Derek Pain: Sell-off by RBS helps my Avation holding to take off

No Pain, No Gain
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The Independent Online

The Royal Bank of Scotland's (RBS) £4.7bn sale of its aircraft leasing division should have thrown new light on the stock market's valuation of Avation, a constituent of the no pain, no gain portfolio that is also, in a much smaller way, in the aviation leasing business.

The multi-million pound RBS deal, plus Avation's own initiatives, have prompted analyst Derren Nathan of stockbroker WH Ireland to put a 200p target price on the group's shares, almost double their present level. And he believes such a high-flying assessment could be regarded as rather "conservative".

The shares joined the portfolio just over a year ago at 83.5p. They are, as I write, 106p after topping 120p. The group moved from the fringe Plus market, where it landed in November 2006, to a full listing 15 months ago; it is, I believe, still the only share to make such a journey without pausing on the way at AIM .

Since quitting Plus, the shares have enjoyed considerable progress, and I am aware of at least one fund manager who believes they are now up with events and is content to give them no more than a hold rating.

But Mr Nathan, supporting his buy recommendation, is particularly bullish.

Avation is, of course, many air miles away from the might of RBS's aviation division, sold to trim the state-controlled bank's debt mountain. After all, it is capitalised at a mere £45m and qualifies as a small cap. Even so, from a standing start the company, under the direction of Jeff Chatfield, has done well, and the Ireland researcher sees little danger of any intrusive turbulence.

He is particularly impressed with Avation's ability to secure extra aircraft. It recently announced it had enlisted two additional planes for leasing to the Skywest Australian airline, also headed by Mr Chatfield, where it has a commitment to supply a squadron of new aircraft.

Assuming Avation acquired them on similar terms to existing arrangements, the newcomers should quickly pay their way, producing revenue of some £2.6m in the next full year.

The group, which has an AIM-traded offshoot also leasing aircraft, has a fleet of about 20, embracing Airbus A321-200s, Fokker 100s and ATR 72-500s. The deal to supply Skywest could involve up to 18 leases with the first eight consisting of new ATR 72s.

Mr Nathan estimates profits in the current year will hit £7m, up from £5.6m, and reach £8.5m next.

The leaser has already joined the dividend club and is expected to steadily increase payments.

Whitbread, one of the portfolio's two Footsie stocks, has fared less well from analytical research.

Credit Suisse has cut its view of the shares from "outperform" to "neutral". It believes downside risks to the company are increasing.

The Premier Inn to Costa Coffee group which also embraces the Beefeater pub/restaurant chain, has served up a remarkably strong trading record in recent times, but the economic environment and increasing competition cannot be making life easy.

Still, I am content to stick with the shares, at least for the time being. The portfolio paid 1,105p against a price now residing above 1,700p.

I was disappointed by the half-time performance of Hargreaves Services, one of the best-performing portfolio constituents.

But I seem to be in splendid isolation with such downbeat thoughts as the shares have hardly blinked and are near their peak.

Despite an interim, pre-tax profits decline of 16.1 per cent to £13.6m, the coal mining to transport group is confident it will meet its full-year profit targets. It is banking on a greater weighting of profits in the second six months than in the past. The stock market is looking for overall figures of around £48m.

Most headline figures, to my surprise, were in negative territory. Only revenue, up 27.9 per cent at £322.8m, and dividend, a 17.6 per cent increase to 6p a share, merited plus signs.

It seems problems at its Maltby pit in Yorkshire did some of the damage and rising commodity prices also contributed to the reverses. But there are hopes the worst is over, although the pit's performance this year will fall short of earlier expectations. Still, the new Tower coal project in Wales will soon be operational and contributing to profits.

The shares are now above 1,200p against a 417p buying price.

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