Oh dear Paul. You actually sound as though you believe that they won't be coming back for more of our money for the rest of this parliament! I'll be amazed if they aren't picking our pockets before this time next year.
Oakbloke does a very good full analysis on Substack. If you have a look at that it will give you a very different take on valuation and where the business makes money. Far too comprehensive to cover here but very interesting reading and quite closely mirrors my view and calculations on it.
AVAP: I got my figures from today's Zeus note. I can't post pictures in comments here, so have included a Zeus excerpt above in the main article.
As you can see, almost all the profit has come from disposals, and it hardly makes any profit in the forecast periods because nothing is included for disposals.
So I think my point is valid.
I'd be interested in how your numbers differ from Zeus's, and why.
with AVAP you have to look at the business model and factor out the noise of the last 3 years from covid effects. I understand why on a first glance at Zeus's numbers you draw that conclusion but in essence I think that's the wrong way of looking at the business. The post from OakBloke does a very good job of articulating that (far better than Zeus in this case I think)
AVAP can borrow secured at c. 6% and they lease at 12%+ so if you have a fleet of $800m they make about 6% on that or $48m at a gross margin. ie it is plenty profitable. Admin expenses are around $12m. The fleet depreciates straight line over the life of the lease and that depreciation takes out a lot of the booked profit. BUT the plane itself, whilst depreciating in an accounting sense, isn't depreciating at all. It has a much longer life span and a much higher value.
Because AVAP have many rights for new aircraft they keep the fleet age young, so will tend to sell aircraft at certain ages and of course the over depreciation and firm second hand valuations then all comes back. So it looks from an accounting perspective as if all the value comes from sales but that isn't really true, it is masked by an over conservative depreciation and as the fleet gets recycled the profit gets booked.
You are correct that the ATR rights are not hidden value. Not sure why anyone thinks they are - they are included in NAV and have very real value. NAV should be c. 300p now and with the 10% share buy back at a 50% discount may well be 315p+ so the stock is trading at below half of book.
There is actually hidden value on the balance sheet though and that is in the line "Maintenance reserves" under liabilities. This is where AVAP hold a maintenance reserve for when planes come back and need servicing. AVAP have their own engineers and can do the servicing a lot cheaper than the reserve so from memory about $20m could get released back to NAV. That's about a 10% uplift or 30p.
What Zeus has also not taken account of is the likely refinancing of the bonds which should reduce finance costs considerably - maybe $6m p/a which almost doubles the EPS to 20c
But this is really valued on a capital basis (not a PER) so the business probably has a residual tangible value now around 350p by my calculations (if we include the hidden value maintenance reserve) and 315p if not, but more importantly is now self generating capital which will get recycled into increasing the size of the fleet.
Over 5 years the CEO reckons this can double the NAV - so 600-700p versus a 150p share price. Typically aircraft lessors are valued on 1* and often taken out on 1.1*
So the potential on offer is a business that can generate 30%+ compound returns a year over the next 5 years plus increasing dividends but with a high safety margin for error, as the current price is less than half the tangible book value. You have to weigh that up against the risks of either another pandemic, large scale drop off in air passenger demand or a sudden influx of new aircraft coming to market (though given the time to market on new planes that risk is pretty low given the massive demand/supply imbalance already in existence given Boeings previous woes)
Anyway, all of this is just my take on it but why I hold the shares.
Yes, £70 billion more government spending per year should stimulate the economy, at least in the short term, but the excess over the £40 billion more from tax means there might be some risk of the currency and bond markets reacting badly, even if it all goes through the Office for Budget Responsibility to avoid Trussing out.
Good point Hoenir, although surely that risk would have happened by now if it was going to? I suspect Reeves learned from the mistake of Truss/Kwarteng in not having their plans reviewed/approved by the OBR and Bank of England.
Just to add some further colour to the above picture (not yet listened to the podcast!), I believe this gives you a "private link" to the RSS feed that supplies the podcasts and you'll then get ALL episodes (free and paid) on your favourite podcast player. I use PocketCasts, but assume it works for all popular podcasts.
Oh dear Paul. You actually sound as though you believe that they won't be coming back for more of our money for the rest of this parliament! I'll be amazed if they aren't picking our pockets before this time next year.
Hi Paul
I think you have AVAP wrong.
Oakbloke does a very good full analysis on Substack. If you have a look at that it will give you a very different take on valuation and where the business makes money. Far too comprehensive to cover here but very interesting reading and quite closely mirrors my view and calculations on it.
Best
David
Hi David,
AVAP: I got my figures from today's Zeus note. I can't post pictures in comments here, so have included a Zeus excerpt above in the main article.
As you can see, almost all the profit has come from disposals, and it hardly makes any profit in the forecast periods because nothing is included for disposals.
So I think my point is valid.
I'd be interested in how your numbers differ from Zeus's, and why.
Cheers, Paul.
Hi Paul - that's ok I have the same Zeus report.
with AVAP you have to look at the business model and factor out the noise of the last 3 years from covid effects. I understand why on a first glance at Zeus's numbers you draw that conclusion but in essence I think that's the wrong way of looking at the business. The post from OakBloke does a very good job of articulating that (far better than Zeus in this case I think)
AVAP can borrow secured at c. 6% and they lease at 12%+ so if you have a fleet of $800m they make about 6% on that or $48m at a gross margin. ie it is plenty profitable. Admin expenses are around $12m. The fleet depreciates straight line over the life of the lease and that depreciation takes out a lot of the booked profit. BUT the plane itself, whilst depreciating in an accounting sense, isn't depreciating at all. It has a much longer life span and a much higher value.
Because AVAP have many rights for new aircraft they keep the fleet age young, so will tend to sell aircraft at certain ages and of course the over depreciation and firm second hand valuations then all comes back. So it looks from an accounting perspective as if all the value comes from sales but that isn't really true, it is masked by an over conservative depreciation and as the fleet gets recycled the profit gets booked.
You are correct that the ATR rights are not hidden value. Not sure why anyone thinks they are - they are included in NAV and have very real value. NAV should be c. 300p now and with the 10% share buy back at a 50% discount may well be 315p+ so the stock is trading at below half of book.
There is actually hidden value on the balance sheet though and that is in the line "Maintenance reserves" under liabilities. This is where AVAP hold a maintenance reserve for when planes come back and need servicing. AVAP have their own engineers and can do the servicing a lot cheaper than the reserve so from memory about $20m could get released back to NAV. That's about a 10% uplift or 30p.
What Zeus has also not taken account of is the likely refinancing of the bonds which should reduce finance costs considerably - maybe $6m p/a which almost doubles the EPS to 20c
But this is really valued on a capital basis (not a PER) so the business probably has a residual tangible value now around 350p by my calculations (if we include the hidden value maintenance reserve) and 315p if not, but more importantly is now self generating capital which will get recycled into increasing the size of the fleet.
Over 5 years the CEO reckons this can double the NAV - so 600-700p versus a 150p share price. Typically aircraft lessors are valued on 1* and often taken out on 1.1*
So the potential on offer is a business that can generate 30%+ compound returns a year over the next 5 years plus increasing dividends but with a high safety margin for error, as the current price is less than half the tangible book value. You have to weigh that up against the risks of either another pandemic, large scale drop off in air passenger demand or a sudden influx of new aircraft coming to market (though given the time to market on new planes that risk is pretty low given the massive demand/supply imbalance already in existence given Boeings previous woes)
Anyway, all of this is just my take on it but why I hold the shares.
Yes, £70 billion more government spending per year should stimulate the economy, at least in the short term, but the excess over the £40 billion more from tax means there might be some risk of the currency and bond markets reacting badly, even if it all goes through the Office for Budget Responsibility to avoid Trussing out.
Good point Hoenir, although surely that risk would have happened by now if it was going to? I suspect Reeves learned from the mistake of Truss/Kwarteng in not having their plans reviewed/approved by the OBR and Bank of England.
Just to add some further colour to the above picture (not yet listened to the podcast!), I believe this gives you a "private link" to the RSS feed that supplies the podcasts and you'll then get ALL episodes (free and paid) on your favourite podcast player. I use PocketCasts, but assume it works for all popular podcasts.