Avation (AVAP)

[abtan]

Thanks for that in-depth reply Carcosa.

I must admit to still not really understanding the rationale for buying here.

The issue I have with using the published NAV is that it excludes the interest due on the debt, which, crucially, will surely need to be paid as the aircraft are out on leases that probably won't be cancelled.

There are 2 lots of debt:
1 - $532m @ 4% to be repaid from 2023-2031
2 - $296m @ 8.25% to be repaid before 2026.

Crudely that's a liability of $200m-$240m that is not on the balance sheet.

The published NAV is $3.27/share * 70.2m shares = $230m

These 2 figures cancel each other out...so in my mind there is no positive NAV.

---

Putting the above aside I don't know how the company will have enough cash to get through the next few years.
For FY23:

- Revenues have been estimated @c$104m (this estimate is from the company according to my notes)
- $12.6m admin
- $165m of capital repayments (!)*
- $47m of interest payments
= negative $120m

I just don't see where they are going to get the cash to survive after 2026.


Thoughts as always are appreciated. Is there some benefit that I can't see here?



(*$165m = $532m debt/8 years + $296m debt/3 years.)

[Carcosa]

Hi abtan,

I forgot to mention that 'maybe' the two ATR72-600 pre-delivery payments may have been returned now those delivery dates have slipped by a year or so. wouldn't like to hang my hat on it but it is possible.

Another correction I have to make is that the two LoganAir ATR's were indeed sold last year. Apologies for that. Missed it. Bit of a FU.

Re your observations; this is why I say we need a banker to explain on this board

The way I interpret the Annual Report it has been taken into account and something that I would have anticipated an auditor would have picked up on. However, suggest you raise your concern now for the forthcming presentation at https://www.investormeetcompany.com/ava ... r-investor, would be interesting to hear their response.

There is a Liability Structure & Loan Maturities profile at https://www.avation.net/files/AVAP_Inv_ ... FY2022.pdf (page 13)

[abtan]

Hi Carcosa

No worries about the sales status of the planes. Whether the planes have been sold or not shouldn't really impact the published NAV figures too much (it's either $m held as a physical asset or cash on the balance sheet.)

I don't really follow Avation, so I won't be listening to or asking questions on the IMC call I'm afraid.
I like spotting opportunities and commentators I respect keep highlighting that this is one of them, which is why it's still on my radar.

I've just taken a look at the "Loan Maturities profile at https://www.avation.net/files/AVAP_Inv_ ... FY2022.pdf (page 13)" that you highlighted.

The main thing that I noticed was that:
a) the Secured/Warehouse Loans Maturity Profile DOES NOT include interest payments.
b) the Unsecured Loans Maturity Profile DOES include interest payments, but only up to 6% (holders have an option to receive an additional c2% in shares or cash I believe).

In any case, there are still no interest payments included on the balance sheet, which is perhaps the most important observation.

---

The total Secured/Warehouse Loans in the Maturity chart = $532m, which ties in with the figure on the balance sheet (page 119 of the Annual Report.)

With the year-by-year maturity profile I've more accurately worked out the interest payments @4% and the total interest payments to 2031 should = $88m.

---

The total Unsecured Loans in the chart = $348m
The Unsecured Loans figure on the balance sheet is $296.2m.
(the difference, as noted above, is a presumed 6% annual cash interest payment on the full balance over 4 years)


For prudence I'm going to assume the full 8.25% from the debt holders, as for NAV/share purposes it shouldn't really matter whether payment is in cash or shares.
This gives me total interest payments up to 2026 for the Unsecured Loans of $98m.

----

So total interest payments due in the next 8 years, WHICH ARE NOT CURRENTLY INCLUDED ON THE BALANCE SHEET = $88m + $98m = $186m

As per my previous post NAV = $230m.

So my "adjusted NAV" accounting for interest payments = $230m - $186m = $44m.
The current market cap = $104m

That's quite a difference and I can't help but think that I've made an error somewhere.


I haven't been into the detail on the debt, but from the little I've read the company seems overvalued right now.
But there's so much detail to go through (which I haven't done) that there's a good chance that I've missed something obvious that explains the current (and in my opinion elevated) share price.

[abtan]

Sorry, I was in a rush this morning and have now realised that I wasn't fully accounting for all the future unearned income.

For some reason I thought that this was ALL accounted for on the balance sheet (and therefore was already included in the NAV), but I can see now that only a portion of future unearned income is on the balance sheet.

I'll keep digging - maybe there is value here after all.

[abtan]

I had another look at this a couple of days ago and have come full circle and believe that there is value here...assuming that the planes are still worth their balance sheet value in 2027.

Up to that point all earned income will likely go towards paying the administration costs, interest payments and capital repayments.
I can't see how the company will be able to pay a dividend purely from rental profits, but of course they could do so with the cash on their balance sheet and from asset sales.

For reference here are my numbers (in $m):

TODAY:
Debt (830)
Current Aircraft Val 814
Current Cash 119
Held for Sale 100

+ FUTURE:
Unearned Income 568
- less FL receivables (55)
Admin 2023-27 (67)
Interest 2023-27 (194)
Depr'n 2023-27 (195)


2027 NAV s/be $259m
NAV/share ($) $3.69
NAV/share (£) £3.05

Current Share Price = £1.26

One thing I wasn't sure about was aircraft valuations and whether they would hold up.
I believe they are currently being depreciated over 25 years ($39m pa in the last financial year).

I think I saw a loss on a plane sale in the last Annual Report, which brings about some uncertainty, but I'm really not an expert on what the planes would be worth in 4 years time.

Assuming the depreciation figure is accurate, however, then there does certainly seem to be significant upside on the table.

A

[jaizan]

When they sell an aircraft, the RNS gives no guidance on whether the selling price was above or below the value on the balance sheet.

This lack of disclosure doesn't fill me with confidence, particularly considering that there is a lot of leverage and just a small error in valuation wipes out the NAV.

[Carcosa]

When they sell an aircraft, the RNS gives no guidance on whether the selling price was above or below the value on the balance sheet.

This lack of disclosure doesn't fill me with confidence, particularly considering that there is a lot of leverage and just a small error in valuation wipes out the NAV

You have almost answered your own question. A LOT of information is not in the RNS. A lot of that data can be found explicitly and/or by inference in the Annual Report which most investors do not read. Also third parties can provide data too. It's practically impossible for Avation to lie about their fleet valuation because commercial high volume aircraft are valued on a worldwide basis. There is no practical difference between an ATR in Taiwan to the same model in Paraguay or Mongolia, for example.

The wrinkle in this is that the sale value can vary if Avation are essentially a forced seller; although somewhat compensated for if the airline went out of business and Avation keep the maintenance reserves which has happened before. However if you recall a few years ago when they sold half their ATR fleet they got above book value.

Avation's leverage changed quite a lot over the years. Compared to other leasing companies they are always in the 'ball park' and currently on the low side of the average.

LTV and Balance Sheet leverage has considerably decreased over recent times but that is hardly surprising given aircraft valuation changes and the sale of unencumbered aircraft. Personally I calculate their LTV excluding both restricted and unrestricted cash balances as that was the historical way of doing things until the last decade or so; but even doing that the LTV is perfectly okay. Longer term the important criteria are Ratings related i.e. Net Debt to Equity (<4), EBITDA to Interest Ratio (>2), EBIT Interest Cover (>1.5) and Funds From Operations to Debt (>9%) as these largely drive the cost of debt.

The forthcoming HY results will I suspect scare off a lot of investors not because of the above but because cash profits have evaporated but underneath all that the company is doing ok; hence my comments a few months ago that suggested buying AVAP after the HY results. However I would feel a lot happier if Avatin started leasing new A220's.

[Carcosa]

The Golden Myanmar ATR aircraft which appears to have now been re-leased was on a six year finance lease (as opposed to an operational lease) to pay for the $19,815,500 aircraft . The lease commenced in August 2019 and presumably they paid two years worth of those finance charges or about 30% of the aircraft cost i.e. received about $6m. The aircraft was subsequently re-leased this month at an estimated base price of around $14m generating around $1.6m/annum rental.

Come the full year results it's might be possible to record a meaningful exceptional gain associated with this aircraft even though there was probably a balloon payment at end of lease for this aircraft.

FYI: In an operating lease, the lessor retains ownership of the aircraft and leases it to the lessee for a fixed period, usually less than the useful life of the asset. The monthly charges for an operating lease are generally lower than those for a finance lease, as the lessor is able to recover the cost of the aircraft over its useful life and can then lease it out again to another lessee.

In a finance lease, the lessee effectively takes ownership of the aircraft for the lease term. The monthly charges for a finance lease are generally higher than those for an operating lease, as the lessee is essentially financing the purchase of the asset and will need to pay interest on the lease payments.

[Carcosa]

Avation released theirhalf year results and provided a presentation on Investormeetcompany.com

Rather than dive into it straight away I thought I'd give a summary overview to begin with.

Overview

What really got my attention was the wholesale turnaround in attitude from management during the investor call. Over the years these calls have been somewhat unexciting in tone and a bit of a bore as they read off the details in the presentation slides. This time around the presentation material was swiftly dealt with and they answered all of the questions but this time however they were happy to let slip meaningful details regarding on-going discussions with existing and potential new customers, market forces and future plans and priorities. Whatsmore the Avation management staff looked confident. For anyone who has seen prior year's presentations this was a significant and much more open presentation.

In July last year I suggested it was worthwhile buying a starter position in Avation and wait until there is some financial (and fleet) clarity with a latter suggestion to buy between the just announced interims and the FY results. I think that was a good call.

What I found pleasing was that the results and especially the NAV were very much what I thought they would be which provides me confidence that accurately modelling the financials going forward is returning to normal i.e. pre-pandemic levels.


The HY Results

As expected, the HY results looked great but under the hood there was a large loss. Whether or not a lot of the following should have been classed as 'exceptionals' is perhaps arguable but it is what it is.

Gain on derecognition of a finance lease
Unrealised gain on aircraft purchase rights
Unrealised gain on equity investment
Aircraft transition expenses
Tax rebate

The above sums up to $13.63m.

Looking at the results on an 'organic' basis then you can see there was a thumping loss. On the other side of the coin is that over the last three years there were a lot of losses that were not 'organic' either!


A few comments

When an airline goes bankrupt the leasing company has to go and recover the aircraft. Access, getting the maintenance records, complying with local Aviation Authorities/flight permits, arranging flight crew, mechanics, engineers, spares, repairs, liaising with an FBO etc, is a non-trivial task. Nearly all of that would normally be the responsibility of the airline when returning an aircraft at end of lease.

It was interesting to note that Avation have an in house 'technical team' that were credited with reducing costs. By 'team' I assume two people. This is worth exploring. I have direct experience in knowing how much an airline representative can save millions in the sort of situation Avation found themselves in. When an aircraft, especially engines, goes for maintenance the airline will largely place an emphasis on incorporating much more than the minimum requirements because they need reliability and improved cost of ownership. When you are selling on the aircraft then you are happy to do the bare minimum at the quickest time, happy to exchange Line Replaceable Units that may be on 90 day turnaround time for a lower spec used part. Without having a good airline engineering team your costs can easily go through the roof when on a time and material basis. In this case, Avation are acting as an Airline engineering dept.

Now that Avation have dealt with the vast majority of their fleet that required transitioning these costs will be significantly reduced from now.

The takeaway from the interims are
Debt reduced
LTV at a historic low

More importantly now, is what came out of the Presentation.
There is a growing demand for replacing ATR's worldwide due to fleet age; potential replacement fleet rollover for an operator.
The ATR is the only aircraft available being manufactured in it's class
Only 35 new ATR's are being produced annually, increasing to 40 next year; creating a shortage of aircraft
Avation let slip their next ATR coming off lease will have a six year lease extension and if not there are other customers already lined up for that.
Come FY results expect more exchange rate gains
Lease rates are up 20% (which is reflected in aircraft valuations)
Expect the two ATR previously announced new aircraft to be delivered next year
More A220's to join the fleet (2024?)

As regards the Loan Maturities profile, in particular the FY2027 unsecured loan repayment, I am quite sanguine about it. Refinancing should not be an issue for an airline leasing company.

With the market perhaps now believing the company has got through the pandemic without going bankrupt then perhaps attention can turn back to valuing the company on its NAV of 282p (although by FY end it should be about 262p with the current fleet). Current share price is 132p

I intend to add to my starter position over the coming weeks when I hope fly-by-night (Rush?) investors will have bailed out and the share price reduced a bit; unless Simon Thompson ruins the party for me.

NB: Some investors may know Richard Wolanski. He has now left the company and returned to Perth. He was very much retail investor friendly and very approachable and patient. Probably explains why the website is taking longer to get updated too.

Re my prior post regarding the Myanmar aircraft; I seem to have got that broadly right unless I misheard the presentation.

[Carcosa]

Some readers may find this interview with Jeff Chatfield of interest. Published in the Jan/Feb issue of Air Finance Journal.

[Carcosa]

If anyone has a passing interest in who the new Avation customer is who took physical delivery of the ex Golden Myanmar ATR72-600 on March 2023, it is Air Tahiti in French Polynesia.

The airline has a total of x7 ATR72's and x2 ATR42's.

Avation also have one ATR72 with Fiji Airways in the same region which may have been helpful in placing the aircraft with Air Tahiti.

[Carcosa]

The probable reason why the share price of Avation declined today (at time of writing!) is likely due to a legal dispute in Vietnam.

In October 2022, a lessor (Not Avation) terminated the leases of four aircraft leased to a Vietnamese air operator (thought to be VietJet) due to defaults by the lessee.

The aircraft are subject to international interests under the Cape Town Convention (CTC) in favor of the lessor and registered on the International Registry. The lessee complied with an English court order granting the lessor possession of the four aircraft, but a lessee's shareholder subsequently filed a lawsuit with the Hanoi People’s Court requesting revocation of the deregistration certificates, and a preliminary injunction against the Civil Aviation Authority of Vietnam suspending enforcement of the deregistration certificates and allowing the lessee to continue management and operation of the aircraft.

The Hanoi People’s Court granted the preliminary injunction, which was upheld on appeal. However, the preliminary injunction is inconsistent with the requirements of the CTC, and the remedy of repossession is available to the lessor pending final determination on the merits, as long as the lessor provides evidence of default by the lessee.

Avation have a number of aircraft on lease with VietJet and indeed a few years ago during COVID times, Avation did make an application to the Courts over those aircraft but then managed to get assurances from Vietjet that satisfied Avation. Perhaps the threat of legal action was sufficient at the time.

However this latest case suggests that Aviation leased assets are at risk when operation on Vietnam; hence the fall in Avation's share price. What it also implies is that future deals will perhaps carry an additional risk premium making aircraft lease payments more expensive.

[Carcosa]

Some real world reference data as of February 2023

New ATR72-600 cost $19.3m
New aircraft lease rates $125k - $166k (Average $145.5k/month)
New lease rate 9%

New A220-300 cost $38.1m
New aircraft lease rates $235k - $290k (Average $262.5l/month)
Lease rate of 8%

New A321neo cost $59.6m
New aircraft lease rates $335k - $420k (Average $377.5/month)
Lease rate of 7.6%

New B737 Max 9 cost $51.9m
New aircraft lese rates $385k - $370k (Average $327.5m/month)
Lease rate of 7.5%

Out of all regional aircraft the ATR72-600 scores the highest for residual value, value for money, Operational success and remarketing potential compared to E175, E195-E2, ATR72-500, ATR42-600, ATR42-500, E190,195,E190-E2, Q400, CRJ900, Q300, E170, CRJ700, E175-E2, CRJ1000 and SSJ-100

[Carcosa]

Avation have hired Michelle Orlic's from Stephenson Harwood (A very large international law firm) to join Avation. As an aviation finance lawyer, Orlic has a wealth of experience advising clients on a wide range of aviation financing matters, including aircraft leasing, financing, and purchasing. Most recently she assisted in advising Lion Air Group restructuring. She spent 11 years at Stephenson Harwood leaving with the position of 'Of counsel' ( is a term used in the legal profession to describe a relationship between a law firm and a lawyer who is not an associate or partner of the firm but who works with the firm on a regular or semi-regular basis).

Of particular note is that Michelle is a finance lawyer with specialist expertise in the aviation sector. She has extensive experience on cross-border aviation financing, acquisition and leasing transactions. Her transactional experience in the aviation sector includes working on export credit agency-guaranteed financings, capital markets issuances, syndicated debt, OEM contracts, sale and leasebacks, novations, refinancings, private jet acquisitions and financings, helicopter financings, charter arrangements, satellite financings and Japanese operating leases. Follow this link to see the sort of work she has been associated with.

While she has focused on the aviation sector, Michelle has also worked on debt capital markets and banking and structured finance transactions, principally in the transportation sector.

Her new position at Avation is Head of Transaction Management

Her move to Avation, suggests that the company is looking to strengthen its legal and regulatory capabilities.

Clearly given her history she will not be cheap! I find it unusual for a company as small as Avation to be able to attract someone of that pedigree for run-of-the mill aircraft leasing when, as we are lead to believe, there are likely to be few transactions over the next couple of years.

[Carcosa]

Three Avation topics in today's post!

Staffing

I got asked on Twitter as to whether I thought Michelle's appointment was associated with finding a buyer for Avation.

I think not, it's not really her area of expertise. The appointment may be driven by recent concerns over the risks associated with the VietJet aircraft (see earlier posts) and the apparent ease at which Garuda dumped Avation's B737 back into their lap without return conditions or maintenance reserves being held.

Furthermore, legal expenses are running around $3m/annum and although Avation already have a very large part of their team associated with legal duties perhaps they felt it time to have someone with wider experience on the team.

It does seem rather extravagant having such a large percentage of the staff associated with legal responsibilities though; but perhaps they double up on other duties too; or maybe some have departed the company and hence a vacancy arised.


A220-300 Additions?

Air Baltic is seeking sale and leaseback financing for the final six of a total of fifty A220-300 deliveries. Three of these are expected in Q4/2023, and the others are due for delivery in March 2024.

The tranche follows the closing of eight A220-300 sale and leaseback RFPs involving Avation, CMB Leasing, Falko-Chorus Aviation, Aviation Capital Group, Altavair Airfinance, Azorra Aviation, GOAL and FPG Amentum-LHI.

Completion and closing of the offers for these last six are due by August 2023.

Given Avation have already sold one of the A220's they had with Air Baltic and refinanced two others I would be pleasantly surprised if Avation submit a competitive bid but I suspect they may feel there exposure to Air Baltic is enough already.



Bonds/Loan Notes

For reference here are some recently issued loan notes within the Aircraft Leasing Business which demonstrates how cheaper rates cab be achieved with scale and better credit ratings.

[Carcosa]

Since we are nearing the FY year end (June 30) I thought I would have a stab at what the results might look like when published probably in late September.

Prior to the pandemic it was relatively easily to predict the headline numbers because income was highly predictable as was finance cost. SInce the pandemic there are various other income/valuation streams/re-leases and the like which makes life a bit harder to predict!

If you want a cleaner image to look at then follow this link which shows the same data on a google spreadsheet.




Nearer the FY end things like the valuation of the Philippine Ordinary shares can easily be worked out (on the assumption Avation have not sold them in H2. Similarly, a good stab as to the change in value of the ATR options can be made, on the basis of a change of the of US treasury one year rate in lieu of not having all the data for Black-Scholes calculation.

Lease Revenue should be reasonably accurate bearing in mind that secondary leases will be bringing in a lot less income than before.

The more I look into it the more that I am certain Avation messed up over the handling of the B737 lease termination (leading to the high transition costs). The claim is that Garuda broke the lease; which is true.. They stopped paying. But given the circumstances they should have been confident to ride it out as did most other leasing companies and major creditors like Rolls-Royce and CFM/GE. Garuda is a state run enterprise. They have gone bankrupt several times in the past. Avation say that Garuda went bankrupt but this is a misstatement of fact. Garuda filed for Chapter 15 in the US but that only affected US based creditors. Chapter 15 is not bankruptcy. After a restructuring the creditors ended up getting paid. Avation should have made their application to the Courts in Jakarta. Must be remembered Garuda is a huge airline and one B737 is a decimal point on their balance sheet. Either Avation totally misread the situation in Indonesia or they were badly advised/refused to bribe. Perhaps not having a wealth of in-house legal talent did not help either. Even after the lease termination there could have been remedies explored to recover the excess of maintenance expenditure over and above the amount remaining in maintenance reserves.

A more hopeful interpretation, one that I think may actually have happened, is that Avation thought they could transition the aircraft right away but failed to do so. FYI I worked at Garuda for four years in the long and distant past.

PS... the last RNS regarding placement of the last ATR going to a mysterious customer in the Pacific is in fact another delivery to Air Tahiti. Either MSN 1025 or 1035. Probably generating an income of around $1.4m/year

[Carcosa]

Thought I would provide something of an industry news round up as it pertains to Avation's business.

ATR
ATR received nil orders in Q1/2023. However, given their very large backlog of 160 aircraft they have multi year orders to fill. They are targeting at least 40 deliveries this year, with the ambition to ramp up production to 80 aircraft in future years. Avation's marketing department tells me that if a customer placed an order with ATR today a new aircraft would not be delivered before late 2024 or early 2025 at the earliest.

This suggests that Avation will be well placed to start using trading their options; although I suppose I should be asking them what their revised agreed option delivery expiry dates are with ATR. It has been a number of years since Avation held some of their options for sale.

The reason is that should an airline/another leasing company want one or more new aircraft to be delivered 'quickly' the only way they can jump the line is to convince another airline to take their slot (which would be unlikely) or if someone like Avation has options prior to 2025 they can sell their options to them or, maybe, force the hand of the airline to go with Avation to lease the aircraft.

B777-300ER
Activity for this varient is strong and being helped by another B787 delay being advised to airlines in last couple of weeks (DNA owners should also take note) and aircraft fright conversions. The B777 aircraft valuations plummeted in recent years to near scrap value but the -300ER variant is seen as the best of the bunch and trading opportunities are on the increase because of good operational capacity. As International travel returns this variant should arrest its continuing fall in valuation.

Avation should now feel more confident with their B777-300ER in PAL as this month represents one whole year of the airline returning to monthly payments. However we do not know what the lower revised lease payments are. Pre pandemic it was ~$13.9m/year. Post pandemic ...?

I don't think Avation would argue too much if the opportunity comes to divest itself of this aircraft.

A330-200
This Airbus type is viewed as a relatively inexpensive asset. Some recent medium-term placements for mid-life aircraft are seeing lease rates of around $250k/month, some 25% more than in 2020. However that is much less than Avation were getting from their aircraft in Eva Air which is generating ~$850k/month (aircraft was only two years old when leased to Eva Air, is on lease for perhaps another four years). So everything else being equal I would be surprised if Avation wants to trade this aircraft.

Hope someone finds the above of some interest.

[Carcosa]

Industry News this week relating to Avation:

Before the news, I would point you towards the Annual KPMG Aviation Leaders Report If you don't read the whole thing then just see the Avation Financing section on Page 4


Trouble in India
The Aviation Working Group (AWG), which Avation is a member of, is an international organization that monitors aircraft leasing and financing laws. It has put India on a watchlist with a negative outlook. The AWG's decision comes after the Indian government granted bankruptcy protection to Go First, an Indian low-cost carrier.

As part of the bankruptcy protection, the Indian government ordered a freeze on Go First's assets, including its aircraft. This freeze prevented lessors from repossessing aircraft that they had leased to Go First.

This means that Avation now has assets in two countries (India and Vietnam) with some concerns over the implementation of the Cape Town Convention. This could make it difficult for Avation to recover its aircraft if a lease has to be prematurely terminated.

However, it is important to note that VietJet has recently posted its results and is in profit. They are also still paying their lease obligations. Alliance Air is a wholly-owned subsidiary of AIAHL (AI Assets Holding Ltd.) and made a loss in 2021/22. It is possible that their financial performance will improve in 2022/23. Avation has not been notified by either of these airlines of any non-payments, so for now all is good.


Philippine Airlines Q1 results, Share Price and hunt for ATRs
On 15 May, Philippine Airlines said it was looking to replace the remaining four De Havilland Canada Dash 8-300 aircraft with newer-generation turboprops. Given that there is really only one player in town, this means that they will be looking to acquire ATR aircraft.

In addition, Philippine Airlines saw a 78% improvement in operating income for Q1/2023 and signed a memorandum of understanding for nine A350-1000s. The share price rose on the news but is still down 5% YTD. Presumably Avation's holdings in PAL have similarly declined.


M&A Activity on the rise
Castlelake Aviation is reportedly in talks to acquire two aircraft portfolios owned by Wings Capital Partners and ALAFCO. The discussions come after a capital raise and leadership revamp, and follow rumours that Castlelake is one of the bidders for Standard Chartered's aviation business.

It is also suggested that Goldman Sachs is leading the talks with Wings, which had previously been rumoured to be up for sale. The Kuwaiti financier had initiated the sale of 23 aircraft from its portfolio three years ago, and had later invited several lessors to obtain information about the sale. In November 2022, ALAFCO agreed to sell 73 new and used assets to Macquarie for $2.21bn, which included 53 aircraft from its existing fleet.

What does this have to do with Avation? Remember this RNS on 7 April 2020?


Strategic Review and Formal Sale Process Update- The Board of Avation announces today that it is continuing its comprehensive review of the strategic options open to it in order to maximise value for shareholders. These options include merger and acquisition activity, an aircraft portfolio sale or review etc., as well as a potential sale of the Company through a "formal sale process"... The Company confirms that it has engaged with multiple interested parties as part of the formal sale process. Several interested parties remain but, in light of the market dislocation resulting from the COVID-19 pandemic, progress has been delayed.

That announcement prompted a 50% increase in the share price at a time of P/NAV of 0.7-0.8. Compare that to todays P/NAV of ~0.5. Given cost of debt has nearly doubled since 2020 and there are actors out there with access to much cheaper debt it would appear to me that if Jeff is minded to re-invigorate the Strategic Review and Formal Sale Process, a buyer would not be too far away.

When Jeff was willing to give up the company back in 2020 then there is no obvious reason as to why he would not do so again. Perhaps that is partially why he is driving the business for improved short/medium term shareholder returns right now and being more shareholder friendly; Note the last RNS regarding the Bloomberg webinar (details below) plus considerably more investor exposure by various management employees over the last few weeks.


Miscellaneous
Whether measured by Avation's fleet size or fleet value, the company is probably somewhere around the 50+ largest leasing company (excluding numerous Chinese Lessors) or in other words near the bottom.

There have been over eleven new aircraft leasing platforms established since 2020. In addition, there were 37 new airlines launched in 2022. This suggests that the aircraft leasing market is becoming increasingly competitive.


Forthcoming Webinar
The Bloomberg webinar on May 24 will discuss how aircraft lessors are dealing with higher funding costs, aircraft supply chain issues, uneven global recovery, ESG goals and lingering insurance concerns with Join Jeff Chatfield and Bloomberg Intelligence senior aviation analyst Tim Bacchus. Click here to Register.

[nr98]

Hey Carcosa, thanks for the indepth coverage.

Few highlevel questions I have w regard to my DD:
1. How do you think of purchase rights as an asset on b/s. Yes, previous acquisitions via merger proxy have all been based on a multiple of book value but other lessors didn't record purchase rights as an asset; of how much value would this be to an acquirer? Would it be fair to mark this at full value? Net of this option, NAV is reduced dramatically and AVAP doesn't trade at a huge disparity to larger lessors i.e. Aer and AL. Moreover, the option is pure turbo prop and ends 2027, wondering your thoughts on this.

2. Turboprop ATR's attractiveness. Didn't hear very favorable opinions on ATR turboprop; according to mgmt, Bombardier has ceased production and so ATRs are the only replacement choice for old turboprops. How true is this? And has secondary market valuations held up - any sources I can use to check on this.

Appreciate

[nr98]

Just a little more on the turboprops' value. Despite management saying how valuable turboprops are, they've still been sold at a discount to book in the past 2 years.