Avation Plc - AVAP

Aircraft lessor trading below 50% of NAV with an activist building a big stake and the intent to close the value gap.

Quick Pitch

Avation PLC (AVAP.L) is an aircraft lessor trading in the UK with a market capitalization of £89 million. It’s currently priced at a discount of over 50% to NAV and has a P/B of 0.45x.

Optical cheapness by itself isn’t a compelling investment pitch though. AVAP popped up on my radar when an activist acquired 19% of the company from a fund forced to sell during winding down. They kept buying shares since, and now own over 25% of the company.

Avation will hold its Annual General Meeting this Thursday, Nov 23rd. I expect the new biggest shareholder to make some noise soon and highlight his plans to close the gap between share price and intrinsic value.

I. The Valuation Gap

Avation's share price of 122p represents a substantial discount to its self-reported NAV of 269p (as of June 30th, 2023) and a price-to-book value of 0.45x according to tikr.com.

Larger players in the industry trade at a lower discount to book value. Avation potentially is an attractive acquisition target for a bigger aircraft lessor and an opportunity to pick up some airplanes at a good price.

II. Activist Involvement

On Sept 29, long term shareholder Oceanwood Capital sold 13.5m shares (about 19% of the company) of Avation at 79p, significantly below the market price of 100p.

Oceanwood was shutting down and likely a forced seller. The buyers were Rangeley Capital LLC & Christopher C. DeMuth Jr. (together, "Rangeley") acting in concert with Jeremy Micheal Kersten Raper .

19% for Rangeley, 0.19% for Jeremy

If you’re on fintwit finX, you probably have heard of these guys:

• Jeremy Raper

• Andrew Walker, also known from Yet Another Value

• Chris DeMuth Jr

They bought more shares at prevailing market prices, and reached a position of over 25% of the company on November 9th.

Jeremy talks about his most recent views on activism in this podcast:

He discusses how his activism has gone from social activism, wherein he would take a small stake in a company and then make some noise (like he did with Hunter Douglas), to raising SPVs and acquiring meaningful stakes if there's liquidity or a block seller.

“It's basically: I own 20-30% of the company, I'm biggest shareholder and have certain agenda. It's less of a discussion, more of a dictation.“

"So I raised an SPV recently … this is publicly disclosed. I've made the filing. .. I'm not going to talk about the strategy or specifically the company. … I've raised money and entities I manage have taken a 20 something percent stake in a listed aircraft leasing company in the UK called Avation. This is all public. And you know my goal is to maximize value for all shareholders.

”… It's ostensibly a very cheap equity and I have a number of ideas to to kind of create value for all shareholders. And I think having more bullets in the gun so to speak will be beneficial to all shareholders of the company."

So it seems like the Rangeley stake is the SPV and Jeremy is pulling the strings. And he’s here to close the gap between share price and intrinsic value.

III. Historical Context

Pre-COVID, Avation did not trade at such a significant discount. On top of that there was a strategic review in early 2020 when the share price exceeded 250p.

COVID disrupted the sales process, and the stock never recovered.

Historical P/B

The CEO owns 18%. He seems to be open to sell at the right price.

From a Bloomberg webinar in May 2023:

In 2019, we received a proposal from an investor to buy the company. We haven't had one lately. Over a period of time you'll see more appreciation from investors for this sector: it has done super well out of COVID. You'll see consolidation.

I'm shocked we don't see more investment grade lessors buy the sub-investment grade ones.

IV. Industry Dynamics

The business of aircraft leasing consists out of earning a spread between the funding cost (lever up and buy planes) and leasing yield (rent out your planes). Bigger players have a lower cost of capital and thus an inherent advantage.

And business is good these days. Coming out of COVID, there now is a shortage of planes due to OEM delays. This puts the power in the hands aircraft leasing companies.

Everybody knows that the OEMs are not going to make the number of airplanes they're saying. That's just not going to happen. And every airline in the world knows that. We've seen massive purchases of aircraft from us. We've seen massive numbers of (lease) extensions.

Aengus Kelly (CEO of AerCap, the world’s largest aircraft lessor), Q3 23 Earnings Call

Aengus excels at taking advantage of the current dynamics to maximize per share value creation: AerCap is selling planes above book value and buying back its own stock in the public markets below book value.

But as Jeremy said in the Business Brew podcast:

If you're a smaller lessor, you don't have that power. The cost of debt is going up. Maybe you need to go for below market leasing. Spread is getting crunched. It's haves and have nots.

Subscale players like Avation are worth more in the hands of a bigger company.

V. Potential Red Flags ?

Avation will hold its AGM on November 23rd. While the CEO of Avation acknowledges the cheapness of his shares and discount to NAV, this bit in the AGM notice seems worrisome:

We continue to evaluate the mix of financing required to optimise the Company’s capital structure. When appropriate, equity funding from the issue of new share capital in the Company remains an important component in funding the Company’s growth. The directors believe the Company has a proven track record in generating a return on contributed capital over the longer term. Accordingly, the Notice of AGM contains resolutions enabling the directors to issue equity securities as described below. It is recommended that Shareholders support these resolutions.

I initially saw this as a big potential red flag, but someone pointed out on twitter that this is actually the same phrasing they have been using for many many years in the AGM notice.

VI. What can go wrong?

• Activist getting involved and for example pushing for a sale doesn’t mean this actually happens.

• What if reported NAV is off?

• If the CEO is shocked to not see more M&A, why isn’t he actively pushing for a sale of the company himself? Maybe he has, and there just isn’t any interest in AVAP?

• If it’s such a no-brainer acquisition target, why hasn’t it happened yet?

• Process drags on and Avation issues new shares at a discount to NAV, thereby reducing NAV per share and destroying per share value.

VII. Conclusion

I think this is an interesting event-driven situation that is still relatively undiscovered. The activist has now publicly commented on his involvement, but hasn’t discussed any of his plans for the company yet.

I own a small position, but it’s completely a “play the player” situation for me: without the activist in here, I would not want to own Avation shares.

Note that this stock is pretty illiquid: average daily trading volume is about £500k, and usually a bid-ask spread of at least 4%.

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Shout out to twitter users @feynzz, @Carcosa61 and @EricUKInvestor, who have been valuable resources in reading up on Avation.

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