AIRCASTLE LTD AYR
February 25, 2010 - 10:28pm EST by
neo628
2010 2011
Price: 9.91 EPS $1.32 $1.16
Shares Out. (in M): 79 P/E 7.5x 8.5x
Market Cap (in $M): 785 P/FCF NA NA
Net Debt (in $M): 2,405 EBIT 0 0
TEV ($): 3,190 TEV/EBIT NA NA

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Description

Aircastle is primarily an aircraft leasing firm that is still excessively out of favor as a financial firm that got thrown out along with the general distaste for all financial firms especially in the midst of the financial crisis.  Although the stock has more than tripled from its all time lows of approx $3.00 reached in early 2009, the stock still represents good value and a very low chance of losing money from current levels.

Aircastle was originally written up on VIC back in last Feb 2008 (almost 2 years to the day) by algonquin222 at a price of approx $22.14 per share and I would recommend reading his write up as most of the background and description are still relevant: http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/3209

At that time the company was trading for 1.34x its book value of approx 16.50 per share.  In the last two years, BV has declined very slightly to $15.75 per share, but the current stock price of $9.90 means the price to book value has declined to approx 0.65x.  This is a little more than 50% less that its former level on a P/B basis.

The company acquires, leases and sells high-utility commercial jet aircraft to airlines throughout the world. Their portfolio consist mostly of modern, operationally efficient jets with a large operator base and long useful lives. As of September 30, 2009 Aircastle's aircraft portfolio consisted of 128 aircraft which have been leased to 60 lessees located in 34 countries.

Aircraft leasors like AYR purchase new or nearly new aircraft from Airbus and/or Boeing, and finance these purchases with approx 33% equity and 66% from long term borrowings.  Though the borrowings are secured by the aircraft, they are typically non-recourse to the parent company. As a lessor, AYR generally has lined up airlines as customers under long term leases often 10 years. 

The profit they make is on the spread between their revenue from operating lease contracts (typically about 13% of the value of the planes) minus interest costs (about 6%, often fixed with a fixed-floating swap). This cash flow minus depreciation charges against the aircraft and operating expenses is the net profit. In many ways they are similar to REIT except that the asset they own is aircraft.

Currently the average remaining lease term is still a healthy five years.  In many cases, the airline customer can renew or extend leases.  Even if the underlying airline customers were to go backrupt and or not renew their leases, the underlying assets can be flow to a different customer elsewhere in the world.  Since AYR has a relatively new and fuel efficient fleet, their aircraft continue to be valuable to many potential customer around the world and the management of the company has proven to be adept with placing its fleet among customers around the world.

2010 earning estimates call for the firm to earn $1.16 per share which represents an earnings yield of 11.7% at the current stock price.  This fact combined with a price that is well below book value makes this a cheap stock that should continue to stay earnings and cash flow positive for the forseeable future.  Earnings should grow as the company is adding approx $2 billion in new equipment.

Another positive for the company as an investment is that management (in my opinion) is very good.  I saw the CEO of Aircastle present at a Fortress Investor Day circa late 2007/early 2008 and I was impressed by his approach to building long-term value in the aircraft leasing business.

Though investors are probably worried about the balance sheet which includes total debt of about $2.5 billion, the fact that this debt is secured by valuable aircraft make this attractive financing for investors/banks to provide and even through the depths of the financial crisis, given the duration of the debt maturities, there was never any real chance that the company was not going to be able to remain a going concern.

Like a REIT, the previous investor base was dominated by investors looking for yield.  Currently however, the distribution has only been 0.40 per share (currently about 3.90% per year).  At some point as conditions in the leasing market improve, it is likely that this yield will be increased again to healthier levels.  To quote the company for its most recent earnings conference call:

"We see positive signals both in the industry data and from our customers. Over the past few months, the year-over-year drops in traffic have become smaller. In fact, the overall International Air Transport Association figures for September show a slight increase in revenue passenger kilometers versus year ago results . . . This overall pattern of market strength is consistent with the demand we see in the lease market. I'm encouraged by the brighter and more optimistic outlook several of our Asian and South American customers have been sharing with us recently . . . we believe lease rentals may have bottomed out and started increasing. . . In short, I think we're through the worst of it."

Catalyst

Aircraft leasing market starts improving, dividend level increasing again

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    Description

    Aircastle is primarily an aircraft leasing firm that is still excessively out of favor as a financial firm that got thrown out along with the general distaste for all financial firms especially in the midst of the financial crisis.  Although the stock has more than tripled from its all time lows of approx $3.00 reached in early 2009, the stock still represents good value and a very low chance of losing money from current levels.

    Aircastle was originally written up on VIC back in last Feb 2008 (almost 2 years to the day) by algonquin222 at a price of approx $22.14 per share and I would recommend reading his write up as most of the background and description are still relevant: http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/3209

    At that time the company was trading for 1.34x its book value of approx 16.50 per share.  In the last two years, BV has declined very slightly to $15.75 per share, but the current stock price of $9.90 means the price to book value has declined to approx 0.65x.  This is a little more than 50% less that its former level on a P/B basis.

    The company acquires, leases and sells high-utility commercial jet aircraft to airlines throughout the world. Their portfolio consist mostly of modern, operationally efficient jets with a large operator base and long useful lives. As of September 30, 2009 Aircastle's aircraft portfolio consisted of 128 aircraft which have been leased to 60 lessees located in 34 countries.

    Aircraft leasors like AYR purchase new or nearly new aircraft from Airbus and/or Boeing, and finance these purchases with approx 33% equity and 66% from long term borrowings.  Though the borrowings are secured by the aircraft, they are typically non-recourse to the parent company. As a lessor, AYR generally has lined up airlines as customers under long term leases often 10 years. 

    The profit they make is on the spread between their revenue from operating lease contracts (typically about 13% of the value of the planes) minus interest costs (about 6%, often fixed with a fixed-floating swap). This cash flow minus depreciation charges against the aircraft and operating expenses is the net profit. In many ways they are similar to REIT except that the asset they own is aircraft.

    Currently the average remaining lease term is still a healthy five years.  In many cases, the airline customer can renew or extend leases.  Even if the underlying airline customers were to go backrupt and or not renew their leases, the underlying assets can be flow to a different customer elsewhere in the world.  Since AYR has a relatively new and fuel efficient fleet, their aircraft continue to be valuable to many potential customer around the world and the management of the company has proven to be adept with placing its fleet among customers around the world.

    2010 earning estimates call for the firm to earn $1.16 per share which represents an earnings yield of 11.7% at the current stock price.  This fact combined with a price that is well below book value makes this a cheap stock that should continue to stay earnings and cash flow positive for the forseeable future.  Earnings should grow as the company is adding approx $2 billion in new equipment.

    Another positive for the company as an investment is that management (in my opinion) is very good.  I saw the CEO of Aircastle present at a Fortress Investor Day circa late 2007/early 2008 and I was impressed by his approach to building long-term value in the aircraft leasing business.

    Though investors are probably worried about the balance sheet which includes total debt of about $2.5 billion, the fact that this debt is secured by valuable aircraft make this attractive financing for investors/banks to provide and even through the depths of the financial crisis, given the duration of the debt maturities, there was never any real chance that the company was not going to be able to remain a going concern.

    Like a REIT, the previous investor base was dominated by investors looking for yield.  Currently however, the distribution has only been 0.40 per share (currently about 3.90% per year).  At some point as conditions in the leasing market improve, it is likely that this yield will be increased again to healthier levels.  To quote the company for its most recent earnings conference call:

    "We see positive signals both in the industry data and from our customers. Over the past few months, the year-over-year drops in traffic have become smaller. In fact, the overall International Air Transport Association figures for September show a slight increase in revenue passenger kilometers versus year ago results . . . This overall pattern of market strength is consistent with the demand we see in the lease market. I'm encouraged by the brighter and more optimistic outlook several of our Asian and South American customers have been sharing with us recently . . . we believe lease rentals may have bottomed out and started increasing. . . In short, I think we're through the worst of it."

    Catalyst

    Aircraft leasing market starts improving, dividend level increasing again

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