Avation PLC (LON:AVAP), has provided a trading update as of 24 May 2024, so DirectorsTalk Interviews caught up with WH Ireland Analysts John Cummins and Charlie Cullen for further insights.
Q1: What recent developments have positively impacted Avation’s financial outlook?
A1: Avation has reported significant positive developments, including an expected increase in the value of its ATR 72 purchase rights to approximately $115 million, up from $88 million at the end of 2023. This increase is due to the grant of new aircraft purchase rights and the extension of existing ones. Additionally, the company has seen an improvement in lease revenues and cash collections, benefiting from full fleet utilisation and a 19% year-over-year increase in international passenger air traffic reported by IATA.
Q2: How has Avation’s recent sale agreement affected its financial position?
A2: Avation has announced a sale agreement for two ATR 72 aircraft from its order book, which is expected to deliver $10 million of net cash proceeds at delivery in FY 2025E. This sale validates the substantial option value attached to Avation’s purchase rights and supports the company’s strategy of realising value through the sale or lease of aircraft.
Q3: What are the updated forecasts for Avation’s net asset value (NAV) and share price?
A3: Following the revaluation of purchase rights, WH Ireland has adjusted its forecasts, resulting in an implied 25% increase in NAV at the year-end. Consequently, the estimated fair value for Avation’s shares has been raised to 250p from 200p.
Q4: Can you explain the strategic significance of Avation’s ATR 72 purchase rights?
A4: Avation holds orders for 12 ATR 72 aircraft and 24 purchase rights, which allow the company to purchase new aircraft at a significant discount to their market value. These rights hold substantial option value, which can be realised through either the sale of aircraft upon delivery or leasing them over their lifespan. The recent extension of these rights and the grant of new ones have increased their value to $115 million, reinforcing their strategic importance to Avation’s business model.
Q5: How is Avation performing in terms of lease revenues and cash collections?
A5: Avation is experiencing robust performance in lease revenues, which are currently at $7.9 million per month. Cash collections have also improved, reaching 105% as airline customers repay COVID-19-related arrears. This improvement in financial metrics reflects the recovering demand in the air traffic sector and effective management of lease agreements.
Q6: What are the potential risks associated with investing in Avation?
A6: As with any investment, there are risks involved. Potential risks for Avation include fluctuations in international air traffic demand, changes in aircraft market values, and potential delays or issues related to aircraft deliveries and lease agreements. Additionally, macroeconomic factors and geopolitical events can impact the aviation industry, affecting Avation’s financial performance and growth prospects.
Q7: What is WH Ireland’s view on Avation’s current share price?
A7: WH Ireland views the current share price discount to NAV as unjustified, given the substantial progress Avation has made in deleveraging its balance sheet and the broadly validated aircraft valuations in the market. Consequently, WH Ireland sees a fair value for Avation’s shares at 250p, suggesting significant upside potential from the current share price of 140p.
Q8: What are Avation’s future growth prospects and strategic plans?
A8: Avation’s future growth prospects are bolstered by its valuable ATR 72 purchase rights and the strategic sale or lease of these aircraft. The company’s ability to capitalise on improving market dynamics and increasing international air traffic demand positions it well for continued growth. Additionally, Avation’s focus on deleveraging its balance sheet and improving cash collections further strengthens its financial foundation for future expansion and value creation.
