I attended the Shares Magazine driven UK Stockmarket Show in Islington at the Business Design Centre (BDC) on Saturday 12th September 2015. It was quite a small show and unfortunately there were not many Listed Companies there as possible investments, but I took the opportunity to meet lots of great people I interact with regularly on Twitter and to spend a long time with Richard Wolanski of Avation AVAP.
I have owned Shares in AVAP for a while and I used to be invested in Skywest SKYW which was also Chaired by Jeff Chatfield and got taken over (think about this - it is the obvious direction of travel for AVAP).
I am pretty immersed in how AVAP operates and the Investment Case but I had a few specific questions that I wanted to put to Richard - I have a very good relationship with Richard after meeting him at many shows and it was superb timing at this one because it was later in the day and I managed to monopolise him for a long time. This Blog addresses each of these in turn below:
Question 1 - Why do you attend every Investor Show?
You will see from my earlier Blog that I was not totally clear on what Percentage of the Company was owned by Large Institutions. I may have misheard but I got the impression from Richard on Saturday that as much as 80% or perhaps a little more of the Shares are in the hands of the Big Boys. Of course, he mentioned Slater Investments which I personally take to be a very good sign as Mark Slater’s record as a Fund Manager is pretty much the best there is.
This means that the ‘Free Float’ on the Shares is probably 20% or less - and it is this portion that is fought over on a daily basis by us Private Investors. The problem here is that Private Investors are a fickly bunch and do not as a whole believe in Long Term Investment !! People want to buy something and sell it very soon afterwards for a small profit and then to move on - attention span of an amoeba.
This means that the AVAP Share Price swings around and the recent poor communications from AVAP over Results Announcements has given many an excuse to Sell and keep the Price from making good upward progress. It was notable that Richard again admitted full responsibility for the communication errors (this was unprompted, he volunteered this mea culpa) and said he was putting a lot of his own personal effort into crafting the Results Statements in a clearer way.
Richard’s aim is to attract some Big Hitting Private Investors - if he could get a few to buy in Huge Size with a Long Term Outlook then this would reduce the Outstanding Shares even more and mean that jittery smaller Private Investors would have less impact on the Price. The problem at the moment is that if the Price rises nicely, many Private Investors are using it to sell out.
To reduce the impact of the Free Float gyrations, AVAP could do a Placing of Shares with the existing Institutions but the problem here is that they all want a 10% or so Discount against the Market Price - and Richard says he doesn’t need the Money anyway, especially with the $100m Global Loan Note programme in place.
It is often a bad sign to constantly see a Company at these kind of Private Investor events but I don’t get the feeling that Richard is lying to me and I know him very well now and see no reason not to trust him or Jeff Chatfield. Fortunately I know a lot about the Company so any dissembling by Richard I am pretty sure I would spot - it is not in my nature to just take an answer at face value and another follow-up Question is usually forthcoming if I don’t get clarity on what I ask about.
Question 2 - Explain to me the importance of Residual Values and how they are accounted for.
Recently on Twitter there was a discussion about AVAP and someone made the point that it was all about Residual Values of the Planes and that these were unpredictable - and made AVAP a VERY HIGH RISK Investment. At the time I smelt a Rat and suspected that this was not actually the case - but I knew I was meeting Richard on Saturday so I banked the Question to fire at him and get clarity.
My initial judgement was correct - I thought that AVAP bought the New Plane and then Leased it out to an Airline for a 10 to 12 Year Period and that over the time, the Initial Value of the Plane was basically paid for. Therefore, at the end of the Lease Period, the Plane was then owned by AVAP and it had now cost them Zero.
Richard said that a Plane tended to be worth 40% of its New Value after the 12 years - this is because if you have the right Planes - i.e. the fuel efficient and popular ones, there are not many to go round. Due to the Safety Regulations, these Planes are obviously maintained to an exceptionally high standard. Richard made the point that having high residuals was obviously a good thing - because it underpins the Capital Value of the Company and it also gives further Lease Options because the Plane can be Leased Out again or it could be sold to free up Capital which can be used to enable further Lease Deals in the future. The latter could be where an Airline already owns a Plane but want to do a ‘Sale and Leaseback’ type deal.
So, in reality, High Residual Values are desirable but even if the Company got nothing for a Plane after the Initial Lease Period, it would not be a disaster as it is paid for anyway.
AVAP staff have considerable experience in this field and part of their Competitive Advantage is their knowledge and ability to Value accurately and Source good Airplanes. The Aviation Industry is surprisingly small and people like Richard have vital Contacts in Airlines and Manufacturers etc. which they can exploit.
Question 3 - How likely is it that additional Lease Deals will be signed this year on top of the 10 New Planes?
I put this question directly to Richard and I came away with a clear impression that such additional Lease Deals were extremely likely. Read into that what you will, Dear Reader !!
Remember, at the moment AVAP has 29 Planes on Lease - the 10 that are coming will grow the Fleet to 39 and boost Revenues and Profits considerably. Any additional Deals will be big time Icing on the Macaroon.
Whilst bashing out this Blog, I realised that a few other things came up in our discussions as follows:
- With 10 Planes due for the coming Year, it basically means that every month there will be a new Deal coming along - this should ensure very good News flow and hopefully can help nudge the Shares upwards.
- I am not sure this was in our discussion, but someone I met with in the BDC canteen (which was shut incidentally !!) had talked to Richard earlier in the day about an American Depository Receipt (ADR) programme - i.e. listing the Shares in America, where all the major Airline Leasing Companies are. From memory, I think the response was that they were not going to do that imminently but it is something that may happen in a couple of years. Obviously with many of the Lenders under the Global Loan Note Programme being US based, it might make a lot of sense.
- The subject of Capital Lease Aviation CLA came up during our chat. At the moment AVAP own 96.1% of the CLA Shares, and I asked Richard how likely it was that AVAP would take full ownership. To be honest I can’t remember the entire details but the interesting thing that did come out was that Richard has clearly considered using CLA as a Financial Vehicle to Ringfence any Higher Risk Leasing Deals that they might want to undertake. This would take the Risk away from AVAP as CLA is a separate Legal Entity and would mean that if problems arose, it would not be serious for AVAP. The mere fact that he is thinking this way suggests more growth in Deals to come !!
Interesting stuff all round, I hope you found it informative,
Fingers crossed that we will see some decent upside in AVAP in this coming year, cheers, WD