Avation issued their
Results for YE June 2022 Since July, I have been cautiously been turning into a re-buyer of Avation shares (see prior posts) and am happy to see these results.
Highlights were
· Profit after tax of $17.1 million (2021: $84.9 million loss);
· Earnings per share of 24.7 cents (2021: Loss per share 131.2 cents);
· Net asset value per share increased 63% to £2.68 (2021: £1.64);
(Note given change in exchange rates that is now
~£3.00 (versus share price of 100p)
· Profit before tax (before non-cash loan modification charges) of $34.9 million (2021: Loss before tax $120.5 million).
So headlines are very good indeed. The NAV is a tad lower than I had anticipated but I can only see this number increasing for the interims based on the fact that aircraft revaluations will continue upwards because of inflation and continual reversals of impairments.
On Aug 6/22 I said:
The company needs to begin expanding its fleet and acquiring new customers as soon as possible.
To which Avation have clearly laid out with plans to focus on Airbus NEO and A220 series in addition to ATR 72 aircraft (one delivery this year and another for 2023).
I still maintain the view that the ATR72 options should not be valued in the manner that they are, but I've been going on about this for years. Basically if they can't provide customers for the aircraft they lose the option at cost. However given Avation are a big customer of ATR it seems the manufacturer has indicated they are happy to be flexible with aircraft production scheduling.
"Avation has reviewed the values of aircraft in its fleet and reversed some of the previous impairment charges and increased the overall value of the fleet. The increase in valuation represents a small proportion of the impairments taken during the pandemic. The review resulted in $3.7 million of impairment being reversed in the six months ended 30 June 2022 with a further $17.5 million recorded as an increase in the asset revaluation reserve. The value of aircraft purchase rights has also increased."
How the options can have a near total reversal in value without a similar level of improvement in the ATR fleet is a bit odd to me. Just goes to show how divorced Options are from real world assets. Nonetheless there is obvious scope for further and significant improvements in the fleet asset values to improve.
Most positively are the following improvements in the
calculations I do relating to the Ratings Criteria
Net Debt to Equity < 4 (Company) = 3.5
EBITDA to Interest Ratio >2 (Company) = 2.34
EBIT Interest Cover (>1.5) (Credit Agency) = 1.54
Funds From Operations to Debt (> 7-9%)(CA) = 10.3%
These are significantly improved and within 'limits' for the first time since 2019/2020
Also Loan to Fleet Value of 71.6% which is the lowest since 2017! This brings it more into line with typically traditional worldwide LTV's. This may be a consequence of prudent activities within an increasing debt cost environment and clearly helped by aircraft/options valuation uplifts. Seriously, this is good. Note, the 71.6% calculation excludes cash which is a typical measure outside of Avation. I much prefer to use this measure as an indicator of what's really going on operationally because it excludes cash sitting on the balance sheet.
They now have a minor equity stake in Philippine Airlines. Share price can be found here:
https://www.marketwatch.com/investing/s ... trycode=ph but the AUD / USD exchange rate has not helped either. Seems the valuation is around $3.5m
I asked several questions during the investor calls;
What is the situation regarding selling the company (as was the plan prior to COVID) - Receives enquiries all the time every 2 weeks but not well formed. Brokers and advisors deal with them. Not seeing much M&A in the sector due to coming out of COVID and turbulence in the finance market
Jeff wants to continue with AVAP Not start anew or be second fiddle to a takeover. Seems to be looking forward to taking Avation further.
Inflation affects the residual values. At time of the Results they were using a 2% inflation rate. Going forward this will undoubtedly increase
Spare engine lease support; seems to be getting out of this business as its problematical unless done in large size
Expect further upward revisions to the fleet valuations. Appears things were going too fast during the auditing for this years results which meant that H1 aircraft valuations were not as high as they could have been. More scope for upward valuations in H1.
Post Finals:
B737 expected to be sold by XMAS (unencumbered)
Myanmar ATR already to be transitioned next month
$5.5m already received (Aug) from Virgin. Another $1m expected
Have already paid $3.5m pre-delivery payments for two ATR's
Should be noted that interest rates do not really affect leasing business. It's the spread between debt cost rate and lease rate that is important. In other words Avation is not impacted by rising interest rates.
I fear investors may runaway with the idea that all is great now. Reality is that things are very very good in terms of NAV and will likely improve a great deal over the next two years.
However profitability for 2023 is on a knife edge. It is the revaluation of the Options that made things look great on this metric. That will not happen in H1/FY 23. As things stand at the moment I calculate a very small profit is likely to be had.
Therefore Avation need to continue to do what they are doing. Namely sell the B737 (unencumbered), create new business with A320/220/ATR's. They have the ability to take on a lot more debt and secure new business to get back to growth.
Overall with a 3-5 year time horizon buying Avatino shares is not a bad idea especially with the ever present possibility of being taken over.