Air Lease (AL, Financial) is an aircraft leasing company engaged in the purchasing and leasing of commercial jet transport aircraft to airlines. The company is globally diversified with a presence in more than seven countries. Moreover, relationships with over 200 airlines diversifies the financial and concentration risk. As of Sept. 30, the company had 244 owned aircraft and 33 managed aircraft with 3.7 years of weighted average fleet age and 6.9 years of weighted average remaining lease term.
Air Lease has been involved in a long-term asset acquisition strategy of the in-demand, widely distributed and modern single and twin aisle commercial aircraft. At the same time, the company sells older aircraft, which has helped keep the fleet young and modern. This also translates into sustainable and longer fleet lease terms.
Air Lease has a strong order book, which helps create value for the company while simultaneously providing cash flow visibility. It is interesting to note that even before being delivered to the company, the aircraft are already leased. Currently, 91% of aircraft deliveries through 2018 are leased with 82% aircraft deliveries through 2019 being leased.
Consistent asset and revenue growth
Since 2011, the company’s assets have grown at a compound annual growth rate of 23% and steady asset growth is likely in the coming years. For the same period, revenue has increased at a CAGR of 38%. With continuous expansion of the fleet and scheduled deliveries of 372 aircraft by 2023, growth in revenue and cash flow will continue.
From a growth potential perspective, China alone owns 24% of the company’s assets according to the net book value. China has a huge customer base and the changing demographics coupled with rising income would result in secular air travel growth. China’s middle class is expected to increase from 209 million in 2015 to 470 million by 2020 and 520 million by 2025.
Thus, as gross domestic product per capita increases, trips per capita are also expected to rise. This brings me to the point that 25 to 40 additional airports are expected in China by 2020. They will mostly be in the developing regions of the country so that the aviation industry is more accessible to the broader population. Moreover, 80% of the company’s China exposure is with three major Chinese airlines. Since these are some of the biggest in the world, Air Lease has the potential to tap the unutilized airline transportation infrastructure in China.
Debt should not be a concern
Air Lease currently has debt of $8.6 billion. This might concern investors, but I do not see any problem on the credit front even if the company’s debt increases in the future.
As discussed, the company has 372 new deliveries by 2023. This will increase debt, but aircraft leading has been swift and cash flows will increase with the increase in debt. As of Sept. 30, net book value of the aircraft was $11.9 million. With total debt of $8.6 billion, the company’s loan-to-value is 70%, which means 100% of the debt is covered by 70% of the company’s asset value. Therefore, high leverage is not a concern for Air Lease.
Attractive valuation
Air Lease is grossly undervalued based on the comparison of the company’s trailing 12-month price-earnings of 10.7 and price-book value of 1.2 against the industry averages of 102.1 and 3.4. Apart from P/E and PBV, Air Lease is also trading at an EV/EBITDA of 9.3 against the industry median of 10.1. The PEG of 0.23 Â is much lower than the median of 1, suggesting the company has high intrinsic value and will surely give good returns on a long-term investment.
Conclusion
Air Lease has been regularly upgrading its fleet to include younger aircraft. This helps them to stay contracted with better lease rentals. Moreover, the company has huge potential in developing nations like China and India, which will help the company increase its market penetration. Therefore, Air Lease is a good buy and is likely to give good returns to its investors in the medium to long term.
Disclosure: No position in the stock.
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