It is important to have a balance of growth and dividend stocks in one’s portfolio and the bifurcation depends on an individual’s age and risk taking profile. In the past, I have discussed some dividend stocks such as Lockheed Martin (LMT) and Caterpillar (CAT). In this article, I will be discussing an attractive growth stock that investors can consider exposure at current levels.
Avolon Holdings (AVOL, Financial) is a global aircraft leasing company focused on acquiring, managing and selling commercial aircraft. As of June 2015, the company had a fleet of 260 aircraft, representing a 29% year-on-year fleet growth. The company’s robust aircraft growth has sustained in the last few years and this has translated into revenue CAGR of 36% in the last three years and adjusted net income CAGR of 57% during the same period. Strong growth is likely to continue for reasons to be elaborated in this article, making Avolon Holdings worth considering.
Avolon Holdings recently announced that Bohai Leasing will be acquiring a strategic 20% stake in the company at $26 per share. Bohai Leasing is a Chinese e-leasing and financial services company affiliated with HNA Group. While the acquisition helps Bohai spread its wings globally, the partnership gives further access to Avolon Holdings in a high growth leasing market. Therefore, I expect the transaction to be positive for both the companies in the long-term and it will also create meaningful shareholder value.
Avalon Holdings' revenue for 1Q15 increased by 29% to $176 million as compared to 1Q14 revenue of $136 million and I believe that this growth is likely to sustain in FY15 and FY16. The company’s 1Q15 revenue growth was primarily due to aircraft additions during the last 9-12 months and Avolon Holdings has $1.67 billion in committed aircraft delivery in FY15 along with $900 million in committed aircraft delivery in FY16. The clear implication is higher lease revenue in the coming quarters that will help the robust growth trajectory sustain.
While the company’s growth will be robust in the coming quarters, a long lease-term will also ensure that the company’s cash flow is stable in the coming years. As of June 2015, the company had an average remaining lease term of 7.2 years. With continued delivery of aircraft in 2016 and 2016, I expect the lease term to remain robust.
Another important point that needs to be discussed for aircraft leasing companies is debt. For these companies, all the aircraft purchase is backed by debt. Air Lease (AL, Financial) is another good example in the aircraft leasing industry as a company that has grown a lot in the last few years and growth has been backed by leverage. However, leverage has not hindered the company's plans and debt servicing has been smooth on high duration of lease term.
As of March 2015, Avolon Holdings also had a high debt of $4.6 billion. However, debt and leverage is not a concern for the following factors:
First, Avolon Holdings has a remaining lease term of 7.2 years and this will ensure stable cash flow that will smoothly service debt.
Second, the company’s aircraft book value was $5.8 billion, translating into loan-to-value of 79%. Therefore, the company still has financial flexibility to leverage.
Third, Avolon Holdings has an undrawn credit facility of $1.6 billion and this will be sufficient to fund a large part of the company’s FY15 and FY16 capital expenditure.
Another important point about the company’s debt is that 68.7% of the debt is fixed rate debt, and this is positive because an interest rate hike is expected in US relatively soon. Higher percentage of fixed rate debt ensures minimal impact on the debt servicing cost.
As I mentioned at the onset, Bohai Leasing’s strategic stake in Avolon Holdings will be positive for the long-term, the elaboration on that point will provide a reason to continue holding Avolon Holdings for the next 5 years. Passenger traffic in Asia-Pacific, which is home to 60% of the world population, is likely to grow at a CAGR of 6.2% during the period 2013-2033.
This will trigger strong demand for aircraft leasing and the demand is evident from the point that the company’s aircraft deliveries are being leased for long-term with relative ease. Partnership with Bohai Leasing will help the company make further inroads in China in terms of new client for leasing and this should translate into continued demand for new aircraft. Avolon Holdings already has 38% portfolio share in the Asia Pacific region and I expect the portfolio share to trend higher.
From an investment perspective, it is also important to mention here that Avolon Leasing expects an adjusted ROE of 14.7% to 15.0% for FY15. In addition, the company has continued to remain aggressive in terms of aircraft sales with five aircraft sold in the first six months of FY15. In the last 3 years, the company has recorded an average gain on sale of asset of 8.7%. Therefore, the financial management is sound and shareholder value creation has been good.
In conclusion, Avolon Holdings is worth considering for the near-term as well as the long-term and I expect the company to exhibit strong growth in FY15 and FY16. This is likely to translate into higher stock price over the next 12-15 months.
