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Avation (AVAP)

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Carcosa
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Re: Avation (AVAP)

#256524

Postby Carcosa » October 8th, 2019, 9:20 am

Your sums may be on the pessimistic side


I would tend to agree. This positive side may go something like this:

If these aircraft go to someone like Lufthansa who had a better credit rating than Thomas Cook then the aircraft could be refinanced at a lower interest rate (and also enhances Avation's credit rating); providing better profitability. Also, given the good market demand for these aircraft the upshot is for Avation to make a $2-4m profit on the transactions. Avation has always todate made a profit when one of their lessees defaults.

A bit of further investigation reveals that both Thomas Cook aircraft are in Lithuania at https://fltechnics.com where they have the technical capability of accomplishing the C Checks and at a competitive price.

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Re: Avation (AVAP)

#256543

Postby dspp » October 8th, 2019, 10:32 am

Carcosa wrote:
Your sums may be on the pessimistic side


I would tend to agree. This positive side may go something like this:

If these aircraft go to someone like Lufthansa who had a better credit rating than Thomas Cook then the aircraft could be refinanced at a lower interest rate (and also enhances Avation's credit rating); providing better profitability. Also, given the good market demand for these aircraft the upshot is for Avation to make a $2-4m profit on the transactions. Avation has always todate made a profit when one of their lessees defaults.

A bit of further investigation reveals that both Thomas Cook aircraft are in Lithuania at https://fltechnics.com where they have the technical capability of accomplishing the C Checks and at a competitive price.


and no pickle forks to worry about :)

regards, dspp

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Re: Avation (AVAP)

#256723

Postby Carcosa » October 9th, 2019, 9:08 am

Occasionally I get asked how much I think Avation have paid for a particular aircraft. This information can be gleaned from the Annual Reports. Each AR has the following section contained in the notes. Latest AR (page 94) has the following section:

Image

We also know from the AR that the following fleet changes occured:

Turboprops:
ATR72-600's x6

Jets
A220's x5
B737-800NG x1 (used)

With reference to the above AR extract highlighted in pink, we see that spent $117,014,000, so divide that by 6 gives $19,502,333 per aircraft. From prior RNS's we also know which customers these aircraft went to. If you want to make a judgement call on how much each individual aircraft cost then I'd say it s safe to assume that an airline ordering several aircraft will get a better price than an airline ordering just one example. But perhaps more powerful effect is the airlines assumed credit rating/risk. So it would be reasonable to assume US Bangla Airlines would pay more than say a National Carrier. But that's just getting too granular for some and it's not really worth the effort to go that detailed for investment purposes.

To provide further confidence, the aircraft highlighted in Green that were reclassified totalled $39,631,000. Divided by two and that gives $19,815,000

So I think its safe to assume a current ATR72-600 costs around $19.5 - $20m

Working out the A220 cost is a bit more difficult but not by much.

The Yellow highlighted item states $211,548,000 for all additional Jet aircraft. The B737 was a used aircraft and you have to make an assumption on how much that particular aircraft cost. Rather than provide my justification I'll just say I think it cost about $42m So the remaining aircraft cost

$211,548,000 less
$42,000,000
============
$169,548,000 or $33,909,600 per A220

But, word of caution though, if you go back through the history of this thread e.g here and others I have stated that the aircraft actual price is wayyyy below where it should be. Luckily I was able to take a reasonable guess as to how much these particular aircraft would likely cost and it now turns out I was in a reasonable ballpark with my figures.

The AirBaltic A220 aircraft can, from an investors point of view, be regarded as being untypical of any future deals Avation may do with other airlines with this aircraft type. AirBaltic were the launch customer and ordered numerous examples. As time goes by I expect airlines will have to pay considerably more for this aircraft type and as a consequence Avation will likely be re-valuing these aircraft upwards by several million dollars over the next 4-5 years. I really hope Avation will continue to add this aircraft type to the fleet.

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Re: Avation (AVAP)

#260952

Postby Carcosa » October 30th, 2019, 6:25 am

Engine Leasing - Major Differences Compared to Aircraft Leasing

Avation entered the Engine Leasing business early this financial year with a purchase and leaseback of a narrowbody jet aircraft engine. Until Avation provide further information it is difficult to speculate which engine manufacturer/model it is.

It would be incorrect to assume engine leasing is the same as aircraft leasing for a number of reasons.

Over a 25 year commercial life time of an aircraft, the engines will have had several shop visits (overhaul) to incorporate engine modifications and Repairs. Many of these modifications will be for performance enhancement, restoration and reliability. As a consequence the value of the engine does not change a great deal over it's life. Indeed on many occasions the value may actually increase.

Lets say that an aircraft consists of an airframe and it's engines. If you review the valuations separately, it is the airframe that loses the bulk (80-90%) of its value compared to the engines. By the time it comes to scrap the aircraft practically all of the remaining valuation lies in the engines.

Hence at the end of life the lease rates of an overhauled engine are sometimes greater than the lease rate for the whole airframe.

Engine valuation can be broken down into four parts; Its Core value + Life Limited Parts (LLP's see below) Value + Maintenance Value (e.g. performance restoration, thrust rating, OEM or third party part manufacturers) + Accessories (Pumps, generators, control Systems etc which are transferable between engines).

For a ball-park figure, as we do not know which engine model Avation are leasing, a typical narrow-body engine will cost around $10-15m each new.

The computations of engine LLP's rates, exhibit virtually no variability given their cost and associated intervals are set by the engine OEMs. LLP costs can be derived per flying hour or per flight (cycle).

LLP hold their valuations very well indeed. The reason is that OEM's escalate these part prices more highly than anything else, say 5-7% per annum. Considering a set of LLP's could cost 45%+ of the engine cost at third shop visit then procuring used replacements with useful remaining life can save significant amount of money at shop visit. Hence a high demand for them in the market.

Avation have so far generally held aircraft assets that are relatively new. If this is applied to engines then over a 10-12 year period the value of the asset should remain constant or possibly increase.

Managing engine shop visits is an art in itself. Not only do engines get removed for life-limited reasons but also unscheduled /unplanned reasons at less than optimal times, fleet shop planning purposes, emergency/hospital visits. Some removals may qualify for warranty payments from the OEM etc.,

The cost of each shop visit will be different depending on how old the engine is and the reason for removal. Typically the most expensive time is around the third shop visit. This is when the Life Limited Parts (LLP's) have to be replaced. LLP's are the largest parts in an engine, typically the large rotating parts to which the compressor and turbine blades are affixed. They are among the most costly parts of an engine. The failure of such a part carries a very very high risk of causing an aircraft crash as the failed parts cannot be contained by the engine casing (unlike blade failures) and as a consequence are life limited and must be replaced without question. Mandatory compliance.

However most of the above is an 'airlines' problem and not so much a lessor's problem. The lessor wants to know that sufficient resources are available for the shop visit bill to be paid.

From a lessor's point of view they will usually have to set specific maintenance reserves conditions and compensation to cover maintenance/overhaul payments. Throughout the lease the airline will have to provide technical data from basic monthly utilisation data (hours and cycles) to major inspection findings. Often a lessor will demand additional boroscope inspections to look inside the engine over and above regulatory requirements.

The lessor will also be interested in monitoring the plans for the engine utilisation and operating environment over the years to come. This is all to try and predict shop visit costs and ensuring the asset valuation is being protected. Occasionally a lessor will demand a certain work package to be accomplished at shop visit which the airline does not want. Usually the lessor wins those arguments!

In principle, the lessor will collect shop visit fees every month from the airline but in practice this may not be the case. An airline wants its cash for day to day business and not squirrel it away until it will be called for 3-5 years later during an engine shop visit. It gets further complicated by the airline probably having a shop visit cost cap with the OEM, having a discount agreement with the overhaul agency or indeed having to pay an hourly rate to the OEM so it is they and not the airline that takes on the risk of unplanned cash flows for unplanned shop visits. Hence the lessor will often work hand in hand with the OEM. One way or another the lessor will ensure funds are available for shop visits even if not directly receiving cash from the airline.

Lessor's, when looking at the engine leasing market will also look at things like whether the engine can be used in whole or in part across more than one airframe model, reviewing world fleet spare engine levels, what OEM control there is, whether the engine Thrust rating can be easily changed to allow the engine to service different airlines/markets and what the overall fleet/age is.

So in summary: Unlike airframes, engine market values remain steady for many years, Lessors must have good technical teams to monitor the engine asset and protect the valuation.

It will be interesting to see if over the coming years Avation moves into this space in a meaningful way.

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Re: Avation (AVAP)

#260963

Postby Carcosa » October 30th, 2019, 7:52 am

(see prior post) Just found this which shows lease rates for good engines are pretty much independent of age, compared to aircraft.

Image

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Re: Avation (AVAP)

#265920

Postby Carcosa » November 21st, 2019, 7:54 am

Positive news once again from Avation as per their AGM/IMS/TU RNS today

The key takeaways for me are:

Better than expected anticipated H1 revenues (+12%) as a result of placing the two ex Thomas Cook aircraft and having the security deposits. "This episode has demonstrated the importance of Avation's focus on young, popular aircraft as evidenced by the number of airlines who expressed interest in leasing these two Airbus A321-200 aircraft"

Will have to wait to see which current customer these aircraft end up with. Some negatives to that in as much as it concentrates the customer base but clearly it can be assumed their working relationship with whoever it is (VietJet?) made things easier. Interesting to note that Avatokin stated " The two aircraft are also available for sale." So perhaps we can expect another announcement this FY of a sale above book value (10-15%?).

Delivery of the Braathens ATR's will be ahead of my personal forecasts albeit by a few weeks so not material in terms of revenue but good in terms of NAV

And buried at the bottom of the RNS is the announcement of the very first Interim Dividend to be paid!

Going forward I would like to see further Jet aircraft being leased out to keep the growth strategy on track.

Have also noted the large number of share buy backs recently. Now standing at around 3% of the issued capital. I presume this is for the outstanding warrants as the numbers roughly match up.

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Re: Avation (AVAP)

#272243

Postby Carcosa » December 19th, 2019, 10:23 am

Just a quick update on the ex Thomas Cook A321's

Ex G-TCDO (MSN 7003) has been re-painted in VietJet colours in Maastricht-Aachen Airport (Netherlands) and has returned to Kaunas (Lithuania) for final checks and customer acceptance.

Ex G-TCDM (MSN 7055) is undergoing repaint in the Netherlands and is expected to be flown to Kaunas very shortly.

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Re: Avation (AVAP)

#273668

Postby Carcosa » December 28th, 2019, 7:47 am

The two Thomas Cook aircraft have been repainted in VietJet livery and have returned to Kaunas in readiness for airline delivery.

In an earlier RNS from Avation they did state these two aircraft are available for sale. It is possible these aircraft are in fact being sold to an Irish Based leasing company (but run by Chinese) called 'Sky High Leasing Company' via a holding company called 'Sky High V Co.'

However, I have to really stress that my source is untested and may well prove unreliable. So, for now, just treat this as speculation.

If true and the deal completes before year end this should have a very positive effect on Avation's H1 performance. Avation did indicate that the aircraft were expected to be delivered in December so hopefully an RNS will be issued before end of year.

Also, MSN 7055 (ex G-TCDO) may have been re-registered as VN-A544. Awaiting confirmation.

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Re: Avation (AVAP)

#274405

Postby Carcosa » January 1st, 2020, 11:58 am

Avations' half year books were closed on 31 December.

Additions to fleet (x5 ATR's)
Two were actually on Avation's books at FY19 year end but not placed with airlines until H1 this year.
A further three were on Avation's books in H1 but two of them will not be be placed with the airline until Q1 next year

The time between coming on Avation's books and being placed with the customer infers that no revenue was being created by these aircraft during that time and the finance interest had to be paid by Avation. However it is possible that various contract provisions were in place that may have limited Avation's costs during this period. We just don't know.

A321's
The other noteworthy event was the repossession of the two A321's from Thomas Cook. These are heading to VietJet following completion of heavy maintenance work and re-liveried to VietJet colours. I would hope to have that confirmed early in January. That would be around 3 months of lost revenue and finance charges to contend with plus recovery costs. Various mitigating factors probably means the net loss to Avation is only around $2.5-$3m for both aircraft.

Having six of the seven A321's with one airline is too concentrated. In fact the one A321 not with VietJet is 18 years old and can be excluded from the argument. Both the ex Thomas Cook Aircraft are up for sale and hopefully that will come to pass very soon. Under normal circumstances we could expect a gain on those aircraft of around $3m+ each. Would certainly help FY end results!

Observations
Jet Narrow bodied market has been challenging over the last 12 months as is evidenced in the following graph. A similar picture is seen with slightly older aircraft too. This is driven by a large number of airlines going bankrupt, low fuel costs, low interest rate environment and airlines holding on to aircraft for longer. The B737MAX fiasco has not had any significant impact other than stabilising short term lease rates. This may explain why it has been a long time since Avation has been active in this market. Fortunately there has been quite a big surge in demand for ATR's and that has been reflected in Avation's fleet additions

Image


My Forecast H1 results

Given that most of the new ATR's are on finance lease and ex-factory delivery and customer deliveries being different, the Thomas Cook aircraft repossessions and many new aircraft fleet additions being seen in December, $ exchange rate changes and 5 year swap rate changes, I have come up with my personal view on what to expect in February's Interims.

The key takeaways are revenue increase despite (Thomas Cook aircraft and ATR deferred revenues) and NAV valuation. It remains a long term holding of mine but am not expecting anything particularly exciting to happen in 2019/20 FY.

Image

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Re: Avation (AVAP)

#274414

Postby dspp » January 1st, 2020, 12:41 pm

Carcosa wrote:The B737MAX fiasco has not had any significant impact other than stabilising short term lease rates.


As usual a fantastic analysis, thank you.

Is there a consensus in the leasing market about if/when the MAX will return to service ? If not how long can the lease rates remain merely 'stabilised' as opposed to climbing steeply ?

regards, dspp

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Re: Avation (AVAP)

#274431

Postby Carcosa » January 1st, 2020, 1:59 pm

Is there a consensus in the leasing market about if/when the MAX will return to service ? If not how long can the lease rates remain merely 'stabilised' as opposed to climbing steeply ?


There appears to be no consensus as to when the 400 or so aircraft will return to service. 'Best guidance is 'early 2020'. It is further complicated by the fact various aviation authorities are unlikely to just accept the FAA's determination as to the aircraft being fit for service. It would be reasonable to assume that the FAA and then EASA would be the first two authorities to allow return to service following re-certification; but other countries, notably China may take a differing view and those decisions may be more politically minded than technically reasoned.

As you probably know, lease rates are largely determined by the residual value of the aircraft If the demand for the aircraft changes, and in particular if we see large scale cancellations then that will affect lease rates dramatically especially if the market starts to view the aircraft as an 'interim' model pending a major re-design of the model or a complete new replacement for say, entry into service late 2020's. That decision would also be influenced by what Airbus may do to their line-up. If the leading appraisers have changed their valuation opinion of the Boeing 737 MAX on the basis of the grounding issues then lease rates will decrease and Boeing will have to recompense leasing companies even further to allow them to pass along the savings to the airlines. If the MAX is popular and remains a true competitor to the A320neo, then the long-term performance should remain unaffected. It would also be in the interest of Airbus that the MAX valuation remains high.

What has not happened before to Boeing is that leasing companies are now starting to sue them. Firstly it was a Russian leasing company and more recently an Irish based company suing Boeing for almost two dozen aircraft. Their case is also claiming for substantial damages. In the world of aviation leasing this is unheard of largely because Boeing would unlikely deal with this leasing company ever again.

The stabilised lease rates to which I referred are for the B737-800 series but the short term lease rates for this model has increased as airlines attempt (largely unsuccessful) to bridge the shortfall in capacity.

In all likelihood the financial leasing viability of the B737 MAX will not be known until 2022/23 at the earliest and I suspect Boeing would engage with the leasing companies to mitigate that risk.

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Re: Avation (AVAP)

#274454

Postby dspp » January 1st, 2020, 3:24 pm

Carcosa wrote:
Is there a consensus in the leasing market about if/when the MAX will return to service ? If not how long can the lease rates remain merely 'stabilised' as opposed to climbing steeply ?


There appears to be no consensus as to when the 400 or so aircraft will return to service. ......... In all likelihood the financial leasing viability of the B737 MAX will not be known until 2022/23 at the earliest and I suspect Boeing would engage with the leasing companies to mitigate that risk.


Thank you Carcosa, much appreciated. regards, dspp

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Re: Avation (AVAP)

#275434

Postby Carcosa » January 6th, 2020, 7:25 am

Today Avation issued an RNS saying they are in a Strategic Review and Formal Sale Process meaning potential M&A aircraft portfolio sale or review etc., as well as a potential sale of the Company through the commencement of a "formal sale process" They also add:

The Company confirms that, at the time of this announcement, it is in preliminary discussions with one interested party about a potential sale of the Company.

So, putting on some rose-tinted glasses we have the potential for a long term bissing war? My initial thoughts are:

Personally I am a bit miffed. Avation has been, since end 2013, and was always intended to be a share for me to hold 'forever'

So what is the value of Avation based purely on the assets & cash?
Well, I estimated NAV to be around $3.94
Plus 'realisable value' over and above NAV for A321's of $0.65
Plus 'realisable value' for A220's of $0.31
Plus value of ATR options of $0.10

Total of $5.00 or 370p

However, a few years back Carlyle Group bought a bunch of ATR's from Avation at a premium to book price so there is track record that perhaps the ATR's are worth a lot more than current valuation suggests.

Furthermore as time goes on and those revenues continues to pay off debt then the NAV increases.

Additionally the potential acquirer may have access to cheaper finance than Avation, which, again is a positive for the company sale

Add on something for already secured new customers/aircraft (announced and yet to be announced) then the company's valuation is even greater.

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Re: Avation (AVAP)

#275535

Postby simoan » January 6th, 2020, 2:33 pm

Carcosa wrote:So, putting on some rose-tinted glasses we have the potential for a long term bissing war? My initial thoughts are:

Personally I am a bit miffed. Avation has been, since end 2013, and was always intended to be a share for me to hold 'forever'

Hi Carcosa,

Me too! I've held from around the same time and recently started adding more to my SIPP around 270-275p bid. Given that the management team have significant skin in the game I can only assume that the enquirer is offering a deal at a decent premium to the current share price, otherwise they would surely have knocked it back. So it only makes sense for the company to initiate a strategic review and advertise the fact to maximise shareholder value. Interesting times, even though some of us would probably prefer the company to keep progressing as it has been doing for the past few years.

All the best, Si

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Re: Avation (AVAP)

#275654

Postby Carcosa » January 7th, 2020, 8:35 am

Having given some thought overnight to yesterdays RNS announcements. The following is my opinion piece. So low on facts and high on speculation!

Just over a week ago I said in this post that I thought an Irish based lessor may be buying the two ex-Thomas Cook aircraft. It may be that I had got it wrong and were in fact looking for a much larger portion of Avation's fleet. Given the size of this Irish lessor it would make sense for them to look at Avation's assets. I therefore wonder if that is what has sparked off Avation putting the 'for sale' sign up?

I did email Avation if they had indeed been approached by this leasing company for the Thomas Cook aircraft and todate I have not received a reply. Not getting a reply from Avation is most unusual so perhaps I got a bit too close to the mark... or they are just too busy/holidays to reply!

So, Avation have put the 'for sale' sign up. I guess I would ask two questions. "Why" and "how much"?

The "Why'

I think it is important to state that the company are full of hard core financiers with a wealth of experience in the aviation industry and they have operated above reproach; working in Singapore, arguably least corrupt business society on the planet helps in demonstrating their integrity. Of course, I accept this is largely a subjective matter but having met them in Singapore HQ and myself worked in this part of the world I am confident in my statement.

The CEO/Executive Chairman, Jeff Chatfield, is key to the business. He is the driving force but I suspect may have been backed into corner with little choice but to do this 'strategic review'. Jeff comes across as a very determined, shrewd, respected and a single-minded person. Avation is his true 'baby' and I very much doubt he wants to give it up. However being a publicly listed company some things are out of his control and when a meaningful approach is made by a third party for some or all of Avation's assets it has to be responsibly addressed. This can be seen by what happened a few years ago.

In 2016 they had an unsolicited approach from Chorus Aviation Capital Corp., to purchase all of their ATR72-600 aircraft (22, at the time). That also flushed out several other players, all of whom were willing to pay above NBV for the aircraft. When I had face to face discussions with the company it came to light that a number of other parties had shown interest in Avation's fleet in the past but these were less than serious/feasible approaches.

In conversation with the company it turns out they did not really want to sell a substantial part of the fleet because it would have placed them back several years in their growth plans. Not only the loss of income would be incurred but a large sale would also affect their credit ratings/borrowing rates and ability to acquire new aircraft. However the approach was a serious one and corporate governance/business meant it had to be dealt with in an above board fashion, hence their decision to work with a aviation related financial institution to review the business case of selling 22 aircraft.

At the end of the day I think I worked out Avation received around 10% above NBV for the aircraft from Chorus. However Chorus only got six aircraft, for some very good reasons. Selling six ATR's allowed Avation to gain a useful cash pile for deployment without destroying the entire business or at least putting it back to where it was by several years.

What that activity proved was to validate the Company aircraft valuations and verify their business model.

M&A activity is aircraft leasing is immense. There hardly seems to be a month go by without someone doing something at corporate level. Most leasing companies are private equity so unless you read the trade press you will never hear about them from the usual investor news resources.

However, Avation is still a 'tiddler' company in terms of aircraft assets but, relatively unusual in that they hold a large percentage of the world's ATR fleet on their books. That would be attractive to a number of other lessors or indeed finance houses. Avation also have a large number of unencumbered aircraft, at least five, possibly seven by now. Whereas Avation may struggle in raising debt against the existing fleet using the unencumbered aircraft as collateral without breaching various financial ratios, another company may be in a much better position to utilise those aircraft to raise several million without any problems.

It therefore seems logical to me that someone else has come along and made enquiries for the entire fleet or at least the vast majority of it. Indeed the RNS effectively says that. And this is where Jeff has been backed into a corner. Am sure they don't want to sell the company or the vast majority of the assets but continue as they are. But seemingly/presumably the offer on the table is likely to be compelling to existing shareholders and Jeff can't bat this one away like he did with Chorus.Therefore it's better to announce to the world that the company is up for grabs either as a whole or piece-meal or do something with M&A

In my view Avation (Jeff) has the following possibilities (But what do these options provide for Shareholders?):

Some M&A activity but Jeff would probably demand a very big role in the new business
The likelihood is that current Avation shareholders will get access to better finance which in the long run should generate better returns because current financial ratios for Avation are at the top end of being acceptable. Outcome is "Good"

Do some form of partial sale similar to Chorus (probably best option)
Would again demonstrate the fleet valuation is below realisable value for the aircraft. Outcome for shareholders is 'Good' but maybe temporary in nature. Cash injection would need to be deployed effectively and right now the jet narrow body market is not as healthy as in recent past (see graphs that I posted a few days ago)

Sell the company and start over.
Would Jeff really want to do it all over again? Management are incentivised to get the best price possible. Outcome for shareholders is very good but some of us would prefer to remain long term investors

Sell most of the assets and start over
Does provide a lot of capital and return to growth could be more rapid than when Avation initially started out. But, again, certain markets are not that healthy at the moment. However, B737-MAX opportunities may be of interest or Avation may even enter the older aircraft leasing market. Outcome for shareholders would be 'Okay'.

NB: The company's IP is really its staff which means Jeff and a couple of other board members.

Yesterday's announcement provides shareholders the possibility of getting the absolute highest price for the business as is reasonable. Whilst I do not for a moment believe Jeff Chatfield or the current management really want to sell the company, if they have to sell then getting the best price is on the agenda. But what is the best price?

"How Much"

Aircraft leasing companies are essentially priced on their asset value i.e. cash and aircraft/engines. However, their is a little wrinkle in this.

Aircraft essentially have three prices attached to them. The asset value we see in their accounts, their 'base line' value which essentially determines their residual value and, finally, their realisable value.

In recent years it has been evident that both the ATR72-600's and the A321's (not so much the A320's) are being sold in the market place at a higher valuation than the accountants say they are worth. As a rough guide about 10% higher; maybe a tad more right now.

Within the M&A environment, deals for relatively young aircraft are done at around the x1.2 - x1.4 mark.

The last reported NAV was ~300p/share. Since then additional aircraft have entered the fleet and shareholders have been advised of aircraft deliveries stretching into Q1 this year. Revenue has been coming in, debt paid off and aircraft have depreciated in value and adverse $/GBP exchange rates observed. End result being NAV will be no lower than last reported and in all likelihood up a few pence per share.

But the NAV is not the value of the company or its worth when it comes to being sold. In my previous post I suggested a truer figure of around $5.00 or 370p for the assets alone.

So what price would investors be happy with? After all share price appreciation has been:
2016 45%
2017 14%
2018 10%
2019 5%
Excluding good and rising dividends (3-4%)

So what price would a long term investor deem acceptable?

Business is consistent and remains on a growth path (Rinse, and repeat) for decades to come. So I would have thought investors would not be happy to be sold around NAV. Must be NAV and a reasonable premium or some other residual amount for a healthy company like Avation.

This chart shows my view on Assets/Liabilities and a range of the NAV/Share assuming similar fleet growth rates going forward.

Image

So in less than two years NAV of around 370p plus 4-6% dividend (higher for existing shareholders who bought in earlier) So would I be personally happy to be selling out today at 300p? Definitely not. The realisable value by then may be around 440p

In fact about three years ago I had a chat with Avation and asked them what their pricing thoughts were if the company was to be sold. At that time their view was 400p at a time of when the share price was around 170p

So personally, I would not want to let go of my shares for anything less than 450p or around 50% more than the current share price of ~300p; and even then it would be a reluctant sale. 500-550p would be nice though!

Given that I consider management are not that keen to sell and realisable valuation are ahead of formal NAV's then I have an expectation that if a deal does go through it have to be at high premium to 300p; or perhaps not happen at all. Selling the entire fleet piece meal may raise more value than selling the company. This is why I would not be surprised that something else happens, as per the RNS itself "These options include merger and acquisition activity, an aircraft portfolio sale or review etc.,.."

Summary
Most of the above is my speculation. Please note that.

My belief is that the company is not going to be taken over/sold. The value of the company is considerably higher than reported net assets. Personnel are also a key component and as such it is doubtful they would want to give up control over their destiny. A merger is more likely followed by a partial sale of the fleet. At the end of the day it will once again prove that the share price lags behind reality.

Carcosa
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Re: Avation (AVAP)

#276098

Postby Carcosa » January 9th, 2020, 7:54 am

Ex-Thomas Cook Aircraft & Spare Engines

Ex-Thomas Cook Aircraft

Today (dividend pay day!) Avation released an RNS saying that, as expected, the two ex-Thomas Cook aircraft have been delivered to Vietjet.

This is after (as previously posted) he aircraft has completed calendar 2C airframe maintenance checks, been configured for operations by VietJet Air and has been put into Vietjet Air livery. These tasks were completed in Lithuania and Germany following aircraft reposition in UK and over European Christmas and New Year holiday periods. All in all less than 4 months since Thomas Cook Went bankrupt. Pretty impressive stuff!

I have already discussed the loss of revenue/costs associated with these aircraft here but lets look at what today's announcement says:

The aircraft are just short of 4 years old and as I have indicated recently A321 lease rates are somewhat low compared to even only a year ago (see graph in a recent post). What this suggests is that the lease income for these two aircraft are likely to be substantially lower than before. Perhaps by as much as $1m per aircraft/annum. Although of course we do not know if Avation have been able to reduce their cost of finance for these aircraft.

However Avation have apparently agreed with VietJet that at the end of the 8 year lease the aircraft will be returned to them 'as new' following what would be a major maintenance check on the 12th anniversary of the aircraft's build date. Potentially that is worth several millions of dollars.

It may well be the case that the other Avation supplied A321's actually have similar provisions in their contracts (in fact I would expect that to be so). It might be worth confirming the return conditions for the earlier A321''s.

Given what I believe are lower revenues from these aircraft I suspect Avation are (not withstanding the current Strategic review) keen to get them sold off; not only for a potential large gain on the aircraft themselves but also to reduce the near 100% exposure of the A321 fleet to VietJet. Remember that Avation already sold one VietJet A321 in November 2016.

The other possible reason to sell the aircraft is that the new A321's in VietJet financed by Avation are supported by European export credit agency finance. Something which would not be obtainable for used aircraft. (An ECA can provide credit insurance and financial guarantees to protect Avation's interests).

Miscellaneous News
Avation now have an additional (total of 2) spare engine on their books. The first engine has, I believe, recently come off lease.
Because spare engines are a relatively small part of the business an RNS is not required to be issued. I presume the additional spare engine is also a CFM56 variant but whether it is new (Unlikely) or used, I do not know. Also how these engines are expected to be used (emergency spares or long term use I do not know. Will probably leave those questions for Avation after the Strategic review)

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Re: Avation (AVAP)

#277316

Postby Carcosa » January 14th, 2020, 11:53 am

With 21% of the declared shares with management (Will be higher given undisclosed numbers from employees etc) I have hopes that the final outcome of the strategic review will end up with a share price a darn site higher than the 10% to date!

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Re: Avation (AVAP)

#277339

Postby simoan » January 14th, 2020, 12:47 pm

Carcosa wrote:With 21% of the declared shares with management (Will be higher given undisclosed numbers from employees etc) I have hopes that the final outcome of the strategic review will end up with a share price a darn site higher than the 10% to date!

I agree, so I'm still pecking away sub 300p...

All the best, Si

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Re: Avation (AVAP)

#277816

Postby Carcosa » January 16th, 2020, 11:05 am

For the twitter folk out there, Avation have recently joined the community @AVATION_PLC

Would have thought they had more interesting things on their mind but there again...

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Re: Avation (AVAP)

#278888

Postby Carcosa » January 21st, 2020, 9:18 am

Simon Thompson of the Investors Chronicle issued this piece yesterday: My comments in Bold

"......
Investors are becoming more alert to the ratings discounts, one reason why 2020 has started with a bang for a raft of the small-cap companies I follow as the Brexit discount embedded in rating unwinds. It’s still too large, though, which is why I expect M&A activity to be a recurring theme this year, too. I haven’t had to wait long for the next deal to emerge as aircraft leasing company Avation (AVAP:305p) is in preliminary discussions with one potential bidder, and has appointed US investment bank Wells Fargo to assist with its strategic review.

It’s a company I know well. The holding has produced a total return of 108 per cent since I first advised buying the shares ('Get on board for blue-sky gains', 11 Sep 2014), and I last reiterated that advice just below the current share price at the half-year results (‘Avation in the ascent’, 9 Sep 2019). Perhaps reflecting a paucity of research, Avation’s share price is well shy of my estimated 370p minimum take-out price and offers a potentially highly profitable repeat buying opportunity.

Discount to sum-of-the parts valuations

At the 30 June 2019 financial year-end, Avation owned fleet assets worth $1.27bn (£976m), since when it has taken delivery and leased out two new ATR 72-600 turboprop aircraft. Net asset value (NAV) per share of 374¢ (288p) was based on equity shareholders' funds of $241m (£185m), but there is hidden value in the balance sheet.

Firstly, the carrying value of the aircraft is conservative. For example, Avation sold two narrow-body aircraft for 10 per cent more than their book value in the last financial year, booking a $10m net profit in the process. The segment accounts for $600m, or 46 per cent of total fleet assets and includes seven valuable Airbus A321-200 and two Airbus A320-200 aircraft. Two of the A321 planes were previously leased to Thomas Cook and have since been leased out to Asian airline Vietjet Air, a profitable and publicly quoted company and a valued customer of Avation. The point being is there could easily be $60m of surplus equity in the narrow-bodied fleet if marked to open market value, a sum that equates to 96¢ (73p) a share.

Secondly, Avation owns 21 ATR 72-600s and six ATR 75-500s, and has a further six ATR 72-600 aircraft on order for delivery between 2020 and 2022. The company also has options over a further 25 of these turboprop aircraft, all of which are held on the balance sheet at nil cost. Each option could easily be worth $500,000 to $1m [More Like $200 - 500k] on the open market given their scarcity value – ATR only manufactures 85 planes a year and demand from China,[Incorrect] India and Iran [Definitely Wrong. Sanctions in place; no deliveries] is tightening the regional aviation market for these fuel-efficient aircraft. At the lower end of my estimate, the option value boosts NAV per share by 19¢, or 15p.

Thirdly, Avation has a young fleet of plans – average age of 3.7 years – with a weighted average remaining lease term of 7.1 years. The planes have unearned contracted revenue of $921m across a diversified base of 18 airline customers, an attractive and solid revenue stream.

Fourthly, the increased scale of the fleet is being recognised in the debt markets (weighted average cost of debt on borrowings improved from 5 to 4.6 per cent last financial year), so the profit earned from contracted revenue is rising as debt service costs fall. [and the unencumbered aircraft help]

Fifthly, Avation is expected to deliver annual revenue of $134m and pre-tax profit of $23.1m [based on available info thats a tad high] in the 12 months to 30 June 2020, having taken into account the security deposits held on the Thomas Cook aircraft, which largely offset lost lease payments between the aircrafts’ repossession last October and subsequent delivery to Vietjet Air. Avation is based in Singapore so pays a minuscule amount of tax, [a few aircraft are taxed outside of Singapore and a substantial rate] so should have earned net profits of $13m since the 30 June 2019 year-end. Deduct from that sum the $5.3m cost of the final dividend, and I reckon retained profit adds 12.2¢ (9.5p) to NAV per share.

So, even if you ignore all the hidden value of the 25 ATR options, it’s not difficult to arrive at a 370p a share sum-of-the-parts valuation. Buy"

At the end of the day as I said on January 7th in this post I valued the fleet at 370p. So same as Simon Thompson.

However no way is the company going to be sold off for anything less than 1.2 to 1.4 times NAV; which is the 500p/share mark.

As I mentioned in an earlier post though; I find it impossible to believe the company is going to be sold. As per the RNS that started all this off, it is far more likely a portion of the fleet will be sold off or some M&A activity will take place.

On a more general note, over 2019:
ATR72-500's have declined some 4% in value
ATR72-600's have declined some 5-6% in value for non-new aircraft
A330-300 are down 30% (Yes 30%)
B777-300ER down 12%
A321-200's UP 6-15%
B737-800 Up 3-6%
Do note that Avation would still likely book a gain on all of these aircraft except for the A330 and possibly B777. Potential risk of a write-down in asset values for those aircraft.


Moderator Message:
C, that is a large chunk of text you have taken from the IC. We would not ordinarily allow such a large chunk under fair usage. In this instance it seems much more likely that IC has benefitted more from your insight over the years, generously donated here, than the reverse. Or you are the IC author moonlighting. Could you please drop me a line of on reflection you feel it appropriate to edit/reduce the amount of text quoted - we none of us wish to get TLF into trouble. regards, dspp


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