Small Cap Value Report (19 Feb 2016) - PLUS, AVAP

19th Feb '16 by Paul Scott

15 comments 16357 reads

Good afternoon!

It's extremely quiet today for results & trading updates, so looks like I'll be able to down tools a bit earlier than usual today.

There's an interesting article today here about strong UK consumer spending. This reinforces my conviction that probably the safest place to invest right now is reasonably-priced UK consumer-focussed shares. That's where the bulk of my portfolio is anyway, and so far so good - I'm having a very good year so far (helped very much by the HOME takeover approach, so a bit of luck involved too).

Plus500 (LON:PLUS) - this share has been a fascinating roller-coaster ride, and whilst I looked at its results published a few days ago, decided against reporting on them here, partly because it's too big now (market cap is £615m, well above my usual cut-off c.£300m). Also, it's such a difficult company to assess, because there have been a lot of red flags, but on the positive side the company has paid out bountiful dividends, suggesting that the profit & cash are real.

My view currently, is that the big question mark remains how they manage to make such out-sized profits, when nobody else in the sector does, and whether that is sustainable?

The reason I mention it now, is that a Conference Call with the company has been arranged specifically for private investors this coming Monday at 10am. Details are not available yet, but will be shortly. If you would like to be contacted when more info is available, then this is the contact email address for the organisers, the very helpful Reg Hoare at MHPC: plus500@mhpc.com

I'm always happy to support initiatives such as this, to improve communication with private investors. After all, it's private investors who create the liquidity in the market, and set the price. So it's crazy the way many companies and their advisers almost completely ignore us!

Avation (LON:AVAP)

Share price: 132p (down 5.4% today)
No. shares: 51.5m
Market cap: £68.0m

(at the time of writing, I hold a long position in this share)

Interim results to 31 Dec 2015 - anyone who's been to an investor show in the last 2 or 3 years will have met the CFO of this airline leasing company, the affable Richard Wolanski.

The shares have dropped 5.4% today, so presumably a few people are not particularly…

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Carcosa

19th Feb '16

Avation (LON:AVAP) Once again I don't think they have presented their results as positively as they could have done in terms of the H2 expectations.

Avation is delivering another 5(?) aircraft into the fleet over the next few weeks. By end of FY 2016 Avation will have added 12 aircraft to the fleet. That will generate significant increases in revenues and earnings in both the second half of 2016 and the following 2017 financial year.

janebolacha

Hello Paul,

The charge to Avation (LON:AVAP) profits for the unused loan note facility was actually very well signalled and easily worked out by simply following the amount drawn down and setting against that the amounts set aside for future aircraft acquisitions and the dates these acquisitions would become income-generative. Although I like the company and their business model is quite easy to follow, I had expected these half-year results to be seen as poor and badly received by the market and I had sold most of my holding at between 143p and 148p. It is cheap, even on a Price/Book Value basis (it's now 20% below book value), and I am looking to buy again once the fall bottoms out. The presence of Oceanwood with a holding of almost 30% raises the possibility of it being bought out. One point of concern is how they will resolve the matter of the plane acquired in November for the Chinese buyer who now seems to have pulled out; I wonder whether that will involve some penalty or loss.

Best wishes,
Jane.

PS: Exactly why the loan facility was drawn down so early, just for the money to sit in the bank earning next to nothing, defeats me! Perhaps they needed to show they had the facility in place before they could actually place the orders? Whatever the reason, the operation has been very expensive indeed.

PhilipHanson

The Avation (LON:AVAP) announcement did sound a bit flat and I'm not sure I liked the list of risk factors in the outlook section. I calculate book value per share is now 166p, which means that the share is currently at about 20% discount to that, it's one of the standard ways to value a leasing company. It would appear they used some of the MTN proceeds to buy back shares into treasury at a couple of points in the period, which has improved the per share metrics.

Additionally, in the Subsequent Events section there is a reassuring note that yesterday they agreed to sell a 22 year old A320 (on lease to Virgin Australia Regional) at "approximately book value" which is good evidence that residual values are about right. This was one of the oldest planes in their fleet.

The "miss" on the 737 may be related to the slowdown in China? The way I read this is that they were looking to purchase an aircraft that was already on lease to an airline from another leasing company (similar to the recent Air France and Air Berlin deals). Therefore if this falls through I don't see any impact other than possible the recovery of a penalty charge against the vendor (?) offset by the fact that the MTN funds which were earmarked for this purchase will continue to weigh on the results in the second half, which could account for the reduction in WHI estimates?

Jane, it was not a loan facility which was drawn down, but an issue of loan notes which were issued in a $100m block.

andrea34

Would AIR not be a better bet compared to AVAP based on their recent update?

JohnEustace

I've made a modest purchase of AVAP based on listening to that earnings call. It was good to hear the frustration in the guy's voices with the market reaction. As they said there are worse problems than having extra cash on hand. Overall they are operating well in a strong segment of a strong market.

Aislabie

So far Avation has done exactly what they said they would do, which gives me great comfort that the growth , always signaled to be from March 2016, will in fact turn out that way.
I am pleased that they took the notes rather than a dilution to shareholders and it seems to me that their position as the premier lessor of ATRs will keep their lease income strong and growing.
Definitely tempted to pick up some more after today's fall.

Avation (LON:AVAP) so if I recall correctly from the earnings call:
- $140m worth of aircraft to be delivered in next 2 months (4 aircraft) /
- ATR are 'sold out' and running 2 months behind on deliveries
- China market looks interesting and if they elect to go with ATR's AVAP well placed
- Loan notes probably as much as they need for foreseeable future and will be wholly employed by end H2
- B737NG aircraft purchase an unusual case/Still can happen
- Recent ATR orders/options are speculative but placing them not an issue
- Old A320 market has picked up and they took opportunity to start selling them

As Paul's write-up says, based on PE and NTAV (and peer comparisons) AVAP's is an attractive share. Have added to my current (underwater) position.

As Aislabie says, AVAP are doing everything what they said they would do.

smatthews1

Would anyone know if these finance charges would be similar for the second half? As the new aircraft leases havnt really been absorbed yet, I think they are quite conservative about this and it could be well received in their final results.

Sean

The thing I would add from the call is their comment about the delay with the Shenzhen lease. They commented about the relative ease of dealing with experienced and established counterparties - the unspoken contrast being with the potential difficulty and cultural differences to be overcome in growing their business into China so I think they are right to be cautious in approaching that market.

ericb

The Board of Home Retail Group plc ("Home Retail Group" or the "Company") notes the announcement regarding a possible offer by Steinhoff ("Steinhoff") and confirms that it has received an approach from Steinhoff regarding a possible cash offer for the Company for a total value of 175 pence per Home Retail Group share (the "Steinhoff Proposal").

lightningtiger

22nd Feb '16

Hi Paul thanks for the link for Plus 500 conference call which does not seem to be working, maybe it is for a select few. The profits are made by utilising the internet to their full advantage and low running costs with their "money making machine". It must be difficult to value because they are in 50 countries.

cafcash49

With regard to Avation (AVAP), I am concerned about their debt. Net Debt 319.4 and operating profit of 33.6 = 9.5: is that not a bit of a risk? I would be interested in others views.

Marcus Pugh

AVAP now (13:43) up 5.23%, things change quickly?

Wol

Sean
My impression from the webcast was that AVAP expect to use up all the spare cash during H2 on the new planes being delivered. I am not sure if they said whether they would have to borrow more to complete those acquisitions. So we might be in the good position of having increased revenue from the additional leases on the new planes without any matching interest costs. In practice though some or most of this benefit will feed into the next financial year.
For the record, I liked the update and the webcast and added to my holding. It's nice to see that the market seems to be agreeing. AVAP are up 5% and almost back to the price before the results were announced.
Julian

Small Cap Value Report (19 Feb 2016) - PLUS, AVAP

Avation (LON:AVAP)

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Paul Scott

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