Aircastle Ltd. (AYR, Financial), which is involved in the leasing of aircraft, has been largely sideways in the last year with stock returns of 10%. The company holds immense potential in the next few years, and the stock can trend meaningfully higher from current levels.
Robust order backlog
One of the key reasons to be bullish on Aircastle is the fact that the company has a robust order backlog for the coming years. As of third-quarter 2016, Aircastle had a total order backlog of $6.3 billion with a weighted average lease term of 5.3 years.
The backlog will ensure that there is smooth cash flow in the coming years and a large part of the cash flow will be utilized toward building a bigger fleet.
I will discuss this point later as well as the perspective of debt servicing. However, the broad takeaway is that Aircastle has a strong backlog that will only increase in the coming years. Just to put things into perspective, Aircastle had an order backlog of $5.3 billion in third-quarter 2014, and the backlog has swelled by $1.0 billion in two years.
Modern fleet
One of the strategies for growth that Aircastle has employed is continued sale of older aircraft and replacement with aircraft that are modern and can potentially command higher lease. This point is underscored by the fact that Aircastle's fleet had a weighted average age of 10.8 years in third-quarter 2011, and this improved to 7.6 years in third-quarter 2016.
It is worth noting that during the same period, the company’s weighted average lease term increased from 5.0 years to 5.3 years. Considering the aggressive growth strategy, I expect lease terms to increase significantly in the next 24 to 36 months.
Elaborating on the expansion drive, Aircastle is expected to acquire $1.5 billion worth of new aircraft in 2016 with narrow-body acquisition accounting for $1.4 billion in aircraft worth. The company is targeting 200 owned and managed aircraft fleet by the end of 2016.
Another important point that is worth noting is that for the first nine months of 2016, Aircastle acquired aircraft worth $961 million; during the same period the company also sold aircraft worth $489 million. While this shows aggressive fleet transformation, the strategy also ensures ample liquidity availability and sound debt management.
Strong geographic diversification
In the next 10 to 15 years, Asia is likely to be the key growth driver for the aircraft leasing industry, and Aircastle has been making gradual progress toward bigger penetration into Asia. This is likely to yield positive results in the long term.
Just to put things into perspective, Asia accounted for 20% of the net book value of aircraft under lease in fiscal 2009, and this has doubled to 39% as of third-quarter 2016 data provided by the company. It is also worth noting that China still does not account for Top 10 leasing destinations for Aircastle, and I see tremendous potential in China and India. However, with presence in Asia and Latin America, Aircastle has big potential ahead. Overall, Aircastle is already present in 35 countries and I see that profile expanding as new aircraft are acquired.
Sound fundamentals
Aircastle has maintained strong fundamentals along with a good growth strategy and the company’s financial health is likely to ensure that growth remains robust even in the coming years.
With unsecured debt to total debt of 72%, Aircastle does have a large number of unencumbered assets that will ensure that financial flexibility remains high. Further, Aircastle also has $675 million in available revolving credit facility; along with cash in hand the total liquidity buffer is in excess of $1.0 billion.
Aircastle reported adjusted EBITDA of $548 million for 2016, and this implies annualized EBITDA of $730 million. Therefore, with robust leasing backlog, EBITDA will remain healthy and debt servicing smooth.
Conclusion
Considering the factors discussed, Aircastle is an interesting stock for the medium to long term, and I see the sideways movement in the stock as a good accumulation opportunity.
There are early signs of economic recovery in China, and that is likely to provide additional upside trigger in the foreseeable future.
Disclosure: No positions in the stock discussed.
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