Avation Share Discussion Threads

[davydoo] 29/6/2015 11:06

Or.... the market turmoil is a good opportunity to buy more...great

[nurdin] 29/6/2015 10:10

Good news washed away by the market turmoil...shame

[russman] 24/6/2015 11:08

It would be positive to have a trading update before the close period. 11th June last year

[puku] 23/6/2015 13:50

Not sure if anyone has flagged this up - but WH Ireland issued a BUY note on 10 April 2015 that gives a lot of info. In this at 67p from May 2013 and added more recently, happy to hold longer term.

[trytotakeiteasy] 23/6/2015 13:48

due a bounce down!!!!! not sure why not trading update so far this year....

[nurdin] 14/6/2015 09:48

SCSW thinks the share price is due a bounce and recommends a 'buy'. Should see some positive move next week...hopefully

[deanowls] 07/6/2015 09:39

There was some narrative around a year ago (possibly micheal mouse?) that the ATR'S were comanding a premium to the list price and with AVAP having so many options that they can choose to sell some aircraft for said premium (which they have) if they so wish, so I am pretty sure that they have a grasp on the assets they currently have, they have also gone for a more prudent depreciation within the past year.

[russman] 07/6/2015 06:45

My limited understanding is. The plane is revalued to the Directors best guess of fair value to the company. The plane is depreciated on the revalued figure over its useful life, say 20yrs. The Directors check the asset vale every year or at the end of the a lease or after a "problem" that the accumulated depreciation & impairments still equals a fair value. It is only when you sell or dispose of the plane that you can check that the fair value = the residual value.

[anangf] 06/6/2015 12:14

You will note from my postings I am a little confused as regards whether the accounting book value is an attempt to present a fair value / exit value or not. Maybe I need to do this in excel. The heart of my misunderstanding is that LEV feels like an attempt at fair value, but why is there then a need for a depreciation charge. Surely LEV just decays to the resiual value at the end of the lease term?
Apologies for labouring this but i think it is an important point.

[russman] 06/6/2015 08:10

Didn't Avation value the delivery options in the balance sheet. It may muddy the timing of "value".

[anangf] 06/6/2015 03:43

Ok, so on the accounting day 1 the plane is booked at cost and depreciation commences. Ongoing they use LEV to determine carrying value and the uplift over cost goes to revaluation reserve. However the original depreciation schedule is followed (or do they depreciate the higher carrying value).
I think I get it, the fair value is represented by the LEV less accumulated depreciation plus whatever is in the revaluation reserve. So on a net basis net assets or shareholders funds do attempt to represent the Fv of the assets.

Coming back to ptb, surely as they put more leases on the book value will increase (PV of lease vakue + rv > 0). So growth in aircraft equals growth in book value. So say 1x is a fair pttb, as the company grows the share price will track up to maintain 1x ptb?

Does that make sense?

[anangf] 05/6/2015 16:09

Thank you, makes sense. The more I learn about this company the less appetite I have to invest. Current price looks reasonable when you think about pttb.

[brileyloucan] 05/6/2015 14:23

Anangf,

what time zone are you in with sending messages at 3.50am GMT?

Thanks for pointing this out. So the aircraft are revalued every reporting date using PV of leases plus RV any pluses are recognized in a revaluation reserve. Currently holding $10m in the asset valuation reserve. So the risk becomes not if they are under depreciating but whether their valuations are reasonable. They are holding the aircraft at $367m but if they just depreciated it would be $359m.

Initially the plane will be recognized at cost and then depreciated over 30 years to the estimated RV. I believe they have subsequently changed this to 25 years. If they revalue they will still depreciate the assets.

My overall feeling is that they are being a bit aggressive with their valuations, I am aware of another aircraft leasing business which depreciates their assets over 20 years to 90% of estimated RV. I think going forward I will probably reverse out the asset valuation reserve in measuring PTBV until I get comfortable they can consistently sell aircraft at book (even in a downturn)

Discount rate should be the weighted average cost of capital, senior debt @ ~4.5%, now junior debt @ 7.5% and equity @ ~15% (reasonable equity return). Therefore 6.5% seems a reasonable discount rate to me.

I don't know if you can look at this on an aircraft by aircraft basis, but lets say that cashflows from first lease pay all the bank debt associated with a plane you have still to cover the depreciation of the aircraft. You are mixing up cashflow with profit. Also given that the debt on a plane is 75% of the initial cost I find it surprising that the first lease would return that much cash, but maybe.

[anangf] 05/6/2015 03:50

Many thanks for the insightful reply to my question.

Following on, I see the imperative here to think in ptb terms. What puzzles me slightly is Note 23 to the financial statements from last year. Planes are valued at lease encumbered value (sum of pv of lease cash flows and pv of RV, all discounted at 6.5%). So that looks like an attempt at "fair value" to me, but why does the company then apply a depreciation charge given they are not cost accounting. That is , if the fair value per LEV is $430m why report $347m? This implies fair value of book is higher than that reported so a lower ptb.

Also 're the LEV value, 6.5% feels like a high discount rate, lease cash flows are asset secured.

Final point, I also read that after 12 years (i.E. lease 1) all debt is paid off and the value of the asset is all for Avation, this feels like huge potential upside.

Would appreciate thoughts on all of the above.

[sacetal] 04/6/2015 23:48

Found good blog on AvationhTTp://www.wheeliedealer.weebly.com/blog

[brahmsnliszt] 04/6/2015 21:23

Also own but just the 1% of the p/f for me.

[brahmsnliszt] 04/6/2015 21:22

Great post briley.Thanks

[brileyloucan] 04/6/2015 18:52

These are all good questions will attempt to give an informed reply.

1) A company like Avation will not be able to issue debt longer than five years as there will not be a market for it so they have no choice. This will be in the terms of the program - it is a MEDIUM term note program. They have issued $100m to date and can issue up to $500m, as a tranche rolls off they will have to refinance it. There is no guarantee that they can, equally importantly they will have to pay the going rate for 5 year paper even though they have locked in the return on the lease. Interest rate risk is one of the biggest problems with Aviation leasing especially in todays rate environment. In the longterm they will be able to ride it out as the lease rates will increase with interest rates but could seriously hit profits.

They are generally buying new aircraft.

3)Not sure here though the depreciation policy is key to the value of the company. If they make big profits during the lease and then make a loss on the sale of the aircraft at the end of 25 years then this is a problem. They recently changed the depreciation policy, but I don't have it to hand - it seemed reasonable to me, but as they are a new company we don't have a good history of whether they are being over aggressive and under depreciating the assets.

4) Less than there was, presumably Virgin Australia would get bought out and the aircraft leases taken on rather than an outright failure. It's a risk and the shares would suffer, not sure if it would kill the company depends if they could re-lease or sell the aircraft.

The new debt program means Avation are now highly leveraged. When they were funding 25% equity 75% debt they had 3:1 leverage now going to be more like 8:1.

Remember this is basically a bank. It has high leverage, it runs interest rate risk, refinancing risk and maturity transformation risk. I value banks on P/TBV and wouldn't buy more at over 1.0 will sell if it gets to 1.5. Do not value on P/E they will be decimated if rates rise.

I do own at the moment ~3% of portfolio.

[anangf] 04/6/2015 15:37

I have a few questions regarding this stock, would appreciate any informed reply:

1) Regarding the recent debt issuance. I appreciate that this is to fund the equity of aircraft financings, hence gross assets may grow by c. x10,the level of debt raised. But why are they issuing only 5 year paper. As I understand it a new plane has an UEL of say 20 years, and will expect to have 2 lease terms, an initial lease for 12 years and a secondary lease for 6 to 8 years. From the tenor of the debt raised does this imply they are financing 12 year leases with 5 year debt, hence running big refi risk, or are they buying aged aircraft into their second lease hence need shorter duration debt?

2) Generally how much debt refi risk exists in the existing lease arrangements?

3) Is there any view on the value of the company ex residual value interest in the aircraft I. E. the PV of the leasing contracts? I read somewhere that there is 500 - 600 bps running of value to Avation. Is that right?

4) To what extent is there concentration risk on Virgin Australia?

Thanks in advance.

[brahmsnliszt] 03/6/2015 21:54

Breakout indeed.On board for the ride.

[davebowler] 03/6/2015 16:29

Chart breakout.

[qs99] 02/6/2015 22:43

a decent sized buy IMO...looks interesting..

[brahmsnliszt] 02/6/2015 09:42

Finally got on board yesterday and a bit more today

[harrogate] 02/6/2015 08:15

I agree - he has been great on timing. I bought a few more on the news as a short term punt.