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November 13th, 2014
By Xiaoya Xiong (Carrie), Zichao Wang (Zich), Hari Vijayan
Agenda
• Introduction
• Current Holdings
• Business
• Macro-economic Review
• Management Philosophy
• Recent Stock Performance
• Financial Analysis
• Financial Valuation
• Recommendation
Introduction
•
A leading aircraft leasing company that provides airlines worldwide with operating leases on new
aircrafts. Rental revenue accounts for 97.4% of total revenue.
•
AL is also involved with aircraft remarketing and sales, fleet analysis and planning, aircraft
financing and support, and aircraft management for 3rd parties. [2]
•
•
•
•
Customers are mainly large commercial airline companies.
Relationship with 200 airlines across 70 countries.
Owns 193 airplanes, of which 90% are flown internationally.
Employee strength- 63 people. The company was founded in 2010 and has its head-quarters in Los
Angeles, CA. [1]
Source : 1.10-K Page 4, 2.Airleasecorp.com/about
Current Holdings
• Purchased: 400 shares @$ 22.32 on Dec 18, 2012
• Cost basis: $8,928
• Current Price: Closed @$37.28 on Nov 12th,2014
• Market Value: $14,912
• Gain: $5,984 (67.03%)
Business Overview
•
The company purchases new commercial jet transport directly from manufacturers and lease
them to airlines throughout the world to generate attractive returns on equity.
•
•
•
•
•
Purchases are funded by internally generated cash, debt financing and excess cash.
•
The company also sells aircraft from its operating lease portfolio to third parties and other
leasing companies.
•
•
•
Provides fleet-management services to investors and portfolio owners for a fee.
Suppliers include companies like Airbus S.A.S, Boeing, etc.
Customers include companies like United Airlines, Air France, Air China, Emirates, etc.
[2]
Fleet principally comprise of Boeing-737, Airbus A320, Embraer E190 class of aircrafts.
AL has developed a globally diversified financing group that has generated $4.4 billion in
financing.
Major Competitors: AerCap Holdings N.V., Aircastle LTD and FLY Leasing Limited
Business performance is principally driven by the growth of fleet, term of leases and interest
rate on indebtedness, supplemented by the gains of aircraft sales and trading activities.
Source : 1.10-K Page 5, 2.Airleasecorp.com/customers#
Business Strategy
•
Fleet is comprised of fuel-efficient and newer generation aircraft. This helps in reducing
obsolescence risk and in maintaining residual value.
•
Cyclical risk in aviation industry is mitigated by managing customer concentration and
lease maturity in operating lease portfolio.
•
•
Leases require all payments in US dollars and protect the company from all currency risks.
•
•
•
•
•
Purchase costs are reduced by sourcing components of aircraft separately.
Monitors the financial health of lessee to reduce credit risk.
Leases are backed by cash deposits and reserve payments.
Leases are always operating, where company retains residual rights on aircrafts.
Lessee is responsible for tax, insurance and maintenance of the leased aircraft.
Leases comply with F.A.A standards.
Source : 10-K Page 8,9,10
Business Segments
Aircraft
sales,
trading and
other
3%
Business Type
Segments
Rental of
flight
equipment
97%
Rental of flight
equipment
Aircraft sales,
trading and other
The Middle
East and
Africa
U.S. and
7%
Canada
7%
Central
America,
South
America and
Mexico
13%
Rental Revenue
Geographical Segments
Asia/Pacific
37%
Europe
36%
Recent Financial Performance
•
•
•
•
•
•
•
Total revenues of $858.7 million in 2013, an increase of 30.9% from 2012.
•
Signed lease agreements for 98 aircrafts that are being manufacturing for delivery through
2023.
•
Has committed to buying 78 new aircrafts from suppliers in the near-future.
Total revenues of $261.9 million in last quarter, an increase of 21.3% from 2012.
101,822,676 shares of common stock are outstanding.
Company’s $2.1 billion unsecured revolving credit was upgraded to investment grade.
[2]
$5.9 billion total debt in 2013, an increase of 34% from 2012.
Effective tax rate was 35.1% in 2013.
All 193 owned aircrafts are currently leased and are obligated to make $6.2 billion in noncancellable lease payments.
Source : 1.10-K Page 5 2. http://www.streetinsider.com/Credit+Ratings/Air+Leases+(AL)+$2.1B+Revolving+Facility+Assigned+BBB-+Rating+at+Moodys/9648607.html
Macroeconomic Analysis
Leasing company’s can lock down profits more
accurately based on trends in economy and
are less dependent on actual state of
economy (this assumption does not account
for credit risk)
IMF GDP Growth Forecast
Commercial air travel and air freight activity
are broadly correlated with world economic
activity and expanding at a rate of 1 to 2
times the rate of global GDP growth. – AYR
2012 annual report
Source : World Economic Outlook, IMF October 2014 edition
Macroeconomic Analysis
Distribution of AL’s Portfolio
5%
6%
11%
44%
35%
Asia-Pacific
Europe
Central & South Americas
U.S and Canada
MEA
Source : World Economic Outlook, IMF October 2014 edition, 10-K Page 45
Macroeconomic Analysis
The extrapolating historical leasing
trends indicates that the total
number of aircraft on operating
lease will increase from 6800 in
2010 to 8500 in 2015, an increase of
1700 aircraft. This increase will be
driven by both new aircraft
deliveries as well as sale-leaseback
transactions.
Source : Airbus Market Forecast 2013-2032 Page 35
Porter’s 5 Forces
Competition
Threat of Substitutes
Power of Suppliers
Power of Buyers
Threat of New entrants
STRONG
LOW
HIGH
MEDIUM
LOW
Competition from
other leasing
companies, aircraft
broking, etc.
Only very big airline
companies can afford
buying their own planes.
However, even then this
is inefficient compared to
leasing.
The number of airline
manufacturers is
limited, and there are
very few big names.
E.g. Boeing, Airbus.
High in mature
market where
competition is high
and financing options
are more.
Cost of new planes is
high.
This gives suppliers
substantial edge in
controlling pricing.
Low in emerging
markets where
competition is low
and financing options
are less.
Similar products
(They all are planes!)
even though AL has a
newer fleet compared
to competitors.
95% of industry is
accounted for by the
top 50 companies.
Leasing is the only other
way an airline company
can operate.
Customer base is
important with most of
the revenue coming from
retaining customer
relations.
New entrants play a
different game
(used/older planes) and
don’t mix with big
players.
SWOT analysis
STRENGTHS
Senior management has an
average of 23 years
experience in aviation
industry.
The fleet is comprised of
young, fuel efficient and
modern aircraft.
Improvement in creditworthiness has reduced the
cost of debt.
Increasing diversity in
customer base.
WEAKNESSES
OPPORTUNITIES
Debt covenants on D/E,
dividend ratios, minimum net
worth and interest coverage
ratios, change of control
provisions and provisions
against aircraft disposal.
Growing replacement market
in North America and Europe.
On-going litigation with ILFC
and AIG
THREATS
Forthcoming change in lease
accounting standards.
Forecast of Tripling demand in Continuity in business,
emerging markets.
retaining customers is of
volatile and riskier nature in
aircraft-leasing.
Technological innovations can
obsolete the existing fleet.
Over-supply in market can
significantly impact future
earnings.
Management Philosophy
•
•
•
CEO - Steven F. Udvár-Hazy, an aircraft leasing industry pioneer.
•
Management expects to finance the expansion plan by raising more unsecured
debt.
•
Focus on meeting needs of replacement markets in North America and Western
Europe with a newer fleet.
•
•
This can improve the market share of the company.
•
This can increase the profitability of the company,
Employees and directors are given stock-based compensation
The management is looking forward to increasing the fleet size, and expanding
more in the global market.
Improve and diversify the presence in emerging markets where a higher lease rate
can be commanded due to lack of financing options.
Source : 10-K Page 44, 48, 2014
Technical Chart
Source : FreestockChart Comparable analysis
Recent Stock Performance
• Current Price: Closed @ $37.28 on Nov 12th,2014
• Market Cap: $3.82 billion
• P/E : 17.27
• P/B : 1.43x
• EPS : $2.16x
• Div & Yield: 0.40%
• 52wk Range: 30.01 - 42.89
• Shares Outstanding: 102.39M
• Beta: 1.51
Source : Yahoo Finance Summary
Financial Analysis
DuPont Analysis
The sharp increase in leverage is a
major factor in the increasing ROE
350.0%
300.0%
250.0%
200.0%
150.0%
100.0%
50.0%
0.0%
2011
2012
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
2013
WACC Valuation
DCF Valuation
Revenue Projections & Growth
Comparables Valuation
Decision Drivers
STRENGTHS
CONCERNS
Strong Potential Economic Headwinds
Current Stock Price > Fair Prices from Valuation
Promising Aircraft Leasing Industry Growth
Aggressive Debt Financing Strategy
Young Fleet, Fuel Efficient and Modern Aircraft
On-going Litigation with ILFC and AIG
Short-Term outlook is not promising
The DCF valuation generated a per share price of
: $32.92
The Comparables valuation generated a per share price of
: $29.50
The per share price on market-close on 12th November 2014
: $37.28
Recommendation : SELL 200
Shares @ Market
Q&A