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  • Writer's pictureMark Watson-Mitchell

Avation – Cheap And Now Ready To Fly Away

The recently issued Trading Statement from this group has alerted me to its potential value – I may well be late to the show, but I do feel that there could still be some useful upside in buying its shares ahead of its next Corporate Update.

The Business

Based in Singapore, Avation (LON:AVAP) is a commercial passenger aircraft leasing company.

It owns and manages a fleet of widebody, narrowbody jet and turboprop aircraft which it leases to airlines across the world.

The company's customers include 16 commercial airlines in 14 countries.

Primarily, the company is an operating lease provider and prefers to lease commercial aircraft to airlines for a suitable period.

Current Fleet

Avation's fleet of 34 aircraft, which is currently fully leased and utilised, includes 19 ATR turboprop, 13 narrowbody jet and 2 widebody jet aircraft.

The average age of the fleet is 7.2 years, and the average remaining lease term is 4.3 years.

The fleet generates $7.9m monthly lease rentals.

The group is committed to a ten-year programme for the supply of new regional aircraft with sensible economics as a key component of its long-term business strategy.

Market Environment

According to IATA, passenger air travel grew at 13.8% in the year to end March 2024. 

It is reported that international travel is showing strong momentum with 18.9% year-on-year growth in revenue passenger kilometres. 

At the same time, supply chain constraints have slowed new aircraft deliveries. 

I was interested to see that IATA expects around 1,600 new aircraft deliveries in 2024, which is about 4.6% of the global fleet and compares to a fleet renewal rate of 5.8% in 2018.

This market backdrop has been supportive for aircraft valuations and lease rates over the last year with Avation seeing positive trends for both new and second-hand aircraft.

Recent Announcement

From time to time the company is willing to dispose of aircraft, if valuations are constructive.

Avation has placed orders for 12 units of ATR 72-600 aircraft, of which the first two aircraft in the series are due to be delivered in Q4 2024 and Q1 2025.

The decision has been made to sell these next two deliveries, due to attractive economics.

The company expects net cash proceeds of over $10m at completion of the sales of the two aircraft, with the proceeds earmarked for pre-delivery payments for Avation's ten-aircraft ATR 72-600 order.

Following the exercise of purchase rights for the ten aircraft, the group was granted six additional purchase rights and the expiry date for all 24 remaining purchase rights has been extended to June 2034. 

It is believed that these purchase rights have significant value.  

Management Comment

Executive Chairman Jeff Chatfield stated that:

"The Company is at a transition point in terms of improving shareholder returns alongside cash flow generation and growth.

We are confident of improving returns to shareholders by carefully optimising the mix of sources of finance available to the Company and are finding asset backed financiers to be extremely constructive."

The Equity

There are some 70.82m shares in issue, with boss Robert Chatfield holding 18.12% of the equity.

The larger holders include Rangeley Capital (25.81%), Canaccord Genuity Wealth (8.61%), Slater Investments (7.08%), M&G Investment Management (4.80%), FourSixThree Capital (4.78%), Milkwood Capital (3.40%), Oceanwood Capital Management (2.44%), Jupiter Asset Management (1.63%) and Columbia Threadneedle Asset Managers (1.51%).

Broker’s Views

Analyst Damian Brewer at Canaccord Genuity Capital Markets rates the group’s shares as a Buy, having set an eye-watering Price Objective of 280p.

For the year to the end of this month he is estimating that the group’s revenues will have lifted to $92.8m ($91.9m), while his adjusted pre-tax profit view is for $48.8m ($21.7m), with earnings more than doubling to 65.6c (29.8c) per share.

For the coming year much more conservative estimates reflect the change in the business, with Brewer looking for $95.5m revenues and just $8.1m adjusted pre-tax profits, worth 11.6c per share in earnings.

The estimates for the year to end June 2026 are for $97.0m revenues, $10.6m profits and 14.8c in earnings.

Over at WH Ireland, analysts John Cummins and Charlie Cullen are going for current year revenues of $90.3m, with adjusted pre-tax profits of $45.0m and earnings of 57.6c per share.

Their 2025 estimate suggest $90.8m revenues, with just $4.5m profits and 5.7c per share in earnings.

The broker’s ‘fair value’ is 250p for the shares.

My View

It is not so much valuing this group on its earnings, but instead on the perceived net assets which it holds.

Taking an average between the price aspirations of the two brokers above, suggests 265p as the median value.

In the last year the group’s shares have been as low as the 78.88p which was scored in late September last year, with the recent high being 155p reached on 24th May.

The current market price of 142p values the whole company at around £100m.

There could well be another Trading Update being announced early next month, just after the group’s year end of 30th June.

Then the full results should be published before the end of September, so there is a good pathway of news, plus, of course the possibility of other corporate newsflow.

Certainly enough, I believe, to maintain interest in the group’s undervalued shares.

(Profile 03.06.24 @ 142p set a Target Price of 175p)




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