed at drawdown and the loans mature between May 2026 and November 2027. "

Well,I think I can fill in some of the details.

Each of the leased aircraft are with different lessees; Fiji Airways (ATR), Yeti Airlines(ATR), Cebu Pacific (A320) and EasyJet (A320).

[Carcosa]

Fifth Aircraft Refinancing
After initiating an inquiry with Avation regarding a fifth aircraft reportedly undergoing refinancing, the company has officially confirmed the existence of an additional aircraft slated for refinancing with Investec Bank Plc.

Outlook?
Not much else to report, so I thought that as we are approaching year end a summary and my outlook might be worth a line or two.


Share price
Avation's share price managed to appreciate by some 44% in Q1/23 before losing nearly all of those gains by the end of September as major shareholder Oceanwood Capital, who are in the process of winding up their business, offloaded their holding to another entity, Ranger/Raper. That drove the share price up again on the expectation of some activism occuring. The share price finishing off the year some 26% higher then when we started. So overall not too shabby.


Shareholder Register
The new shareholders are supposed activists but to date have not done anything, not even talk to Avation's board. As far as I can see these activists, have no real past record to speak about, are not aligned with the business of aerospace/aviation and do not know the airline business in any great depth. They are a breed of internet personalities. Opportunistic. I don't expect them to hang around for long and likely to bail out at any time. Their average purchase price is somewhere around 80p, or lower. So if they make a block trade sale at a significant discount to the current share price they would have done very well. Can't criticise them for that.

Given Avation is trading at a P/TB similar to other lessors (albeit very few are listed and even fewer are pure leasing plays) and Avation is a small business in comparison to their competitors I do not see anything that these guys can now bring to the party. Avation now has a much larger US centric retail investor holding but such retail investors attracted to Avation through these new shareholders are inherently looking for the get rich schemes quickly and I have no doubt that they have already started to sell out following public inaction by Raper.

If Raper had engaged with Avation's management then their may have been the opportunity for the board and Raper to work together to form a strategy to drive real shareholder value. Raper clearly failed to do that based on the AGM presentation.

Ranger/Raper undoubtedly brought Avation to the attention of US investors and by now I suspect they have already been selling their newly acquired shares having failed to make a quick buck overnight.

Hence I see nothing but negativity for the share price arising from Ranger/Raper but on the other hand should someone want to takeover Avation or buy their assets then they will find a supportive major shareholder.


Deleveraging
To their credit, Avation have shifted the focus away from debt holders to equity holders by continual deleveraging the balance sheet.


2024
Avation cannot exist in a vacuum. The principle differences between aircraft lessors are defined by the quality of their portfolio assets, cost of debt and their credit ratings. Simply put, these criteria are reflected in the P/TB ratios.

There are very few lessors listed on the world's exchanges and even amongst those there are hardly any 'pure' aircraft lessors like Avation; so making comparisons can be difficult, but not unduly so.

To me, the current share price is where is 'should' be and going forward its up to management to start growing the fleet organically again. Only two ATR's in 2024 (originally slated for 2023) will not be enough for me. Management state they are looking at A220's/A320's. I would like to see additional new aircraft entering the fleet by H2 2024.

As an industry, aircraft lessors should perform well in 2024 and that's a positive for Avation.

The future of Avation lies in converting their ATR options into real assets; ideally income producing assets. As a strategy, Avation are in a sweet spot.

With interest/inflation rates expecting to decline then the values of the ATR options may start to reverse during the latter part of 2024 but on the other hand the encumbered assets may increase in value to a certain extent and then of course there is always the question on reversals of the impairments.

I suspect our new major share holders might find its very difficult to do anything notable and will sell out during the year. This will have a considerable negative effect on the shareprice. The only chance of redeeming themselves is if Avation's management decide to sell the company; but I doubt Ranger/Raper have any meaningful influence on that decision. Avation management have considerably more contacts/influence in the corporate marketplace then Ranger/Raper could ever hope to have.

Jeff Chatfield is approaching 63 years old and until comparatively recently he was the only Exec. Now that Mark Shelton, an apparent decades old friend of Jeff's is also an Exec, I postulate Jeff is lining up his successor. Mark was in the role of Senior Project Engineer for Avation when things went pear shaped for Avation in Australia.

So in summary I would not expect the share price to rise much about P/TB of 0.7-0.8 at best.



News Related to Avation

Some extracts from IBA's report 'Key Trends for Global Aviation in 2024 - The IBA Perspective'

Base Values of previous generation narrowbody aircraft will rise and Market Values will outperform them. Demand for leased assets will remain strong and lease rates will exceed their pre-pandemic levels

Lease rates of some mid-life widebodies will double from covid lows and values will continue to surge upwards.

Rising interest rates have devalued encumbered assets, making trading a challenge, and suppressing deal volumes for some lessors. Inflation has peaked and interest rates will begin to decline in 2024 according to IBA’s forecast. Following a recent wave of M&A, lessors will look to rationalise and de-risk their portfolios, creating growth opportunities for other players in the market. The growing lease rate environment matched with the gradual easing of interest rates will unlock the demand for lessor-to-lessor trading that recent market conditions have stifled.

[Carcosa]

I received a twitter message recently helpfully commenting upon Avation's revaluation reserve which made me look into this a little bit more with an eye on impairments.

The central point was that the Revaluation Account largely equates to the impairments.

Would very much appreciate explanations from any readers who understand how impairment and revaluation reserves work. The following is my understanding based on some internet research so I may have this totally wrong and/or it's actual implementation by Avation is less than ideal.

It's easy to understand that when a new asset/aircraft is obtained it is depreciated over 25 years to its residual value (15% of cost) over 25 years. This roughly translate to 'Base Value' (BV)in aircraft leasing terms.

In reality we know that aircraft valuations change month by month depending on market conditions. This is what we call current market value (CMV). Sometimes CMV will exceed BV, equal it, or be below BV.

A revaluation account tracks increases or decreases to the book value (carrying value) of an asset when its value is "revalued" to CMV.

To prevent these fluctuations in CMV from impacting the net income, the difference between CMV and BV is recorded in the Revaluation Reserve. Think of it as a 'buffer' that ebbs and flows to account for the differences between BV and CMV. If the aircraft CMV increases then an increase in the Revaluation Reserve occurs or should the opposite be true the Revaluation Reserve decreases accordingly.

The aircraft continue to be depreciated as normal. Over time, the related depreciation expense decreases the revaluation reserve balance.

The reserve is reduced over time and eventually transferred to retained earnings when the assets change status.

If an impairment charge is recorded on an aircraft asset, the reduction is recognized as an expense directly reducing net profit, but only to the extent it exceeds any previous upward revaluations of that asset that are held in the asset revaluation reserve. That would directly reduce net profit, bypassing the asset revaluation reserve.

A reversal of impairment goes first to profit/loss up to original historical cost, which then allows the revaluation reserve to be "replenished" if asset values increase further. The reserve is meant to hold market fluctuations above an asset's original historical cost only. Impairment charges and reversals bypass that prior assumption.

The Revaluation Reserve forms part of the book value of the aircraft which largely constitutes the NAV of Avation.

(FWIW as I have mentioned in an earlier post, I believe impairment reversals are likely with the ATR fleet but negated by potentially further impairments with the wide-bodied fleet).

So, in summary, I do not think the Revaluation Reserve is a reflection of the impairments but largely the difference between book value and market value.

However, when looking at the Revaluation Reserve it does not look 'right'? Why is the Revaluation Reserve carrying $50.8m? Surely it should be very low if not zero? After all there has been considerable impairments booked against the fleet. Have those impairments been so high that they over did it? Based on market values you could argue that impairments did not go far enough. To me, the Reserve numbers do not make sense.

Would appreciate any informed comments or explanations to this post.

[stray1030]

I'm no accounting expert either, but I think the key point to understand is that the method for recording impairments of assets is different from the method for recording upwards revaluations.

When an asset is impaired it's "recognised through profit or loss" immediately. It shows up on the statement of profit or loss under line item "Impairment loss on aircraft". On the consolidated balance sheet there is no individual line item for these impairments, they just reduce PPE.

When an asset is revalued higher, it isn't recognised through profit or loss. Instead it's recorded through the statement of other comprehensive income under the line item "Revaluation (loss)/gain on property, plant and equipment, net of tax". On the balance sheet it shows up as "Asset revaluation reserve".

The scenarios above apply when an asset has no previous impairments or revaluations. Then there is the further nuance that reversals of a previous adjustment are recorded by the same method as the original entry. So if an asset has previously been impaired, reversals to the impairment flow through profit and loss. And if an asset has previously been revalued higher, reversals flow through other comprehensive income.


The end result is that on the balance sheet impairments to wide bodies are accounted for as a reduction of PPE, while ATRs show up in the PPE line item at cost less depreciation, and surplus value for ATRs that have been revalued higher shows up in asset revaluation reserve. So I think PPE plus asset revaluation reserve should be a decent approximation of the fair value of aircraft.


Worth noting that it's the aircraft's "lease encumbered value", not the fair market value, that is used to determine whether an impairment or revaluation should be recorded. The lease encumbered value incorporates "the income streams associated with the lease and the
expected future market value of the aircraft". I'd imagine LEV is a pretty good proxy for fair market value but not exact.

[Carcosa]

stray1030, Thanks for your post. Helped clarify my thinking.

Sharescope Article
Bruce Packard of Sharescope wrote an article that some may be interested in reading

If I have summarised his article properly then he is saying, (with my comments in italics):

1. AVAP has taken $60m in writedowns on its $300m turboprop aircraft fleet. If these aircraft recover in value, AVAP could potentially see "writebacks" and restore these assets to their previous book value. This could be material given AVAP's small $115m market cap.
- Yes, but the widebodied fleet valuation may wipe out those writebacks.


2. However, there are risks around AVAP's financing and accounting:
- AVAP has a large refinancing due in 2027.
- For an aircraft lessor like Avation, refinancing is not an inherent problem. It's a fact of normal life for any lessor.

- Most of AVAP's assets ($845m out of $1.18bn) are accounted for at historic cost, not fair value. AVAP moved $78m of aircraft assets from fair value accounting to historic cost, suggesting they may have fallen in market value. If all assets were marked-to-market, there could be larger writedowns.
- Broadly agree


3. The situation has parallels with litigation finance firms and banks - anytime there is a mix of fair value and historic cost accounting funded by short-term debt, it introduces complexity and potential risks around asset values and refinancing. As an investor, understanding these nuances is important.
- Totally agree on the risks part but not sure I appreciate the commonality with litigation firms.


Share Price
I was buying Avation shares in September 2021 at ~80p and in the last few weeks I have said:

- I see nothing but negativity for the share price arising from Ranger/Raper
- I would not expect the share price to rise much about P/TB of 0.7-0.8 at best.
- To me, the current share price is where is 'should' be

Investors are now largely relying on the general economic activity to lift the share price but there are negatives for Avation as interest rates and bond yields decline too e.g. Aircraft Option valuations which management will have to cope with. The majority shareholders are silent wrt their intent and activity.

For an investor with limited funds I would suggest there are better opportunities for your investments outside Avation.

News Related to Avation
Nepal's Yeti Airlines eyes additional ATRs and IPO in 2024. Late last year Czechia's Let Kunovice, India's Hindustan Aeronautics, and De Havilland Aircraft of Canada had all responded to an RFP by the December 5, 2023, deadline which related to smaller aircraft types. However there was public criticism regarding the activity (bearing in mind they had recently crashed an ATR) and the RFP was largely for older type aircraft.

Avation has one ATR72-500 placed with Yeti Airlines and it is likely this is the aircraft type Yeti will end up with or possibly the ATR 42-600S (STOL) version given the operating requirements in Nepal