Air Lease: Healthy Growth and Stock Upside to Continue
- By Faisal Humayun
I wrote an article on Air Lease (AL) on July 5 with the opinion that the stock was set to move higher after consolidation. In three months, the stock has trended higher by 14%, and the positive momentum is likely to sustain for the medium to long term.
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The intrinsic value of AL
With inputs from the company's second-quarter results, I will discuss the fundamental factors that will continue to support upside for Air Lease. Since the company's growth is largely backed by leverage, I will discuss credit factors supporting growth along with other company specific factors that ensure smooth cash flow profile for Air Lease.
The key objective is to underscore that Air Lease can be considered for fresh exposure even at current levels.
Valuations not expensive
Since the stock has surged recently, the first point that needs to be discussed is the company's forward valuation. Air Lease is currently trading at 2018 EV/EBITDA of 9.7, and this might seem expensive when compared to peers.
AerCap Holdings (AER) is currently trading at 2018 EV/EBITDA of 8.8 and Aircastle (AYR) is currently trading at 2018 EV/EBITDA of 7.5.
Air Lease deserves premium valuation as compared to peers, and forward valuations do not indicate any overvaluation. The key reasons for assigning premium valuation are as follows -
Air Lease is a young company, and the company's aircraft fleet age is just 3.6 years as of the second quarter. On the other hand, the fleet age for peers is more than five years. A young fleet implies higher aircraft valuation coupled with longer lease term. This is a key point for premium valuation.
Air Lease currently has a big order backlog of 373 aircraft that are scheduled for delivery beyond 2021. For fiscal 2018, Air Lease has 47 aircraft deliveries, for fiscal 2019 and fiscal 2020, the aircraft deliveries are 77 and 75. The key point is that these aircraft deliveries will ensure strong revenue and cash flow growth. AerCap Holdings, which also has significant aircraft deliveries through 2022, has valuations that are close to Air Lease.
With strong growth and a young fleet being key factors, Air Lease does deserve premium valuations; as a large number of aircraft deliveries come due in 2018 and 2019, the stock will maintain positive momentum.
Credit metrics remain strong
As I mentioned earlier, growth for Air Lease is driven by leverage and therefore it's important to look at the credit metrics on a quarterly or half-yearly basis.
As of the second quarter, Air Lease had total debt of $9.3 billion with debt-equity of 2.6. Debt is not a concern considering the following factors:
Air Lease aircraft is 90% placed through 2019, and the company has $23.9 billion in committed rentals. This will ensure steady cash flow in the coming years and even with high leverage, debt servicing will be easy.
As of June 30, the company's average fleet net book value was $12.7 billion and this translates into loan-to-value of 73%. This provides Air Lease with buffer to leverage further, and it's also important to note that the company has a large unencumbered asset base. This also underscores the confidence of creditors related to the company.
Air Lease commands a rating of BBB (Stable) from Standard & Poor's. Further, 90% of the company's new aircraft delivery is placed with clients. These two factors ensure easy financing for new aircraft deliveries.
Conclusion
It is worth noting that the general trend for aircraft companies is to lease than own aircraft. With strong demand from Asia and other emerging markets, the leasing activity is likely to remain robust in the next five to 10 years.
Air Lease has surged in the recent past after a prolonged period of consolidation; as there are early signs of growth stabilization in emerging markets, leasing activity will improve in the coming quarters.
Air Lease has 21% fleet placed in China and another 21% in Asia (excluding China). Further, Latin America contributes to 8% of the fleet placement. With 50% of the fleet in potentially high GDP growth regions, Air Lease has made strong inroads for sustained growth.
For investors considering exposure for the next three to five years, Air Lease has a lot to offer in terms of stock upside and value creation through potentially higher dividends.
Disclosure: No positions in the stocks discussed.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 4 Warning Sign with AL. Click here to check it out.
The intrinsic value of AL
