Potential Inflection Play
Prescience Point Capital Management recently presented an investment pitch on AerSale, a global aviation aftermarket service company. The investment thesis is centered around two key factors: the anticipated imminent approval of ASLE’s enhanced flight vision system, AerAware, and a medium-term play leveraging industry tailwinds. The Federal Aviation Administration (FAA), the regulatory authority, is expected to grant approval for AerAware shortly, following the successful completion of the final set of test flights in late August. Typically, this process takes approximately 30 days after the last flight testing. Upon approval, the company is poised to announce multiple substantial orders from airlines that have already expressed keen interest in the product. A single large order alone would more than double ASLE’s annual adjusted EBITDA, potentially propelling ASLE shares to exceed $20/share. This implies a near-term upside of over 30%.
In the medium term, AerSale’s core business is anticipated to rebound within a favorable environment for commercial aircraft aftermarket services and products. The scarcity of new aircraft due to supply chain and production challenges, coupled with the rising passenger traffic, has increased demand for parts, maintenance, repair, and overhaul (MRO) services, as well as leased aircraft and engines. This supply/demand imbalance is not expected to be resolved in the short term, forcing airlines to rely on older aircraft. This suggests that the commercial aircraft aftermarket is entering a prolonged period of growth. ASLE is well-positioned to capitalize on these industry tailwinds, having significantly expanded its inventories, including airframes, engines, and entire aircraft. Combined with the expected substantial orders for AerAware, this expansion is projected to triple ASLE’s adjusted EBITDA from the guided range of $40 million to $55 million for FY23 to $155 million in FY24. Valuing these earnings at a 15x multiple, which is in line with lower-margin/growth peers, implies a price target of $45.90/share, indicating a potential upside of over 200%.
Note: The ‘Ideas Elsewhere’ section is intended to highlight interesting event-driven investment ideas by other authors. These ideas are not my own, and I am simply summarizing them to bring attention of SSI subscribers. I might not actively follow the developments of these ideas, so there might be limited updates or follow-ups in the comments section.
I’ve just got to think the approval and initial orders are already priced in. But that would make it incredibly cheap, so . . . I don’t know.
When Aersale posted an update on the FAA approval process, the stock jumped 4%. Now it is back down by about 9% from that high on no new information. I think this means that the market will react positively to an approval by the FDA but also that they aren’t treating it as guaranteed by any stretch.
As Prescience tells it, the approval process has dragged on for years, and investors have lost interest. Perhaps investors have come to not take what management says at face value because of this as well. IIRC, they have said in earnings calls that they have a major customer that they have been seriously talking to about a significant order, but do they really, or are they just being overly optimistic, and the buyer is actually only a tentative prospect? This is where Prescience’s sleuthing about United being the customer that they’re referring to comes in — as well as the fact that this technology could be a significant money-saver for the airlines. Why wouldn’t United be serious about buying a large volume of these? Personally, I think Prescience makes a strong case that the stock is undervalued, so I am long ASLE, but there’s certainly risk that the approval doesn’t happen for whatever reason or that the airlines don’t want the product for whatever reason.
Aersale is down to almost half of its high of $16.86 following the announcement of the FAA approval on… not much news at all, as far as I can tell. The only significant thing I found was this secondary offering, which I am guessing affected the supply of stock somewhat (4m additional shares on the market out of a total of 51m outstanding): https://finance.yahoo.com/news/aersale-announces-secondary-offering-common-223400342.html
I am curious if anyone has any thoughts here.
Leonard Green is looking to sell the rest of its 18.6% stake too, creating an overhang:
https://www.sec.gov/Archives/edgar/data/1754170/000110465924001840/tm242122-1_s3.htm
It’s a bad sign when the biggest shareholder that knows the business extremely well wants out at this valuation. It’s safe to say this investment didn’t perform well. 14 years is a long time for a PE company to hold but if it was really an inflection play why sell out now?
The original writeup cited 30-45 days from mid September for approval. It’s now much past that, so place your bets on what the value of the flightaware tech is. If you like the rest of the company at ~8-$9 /share then it’s a nice option. If not probably not worth gambling on.
The stock went down because of a few key reasons:
– Everybody was banking on some big orders announcement upon the FAA approval, thanks to two years of management bragging about a “launch customer.” No orders were announced. Shareholder communication has been poor, and IR has been unresponsive.
– Leonard Green sold a large portion of the stake at a discount to market prices. The timing was pretty as this happened right after the FAA approval. A few weeks later, Green registered the remaining stake, indicating intention to exit ASLE completely. However, it’s worth noting that the fund is pretty old (launched in 2007 if I’m not mistaken) and is seemingly liquidating. Green has been gradually selling the stake right since the de-SPAC, so it’s not 100% clear whether these recent sales are truly indicative of anything.
– Back in November ’23, a solid short report on the AerAware tech came out, claiming the product was redundant, had no future and was massively “overhyped” by the management. On top of that, it appeared that management hid a large patent infringement lawsuit from shareholders. You can imagine how the recent events after FAA approval looked like in light of this short report.
At one point, I was even thinking of shorting this, but decided it was too risky. Core business is very lumpy and difficult to value. It basically hinges on how well management can navigate the aftermarket airplane components scene, and they’ve been doing alright in recent years. Moreover, management has now ramped up the inventory with a lot of new feedstock and is saying the aftermarket components industry is beginning to inflect. The cargo airplane prices recently rebounded as well. ASLE trades at 11x 2023E EBITDA, completely in line with a somewhat comparable peer AIR (although management argues ASLE is a better business).
So shorting this is tricky. The core business isn’t clearly overpriced, and any surprise AerAware orders could prompt a share price jump, resulting in a big loss on the short position. Meanwhile, going long ASLE as an option play on AerAware success also seems risky as if it finally turns out AerAware is a flop and the patent litigation news come out, the stock could drop even further.
Short report – https://ningiresearch.com/2023/11/16/research-report-aersale-corporation-nasdaq-asle/
Some original Fund V investors from 2007 exited already, the rest rolled their stakes over into a continuation fund where it’s now held.
Does anyone have any updated thoughts on this one?
Their overall industry has been white hot from FTIA, to the strong SARO IPO, and (my favorite) WLFC. So ASLE’s poor business performance is a mystery; management has over promised and under delivered. They neither execute well nor explain the gaping chasm between their plans and what demonstrably happens with either their core business or their manufactured products such as AerAware. But the stock move largely reflects that, so others can chime in with a directional view from here. I don’t have a clear one. I know only that everyone else seems to be flooded with demand and barely able to keep up while asset values (especially WLFC’s engine fleet) have rushed far ahead of their stock price.