Quick Pitch: Avation (AVAP:L)

Activist Campaign / Company Sale

 

This is a bet alongside Jeremy Raper and Rangeley Capital in expectation that one way or another they will help close the discount gap relative to peers and book value of the airplane fleet.

AVAP is a $110m market cap UK-listed aircraft leasing company. The company is currently trading at 0.49x P/BV vs. 0.9x multiples for much larger aircraft lessors. Recently, Rangeley Capital acting in concert with Jeremy Raper has accumulated a 26% ownership in AVAP. The action plan has not been disclosed yet, but here’s what Jeremy said during a recent podcast:

I’ve raised money and entities I manage have taken a 20 something percent stake in a listed aircraft leasing company in the UK called Avation, AVAP. This is all public filings. And you know my goal is to maximize value for all shareholders. It’s ostensibly a very cheap equity and I have a number of ideas to kind of create value for all shareholders.

Jeremy has highlighted that the landscape for smaller aircraft lessors has deteriorated amid higher interest rates, given their lower bargaining power and credit ratings. So the playbook may revolve either around company sale to a larger industry player or liquidation of its airplane fleet.

They (larger lessors) are managing to pass on the cost of higher interest rates to their customers. And it’s not showing up in credit yet, meaning they can charge higher yields without having to take huge impairments. […] But if you’re a smaller lessor, you don’t have that power. The cost of debt is going up. Maybe you need to go for below market leasing. Spread is getting crunched. It’s haves and have nots.

Important to note that the largest part of this stake (19% out of 26%), was acquired from the shutting-down hedge fund Oceanwood Capital at 79p/share (market price was 100p at the time). So for this portion of the investment, Jeremy/Rangeley are already sitting on 50% paper gains. However, the rest of the stake was accumulated at the end of October / beginning of November around the current market prices. I do not think these incremental purchases have been done only to breach the 25% ownership threshold – even at today’s prices the company is still very cheap relative to peers and equity value is fully backed by the liquid aircraft fleet.

During a shareholder meeting in late November, AVAP’s management (executive chairman owns 19%) stated that they have not yet had any discussions with Rangeley/Jeremy yet – their response to question about this:

Not particularly because they have been buying shares and they’re following the rules and want limited interaction with the company until that program is completed. So, we’re not really in a position to comment at the moment.

However, management’s previous comments kind of indicate that might be open to consider sale of the company – from a May’23 webinar:

In 2019, we received a proposal from an investor to buy the company. We haven’t had one lately. Over a period of time you’ll see more appreciation from investors for this sector: it has done super well out of COVID. You’ll see consolidation. […] I’m shocked we don’t see more investment grade lessors buy the sub-investment grade ones.

 

AVAP Book Value

Here is the breakdown of AVAP’s book value.

AVAP1 1

Note: the indicated share count includes 6m of warrants issued to Avation noteholders, these are exercisable at 114.5p by Oct 2026.

Cash ($117m). That is higher than the current market cap. Note covenant details and minimum cash requirements have not been disclosed in the annual report, but if the company chose (or was forced to) return just a part of this cash to shareholders, it would be hugely accretive and likely result in material spike in the share price. The amount of cash held by other aircraft leasing peers is a significantly smaller portion of aircraft fleet BV (AER at 5%, AL at 1%), so probably at least half of the reported $117m pile could be regarded as excess cash.

Airplane Fleet (BV of $845m + $8m). AVAP’s fleet consists of 36 airplanes, including 21 turboprop (regional), 13 narrowbody, and 2 widebody aircraft. The average aircraft age is 6.4 years with average remaining lease term of 5 years. The airplanes are leased out to 17 airlines in 14 countries, with a focus on Asia (74% of total planes leased) and Europe (26%) (see here, p. 16). Given that the fleet is predominantly regional and narrowbody, AVAP’s planes are generally operated on short-haul routes.

I have done some online checks to see how much this airplane fleet could be worth if sold today piecemally and it seems that the reported book value falls within my low and high end estimates, based on publicly reported pre-owned aircraft sale values (keep in mind these are rough estimates and some line items might not be accurate).

AVAP2

Turboprop ATR 72-600 planes comprise 40% of AVAP’s fleet value and might seem like the biggest risk in terms of valuation. However, over the last fiscal year, AVAP sold three ATR 72-600 airplanes above or close to their book values (see here, here, and here). Also, since 2020, the price of new-build ATR 72-600 has been gradually creeping up (table below). Corresponding to the same price increase trend, in both FY22 and FY23, AVAP recorded significant gains on purchase rights to acquire additional 28 ATR 72-600 airplanes.

AVAP3

My read from all of this is that these aircraft models are in high demand and that the fair value of pre-owned ATR 72-600 planes is likely to be at least in line with the depreciated cost basis. The ATR manufacturer itself also indicates high demand for its aircrafts and plans to double the production capacity in the coming years:

The goal for 2023 is to maintain our position as the leading regional aircraft manufacturer, by targeting at least 40 deliveries, with the ambition to ramp up production to 80 aircraft in the coming years.

All in all, I think that AVAP’s airplane fleet book value reflects the realizable value of the assets fairly well.

Aircraft Purchase Rights (BV of $86m). AVAP holds purchase rights to acquire 28 ATR 72-600 planes from the manufacturer, with deliveries on or before June 2027. While the company provides limited details on these purchase rights, AVAP has the contract since fiscal 2018. To re-value these rights regularly, AVAP uses the Black-Scholes option model rather than actual changes in the new-build plane values. However, as shown in the table above, the price of new ATR72-600 increased by c. $2m since beginning of 2022, which would sum up to a $56m gain on purchase rights for the 28 aircrafts on order. This also ties in with the reported $21m and $38m of unrealized gains for these purchase rights during FY22 and FY23. The rest of the gain ($27m) was recorded during fiscal 2020.

Thus the $86m on AVAP’s balance sheet attributed to these rights seems to correspond to the actual increases in plane values, and quite likely a similar amount could be gained in sale / rights transfer scenario.

 

An accretive target for larger players

An acquisition of AVAP or its aircraft fleet would appear to be highly accretive for larger aircraft lessors, even at a premium to the current share price levels. Publicly-listed competitors AER, AL, and BOC Aviation (2588:HK) are currently trading at significantly higher book value multiples of 0.93x, 0.63x, and 0.91x P/BV, respectively. The valuation discrepancy is warranted, given that these comps are much larger and have displayed significantly lower costs of debt and scale efficiencies over recent years (charts below). As a result, these comps are generating ROEs of 10%+ whereas AVAP remains unprofitable excluding unrealized gains.

AVAP4 1

Fleet lease yields are fairly similar across the group, however AVAP’s higher cost of debt is driving down the yield spread. This difference is only likely exacerbate going forward, when the company will need to refinance its debt at much higher interest rates – being a small industry player AVAP not able to pass the increased borrowing costs to its customers as effectively as large industry players. On top of that, there is usually a lag between increases in interest rates and corresponding improvement in lease rates (partially due to multi-year contract terms). This would pressure AVAP’s profitability even more in the short term. Just by re-financing AVAP’s aircraft fleet at more favorable rates (i.e. relative to lease yields), potential acquirer could realize material gains – 2% spread improvement would result in c. $15m of pre-tax gains.

Another way to look at the value AVAP in the hands of the larger peer would be check incremental profits that the acquisition of the fleet could generate. The net income for listed peers tends to hover around 3% of the fleet book value. At this level, AVAP’s fleet could produce c $26m in net income, implying that the company is trading at 4.5x potential earnings of the current asset base. Meanwhile listed peers sit at around 8x-9x PE.

Precedent transactions also suggest any acquisition would be done much closer to book value vs the 0.46xBV that AVAP is currently trading:

  • In 2022, AER acquired GE’s Capital Aviation Services business for $30bn or approximately 0.8-0.9x P/BV (see here).
  • Also in 2022, SMBC Aviation Capital bought Goshawk Aviation at 0.82x P/BV (see here).
  • This year, Avilease acquired Standard Chartered Aviation Finance business at over 2x P/BV (see here).

I do not think the likes of AER, AL or BOC Aviation would be buying out AVAP outright as these companies concentrate on larger Boeing/Airbus jets and have limited/no fleets of turboprop planes. I have used these companies as examples of where airplane lessors trade and what profitability levels could be achieved with improved scale/efficiency. Still these players might be interested in piecemal purchases of the Airbus/Boeing planes from AVAP, and that’s already 50%+ of the fleet value. And then we have slightly smaller lessors such as DAE which among other aircraft also has a fleet of 67 ATR-72. Aside form the lessors, a number of regional airlines with existing ATR-72 might also be after AVAP’s book – 21 operating ATRs and further 28 on order – for a quick boost in capacity.

 

Why has Oceanwood sold out at such a low price?

The part of the thesis that I fail to fully understand is this – if the upside is so easily recognizable/realizable, why did Oceanwood Capital sold its stake so cheap – 20% below the market prices at the time and at 70% discount to book value?

AVAP amounted to c. 4% in Oceanwood’s portfolio and the stake was disposed as part of the fund’s liquidation. However, my read of the situation is that this was not a fire sale scenario where the fund was pressured by margin calls and client redemptions. Oceanwood fund is shutting down as its deputy CIO, who previously co-managed the fund with the founder, decided to strike on his own. Seemingly, there had to be sufficient time to shop the investment around in order to find a buyer at a higher price. Oceanwood could have explored a sale to various parties, including AVAP’s peers in the leasing industry.

The company also holds plenty of cash – $116m as of June – that is just idly sitting on the balance sheet. To buyback shares from Oceanwood even at the current 123p market price (vs 79p where Oceanwood sold) would have amounted to only $20m and would have significantly enhanced the value for the remaining shareholders, including the executive chairman who holds an 18% stake in the company. The chairman himself should have been interested in doubling his ownership in AVAP at an attractive price. Finally, Oceanwood’s stake could also have been sold to the yet-to-be-launched hedge fund of the ex-CIO.

I am obviously not privy neither to the exact circumstanstance of Oceanwood’s liquidation nor to any agreements that Rangeley / Raper might have with Oceanwood re the sold AVAP stake. So maybe there is a very easy and clear explanation for this. If Jeremy / Chris are reading this, congrats on what so far seems to be shaping up to a slam dunk of an investment.

21 Comments

21 thoughts on “Quick Pitch: Avation (AVAP:L)”

  1. Thanks for the note. Few queries:
    1) Avation is an unprofitable subscale player, so why should they buy back shares? I would argue they should first fix their balance sheet.

    2) I am curious why GE’s Capital Aviation and Goshawk were sold for 80% of BV while Standard Chartered Aviation was for 2x? That is a big difference. Moreover, shouldn’t Avation go much below 80% BV as it is subscale and burning cash?

    3) what is the source of publicly reported pre-owned aircraft sale values?

    4) What is the source for CMV and MLR data?

    Thank you.

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    • Thank you for the questions:
      1) I am not saying they should be buying back shares if Avation continues to operate in its current form. Expensive debt is clearly a bigger issue. However, if one looks at asset/company sale scenarios, then cashing out some of the shareholders materially below BV would be very accretive for the remaining shareholders, including the executive chairman. Large cash simply provides optionality.
      2) I am unable to comment on the differences in valuation, but it might have had something to do with a high embedded leverage for the Standard Chartered transaction (gross assets of $3.8bn vs net assets of $0.3bn).
      3) Values of pre-owned aircraft – I have really just gathered these from various random places and press releases, so as I have already noted, it might not be accurate. Some info came from avitrader.com, airliners.net. If you come up with more accurate estimates, please share.
      4) CMV and MLR table was taken from here (https://www.lemonfool.co.uk/viewtopic.php?f=33&t=6425&sid=74d041a353dd7dd723ea0114f66f741a&start=260). It was compiled by aviation consultancy Ishka.

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      • Thank you, dt.

        1) Can you please explain your point: “if one looks at asset/company sale scenarios, then cashing out some of the shareholders materially below BV would be very accretive for the remaining shareholders” ? If the company gets sold in the future, shareholders would anyway get the cash on the balance sheet.

        2) It seems this situation could be dead money unless we have some clarity when the company decides to narrow the gap.

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      • 1) It’s a matter of repurchasing $1 at 60 cents.

        Let’s look at this from the perspective of the executive chairman. He currently has 18% stake in the company. If he could use part of the cash balance to repurchase shares from minority shareholders at let’s say 0.6x BV, he would increase his % ownership in the company on an accretive basis. Then if the company/assets are eventually sold closer to the book value, then the value of this incremental stake would be higher than the pro-rata portion of cash that was spent to repurchase shares materially below book value.

        2) Correct – AVAP has always traded under 0.5xBV or even below 0.4xBV. However, Rangeley/Raper did not enter this setup just to keep it as ‘dead money’. I would expect some kind of initiative from their side (together with management or without) over the coming months.

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      • yeah, ok. Timing is important because they are burning cash.

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  2. Thank you for the pitch. Do any other airplane lessors capitalize purchase options and include it as an asset on their balance sheet? I don’t recall seeing this listed as an asset on AL or AER’S balance sheet. Why would some lessors include this and other don’t? Is there a reason via IFRS and GAAP, or does this say something about management (i.e. is this aggressive accounting)?

    It accounts for most of the P/B discount relative to peers. If you adjust for capitalized aircraft purchase options maybe the P/B difference isn’t so great. Thanks again.

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    • Initially, I wanted to deduct the value of aircraft purchase rights from BV calculations and had a similarly skeptical view. However, it seems that the increases in the value of the purchase rights are backed by documented increases in the prices of the new ATR72 planes. The demand for these aircraft also continues to be elevated. AVAP estimates the value of these rights using the option model, so the figure on the balance sheet is a sum of the actual observed plane pricing increase + any remaining time value of the option. In an ideal case, we should be deducting the second part to estimate BV realizable today more accurately. But as the volatility in plane prices is low, this time value of future ATR72 price fluctuations should be quite limited.

      You are correct to point out that neither AER nor AL have this kind of line item on the balance sheet. I am not sure whether this is due to different accounting standards or management’s aggressive accounting (I would think the former). And maybe BV multiples would be much closer among these companies if AER and AL also reassessed the value of their order book and recorded it on the balance sheet (though the differences in earning multiples would not be affected by this). But worth pointing out, that these planes have been on ATR’s order book since the end of 2017, whereas only a small portion of AERs or ALs order book originates from 6 years ago. So AVAP’s order book had more time to age and in turn, might have become relatively more valuable vs contractually agreed plane acquisition prices.

      But my key point here is that disregarding differences between the peers, I think this is a real asset and any potential buyer would be forced to pay up something fairly close to AVAP’s estimated value for these ATR72 purchase rights. So this is not only a balance sheet entry resulting from potentially aggressive accounting.

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      • I’m a CPA and a bit of an accounting wonk who worked at the FASB (the U.S. accounting standard setter) for almost 10 years. AER and AL follow USGAAP, whereas AVAP follows IFRS. Both sets of standards have special accounting for purchase options that meet the definition of a derivative (and should be measured at fair value), but are related to the purchase of an asset that the company may use in its normal operations. If a company has an option to purchase an asset that they will use in their business, the company can elect to recognized the option at its cost (and not remeasure at fair value each period) if certain criteria are met. AVAP does not likely qualify for this alternative from fair value accounting for at least some of their purchase options because in their annual report they note, “The Group has determined that it would seek to dispose of excess aircraft purchase rights over and above its requirement to acquire additional aircraft for its fleet. ” For the options on aircraft that they intend to use, their is still an alternative in IFRS to recognize and remeasure them each period at their fair value, but certain conditions must be met. So it appears that the accounting is not aggressive for at least the purchase options for excess aircraft that they intend to sell and not take delivery. For the remaining options, as long as they qualify for fair value accounting, then it’s not outside of the rules.

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  3. I wouldn’t worry about Oceanwood Capital. Different investors have different views and priorities and in their case it sure seems like the CIO might have been motivated to close out the portfolio quickly so they could move on to their next job.

    The issue I see here it has a lot of leverage and the actual catalyst isn’t specifically known yet (sale, dividends, etc). Raper has a great track record so this is likely to do well too but it has more moving parts than his mining lawsuit plays, and combined with that leverage makes it seem risker. If we had a (unlikely) second pandemic it could be a zero. I’m thinking to pair it with a put that pays off well out of the money as a hedge but I don’t see any LEAPS available for the stock. Any ideas on other ways to hedge, such as a way to short turboprop airliner values?

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  4. Thank you, Dt, for the write-up. If it might be of help for anyone, I’m sharing my amateurish attempt to triangulate the AVAP plane values. Just public sources, I did not have access to any premium aviation data subscriptions. AVAP provides minimal info on the fleet so I was trying to find values of approx 6 year-old planes of various models.

    **ATR72-600:** @ $15 million
    – Value of a new aircraft as of 2023 is $22 million. Avitrader.com (https://avitrader.com/2023/02/27/narrow-body-aircraft-values-recover-in-2022-and-set-for-2023-climb/)
    – As this is the main aircraft of AVAP, in a recent earnings call, they have disclosed that the new aircraft price stood at $21.3 million as of Dec’22 based on IBA Insight data. H1 earnings deck (https://www.avation.net/files/AVAP_Inv_Presentation_3Mar2023_final.pdf)
    – In 2021, 4-year-old plane were going for about $13-14 million (likely these prices were affected by Covid so would need to be adjusted upwards). IBA Insight (https://www.iba.aero/insight/turboprop-aircraft-values-show-positive-trends/)

    **ATR72-500:** @ $6 million
    – In 2021, 10-year-old ATR720-500 was going for $6 million. As these planes are no longer in production, I am just using the value of 10-year-olds in 2021 as my average plane value in the AVAP’s fleet. IBA Insight (https://www.iba.aero/insight/turboprop-aircraft-values-show-positive-trends/)

    **A220-300:** @ $30 million
    – New A220-300 in March 2022: $36.1 million. Cirium Aviation Analytics (https://assets.fta.cirium.com/wp-content/uploads/2022/03/23235419/Aircraft-Value-Guide.pdf)
    – New A220-300: $37 million, 4-year old value: $28 million. IBA Insight, from two years ago (https://www.iba.aero/insight/tracking-airbus-and-boeing-narrowbody-aircraft-values-in-2021/)
    – Range between $26.2 and $38.8m provided on Airliners.net, aligning with the two other sources. Airliners.net Forum (https://www.airliners.net/forum/viewtopic.php?t=1484553)
    – New at $39m in 2023 Avitrader.com article based on IBA’s new estimates also squares with the forum numbers. Avitrader.com (https://avitrader.com/2023/02/27/narrow-body-aircraft-values-recover-in-2022-and-set-for-2023-climb/)

    **A320-200 (ceo):** @ $25 million
    – Market value of 5-year old A320-200ceo in July 2022 at around $25-26 million and 10-year-old at the same timeframe at $17-18 million. IBA Insight (https://www.iba.aero/insight/narrowbody-aircraft-values-update-august-2022/)
    – Market value from the oldest to the newest at Airliners.net from $3.8-34.6 million. Assuming a reasonable 5-7% depreciation per year gets us to $23-25 million on a 6-year-old plane in line with IBA estimates. Airliners.net (https://www.airliners.net/forum/viewtopic.php?t=1484553)
    – 12-year old A320-200 estimated to be worth about $18 million (about 6% depreciation from the current market value estimates). Avitrader.com (https://avitrader.com/2023/02/27/narrow-body-aircraft-values-recover-in-2022-and-set-for-2023-climb/)

    **A321-200:** @ $27 million
    – 4 years old A321ceo was valued at $32.5 million, meanwhile, the 12-year-old is estimated to be worth $18 million as of the end of 2021 (about 7% yearly depreciation). IBA Insight (https://www.iba.aero/insight/tracking-airbus-and-boeing-narrowbody-aircraft-values-in-2021/)
    – Range between $9.2 million for the old and $42.4 million for the new build A321-200. That’s about 27 million for a 6-year-old plane, assuming a rapid 7% annual decline in value. Airliner.net (https://www.airliners.net/forum/viewtopic.php?t=1484553)

    **A330-300:** @ $30 million
    – Expected value of 12-year-old A330 at $20 million in 2023 from Avitrader based on IBA’s latest reports. Avitrader.com (https://avitrader.com/2023/02/27/narrow-body-aircraft-values-recover-in-2022-and-set-for-2023-climb/)
    – Airliners.net range from oldest to newest is between $4.5 and $48.8 million. Assuming a 7% decline in value every year gets us to $31.5 million on a 6-year-old plane. (https://www.airliners.net/forum/viewtopic.php?t=1484553)
    – Listing price of a 2007 A330 at $20 million, so that’s about a 5% annual decline from the full life market value of A330. Assuming a similar rate of decline on a 6-year-old plane will get us to $35-36 million. Controller.com (https://www.controller.com/listings/search?Category=3&Model=A330%7CA321&Manufacturer=AIRBUS)
    – As of the end of 2021, a 10-year-old A330-300 was at about $25 million. Scope Ratings (https://www.scoperatings.com/ScopeRatingsApi/api/downloadstudy?id=e5107d42-f3c7-4bfc-be3b-3f93b1826c9f)

    **777-300ER:** @ $40-50 million.
    – Airliners.net estimated range between $17.2 and 92.5 million from oldest to the newest build. Airliners.net (https://www.airliners.net/forum/viewtopic.php?t=1484553)
    – Cirium estimated range is between $19.2 million and $27.2 million. Cirium Aviation Analytics (https://assets.fta.cirium.com/wp-content/uploads/2022/03/23235419/Aircraft-Value-Guide.pdf)
    – In the 2021 scope report, a 10-year-old 777-300ER valued at c. $43 million (7% decline from airliners.net upper limit estimate)

    With these figures the total sums up to just under $700 million.

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    • This is great, thank you!

      So is your conclusion that the value of the planes (~$700m) is $49m below DT’s low end estimate?

      Reply
      • The key differences between mine and Giorgi’s calculations seem to be ATR72-500 and Airbus 321 values.
        – The 321s on Avation’s fleet are relatively new aircraft that were acquired during the years 2016-2017 from Airbus. Back in 2017, the company paid c. $250m for 5 new A321. So my estimate of $32-$40m value for a six-year-old A321 is likely to be overly conservative, especially with plane prices increasing across the board due to inflation and other factors. These models are now discontinued and replaced by 321neo. As can be seen in this official pricing list from Airbus (https://www.airbus.com/sites/g/files/jlcbta136/files/2021-07/new-airbus-list-prices-2018.pdf), the list price for 321neo model ($129m) is only slightly higher than the non-neo-321 ($118m). These list prices are not what most companies end up paying, so not sure how much of a real referce tese are, but just this year Cathay Pacific recently placed an order for 32 new A321neos for $4.66bn, or $145m per plane (https://www.reuters.com/business/aerospace-defense/cathay-pacific-buys-32-airbus-a321-200neo-aircraft-466-bln-2023-09-29/).
        – For the ATR70-500. These were acquired new during FY2012. And the company shows a total of $108m paid for these planes in the cash flow statement, so $18m per plane. At the time the ATR72-600 cost approximately 25% more. So I valued these used planes at a slight discount to the values attached to the 600s models. My guess is $6m is a bit too punitive.

        Without having full data for used plane prices, this exercise is more of an art than science. We also have to keep in mind, that Avation is regularly reviewing the value of its fleet and deducting impairments if there is a mismatch with fair values. Some of these impairments get later reversed ($3.3m was reversed during 2023).

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  5. https://www.iba.aero/insight/regional-aircraft-performance-2023

    “ The top performer in the turboprop segment is the ATR72-600, which has seen an average 8% increase in values in 2023 compared to the previous year. This rise in value can be attributed to the cheap cost of passenger-to-freighter (P2F) conversions available for the type, coupled with the OEM facing little competition in the turboprop market – the only other viable option being the older DHC8-Q400.

    The interest in the aircraft type has surged over the last year, especially among airlines in search of capacity to meet the current market demand. This has led to many existing operators opting not to return their aircraft at lease maturity and instead choosing to extend leases at higher Lease Rates”

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  6. A good slide showing how AVAP’s cost of debt compares to other aircraft lessors. The net spread would increase by 50% if the debt is refinanced at peer levels.

    AVAP yield

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  7. AVAP reported H1’FY24 results with no major changes on the operational front. While revenues and operating income were down 17% and 50%, respectively, year-over-year, the declines were partially driven by one-off/non-recurring items. Company’s cost of debt continued to creep up to 6.3% in H1’FY24 (vs 6.1% in FY23 and 5.7% in FY22), but this was more than offset by an increase in lease yield from 9.7% in FY23 to 10.4% in H1’FY24. Nonetheless, the yield spread remains substantially below those of larger competitors, such as AER and 2588:HK. AVAP currently trades at 0.44x P/BV compared to 0.93x and 0.94x multiples for these larger aircraft lessors.

    During the conference call, management was asked multiple times about the wide discount to NAV and the involvement of activist investors. No material updates have been provided aside from management’s comments that it is focused on narrowing the discount to NAV and is open to any feedback from the activist. See several quotes from the conference call below:

    So the first one, the discount to NAV is becoming a major problem. Why do you think this exists? And what are you planning to do about it?
    – Great question. We have a view that, obviously, the share price is not reflective of the NAV. And were the steps that we can take to narrow that gap, clearly, we can buy back shares at some point. We have shareholder authority to do that, and that’s something that we can consider from time to time. Because clearly, with the price where it is, it’s quite a profitable thing to do. We’re not really that excited about spending money on too much, if you like, investor relations promotion because that seems to be a tough path to follow. So we’re more interested in buybacks. And potentially in the future, when interest rates go down, then clearly, the company will be generating lots of cash. So we can talk about reinstating dividends and things of that nature at some point.

    The next one talks about market value of the business on the basis of NAV and the value of futures orders before COVID, but COVID disappeared. Are you surprised that market continues to value the business poorly? From Mark L.
    – Well, I think I’ve dealt with some of that. I mean the — most lessors are based — listed lessors are valued as a consequence of NAV and also return on equity and other metrics. Clearly, as interest rates go up and the cost of money goes up, then investors have a different view. But our discount is substantial, and therefore, we need to narrow that gap. Because clearly, the — of listed lessors, we have the greatest discount. So that is something we’ve got to address at some point.

    The next one is from [Lauren]. What has been done to close the price to net book value gap? We trade at 0.4 is a strategic process and thinking going on in London?
    – Well, clearly, we’ve touched on that earlier, and we can buy back shares. I mean there was a strategic interest in the company last year. At the moment, things are fairly quiet on that score.

    The next one is from Tim, do you and Jeremy Raper agree on the path forward? Presumably, he’s involved to unlock the NAV discount, and that has persisted for 4 years.
    – Well, we take feedback from all shareholders. So for shareholder writes to us or asks a question or comments, we address that. We’ve listened to Mr. Raper’s comments. Clearly, he’ll be motivated to unlock the NAV discount, and therefore, get a share price up at some stage. And we clearly are all motivated to do that, me as well.

    Next one is from Markel. Does the company have a dialogue with the new [18%] shareholder [indiscernible] registered the last 3 months, you share their views?
    – Well, it’s Mr. Raper and he, like every other shareholder, if he makes a comment, we certainly listen to it and have done so and will continue to do so.

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  8. AVAP sold 2 ATR newbuilds, in advance of taking delivery, for gross proceeds of $10mm (to be received once planes get delivered, later this year and early next, respectively). If you account for PDPs ($1mm each plane, I estimate), this implies about a $4mm profit, per plane – or at a premium to the implied per-plane in-the-moneyness of the purchase rights as of last balance sheet date ($88mm for 28 purchase rights, or $3.15mm per plane). this should not be a surprise as newbuild plane demand remains very strong; supply is very low; and as travel demand has rebounded the value in use of aircraft of all stripes has risen considerably. I believe these prices imply about $22mm/ATR-600 for newbuild ATRs, versus AVAP’s implied ‘strike’ price (where they have the right to purchase planes) of around $18mm.

    essentially AVAP has demonstrated not just that the intangible value in the purchase rights is ‘real’, but that it is actually could keep going up; and that they can monetize these intangible assets, for cash. AVAP has exercised another 10 purchase rights for delivery over the next 4 years (so call it another $40mm of implied profits, through the PnL, assuming current valuations hold) and then has a further 24 options (as yet unexercised) going out to mid 2030s. I think they likely preserved most of the residual intangible book value through that order (along with the time extension), but perhaps less on a per-plane basis (ie accepting a lower purchase ‘strike’ price in return for maturity extension on the options).

    still, at a high level, it is hard to conclude there isn’t a significant tailwind of intangible -> tangible asset conversion occuring here, at a minimum over the next 2-3yrs as aircraft markets remain extremely tight.

    tangible book value today is $142mm, and the equity trades at a $125mm market cap – so this $40-50mm of tangible value creation (pre-tax) is clearly a significant positive either versus the market cap, or versus tangible book today.

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    • Thanks for the comment. This sale of two ATRs validates management’s estimated value of the purchase rights.

      From the write-up above: “Thus the $86m on AVAP’s balance sheet attributed to these rights seems to correspond to the actual increases in plane values, and quite likely a similar amount could be gained in sale / rights transfer scenario.”

      Have you had a chance to talk to management? Is the plan to monetize all of these rights or does the company plan to take the actual delivery of some of these planes for it’s own business?

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  9. yes, i have discussed all aspects of the business, strategy, and balance sheet with management, and will remain focused on maximizing value for all shareholders.

    you will note in today’s trading update that performance rights at book now appear much higher – $115mm, versus $88mm at last report – given the increase in number of rights; move in aircraft valuations; and extension of these options (ie a good chunk of time value). It is worth noting that tangible book is probably $10mm or so higher (post closing of the two sales early next year), and the company appears to be generating positive FCF again now that the fleet is fully released. adjusting for the increase in purchase rights value, book value as at 1H is likely 285p – giving no value to the $10mm receipts as that will hit at year end/early next. tangible book at year end is likely to be around 175p, so still well north of current trading levels.

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