Derek Pain: Developments 'Down Under' may lift Avation

No Pain, No Gain

Shares of Avation, recruited to the no pain, no gain portfolio in January last year, have endured a disappointing 2012 journey. The once high-flying stock became quite nervous ahead of its year's figures. Although disappointing, the results, which appeared last week, were clearly better than some anticipated and the shares regained a little altitude.

Even so, year's profits were well below my expectations. Against the £7m, perhaps £8m, that was being predicted back in February, the pre-tax figure that emerged is only £5.2m and compares unfavourably with the £5.6m recorded in the previous year.

What has prompted such a low-level performance? There is no doubt it has been an exciting year for Avation, an aircraft-leasing group, as it ramped up its fleet, gathered orders for more aircraft and arranged further finance. Nevertheless, revenue at £22.1m, is below earlier estimates and no doubt reflects the cost of expansion, the sale of an offshoot, and the more cautious outlook for the Australian economy. The group's major customers are two "Down Under" airlines, Skywest and Virgin Australia. It is possible that the reported resources slowdown is endangering the continuing growth that the two operators have enjoyed. Still, with agreed additions to the fleet, chairman Jeff Chatfield suggests new aircraft should lift income by £4.6m in the current year with a further £2.9m in the following year.

Despite the unsatisfactory profits performance, the portfolio intends, at least for the time being, to stick with the shares. Mr Chatfield's overall report is encouraging. He says the board is "confident that our business provides for continued and sustainable growth in 2013 and beyond". And there are a number of influences that could inspire the shares. One is the proposed takeover of Skywest by Virgin Australia. It's a long way from being a done deal but if it should reach fruition it would value the London quoted Skywest shares at around 30p, not far from their peak but well below analyst forecasts they should hit 45p.

The two Aussie airlines already enjoy close business ties. And it must be significant that Avation has received further orders from Virgin Australia at a time the airline must have been contemplating the Skywest offer. So any merger should not inhibit – and could actually improve – the leaser's relationship with Virgin Australia which hitherto has largely conducted its Avation links through Skywest, a company also headed by Mr Chatfield.

There are other favourable straws in the wind. The group is still working towards a Singapore share quote. In spite of its Australian associations it is based in the city and feels the Asian investment community will be more attracted to the shares if it has a local quote. And, despite the profits reverse, the yearly dividend is being lifted but only by a modest 4 per cent to 1.04p a share. There are also a number of institutional shareholders. One of them, Oceanwood Capital Management, has just increased its shareholding to 15.1 per cent. In addition, Avation controls an AIM-traded leaser called Capital Lease Aviation that has just increased profits – from £3.5m to £3.8m.

The portfolio descended on the shares at 83.5p a time. The leasing group, a spin-off from Skywest, arrived on the fringe Plus share market (now called ISDX following the rescue takeover by inter-dealer broker Icap) six years ago at a mere 4p. By the time it switched to a full listing the shares were around 58p. Subsequently they topped 120p, before slipping to around the portfolio's buying level. The price, as I write, is 95p. I am, of course, disappointed that what I regarded as a sound investment has produced such a pedestrian profits display, and I am far from convinced that the group will manage to achieve the £7m figure in the current year. Earlier this year there was talk the shares should advance to 200p. Sources close to the company even went so far as to put a 400p tag on the stock.

Such hopes, at least in the next few years, are unlikely to be realised. But should Virgin Australia feel that after absorbing Skywest it might be a good idea to also annex the financial muscle of Avation, then the shares could be in for a rousing time.

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