AA4.L - Amedeo Air Four Plus

[ContrarianValue44]

Hello I'm looking for people to be "devil's advocate" on my stock write-up idea (bring up potential pitfalls of the investment thesis). Here is my write-up: https://www.itaiparnes.com/post/equity-research-publications-amedeo-air-four-plus

I do think that the stock has up to 700 percent upside, and a potential 50 percent dividend yield, therefore strong potential. But I'm looking for users to help by pointing out any shortcomings or risks that I missed.

Disc: long Amedeo

Many thanks!

[hasilp89]

Nice write up and interesting idea. How did you come across the company? Curious on why you think it is so undervalued / why this opportunity exists?  Huge upside assuming your £1.98/share NAV is correct. Is it purely covid, Thai airways or is there something else there? Assume there’s always be some discount given size & customer concentration but trading at 1/8th of NAV is a bit much.

 

edit: after a little more reading its seems the something else may be that the a380 is discontinued which has a big impact on resale / fair mkt value. Additionally Emirates will phase them out over the next 15 years. Leases expire in 2026-2028. Worst case have to assume emirates will not renew and you’re stuck in the secondary market for a380 which appears soft. Granted it seems they did ok on the etihad sale.  
 

https://www.flightglobal.com/fleets/emirates-begins-a380-retirements-to-support-in-service-fleet/134186.article

Edited June 6, 2021 by hasilp89

[AG]

Hi Contrarianvalue, thanks for the idea. I think halsip89 is spot on. I remember looking at another one of Nimrod’s air leasing funds and gave it a pass because of potential issues with the A380 terminal value.

This Forbes article sheds some light:

https://www.forbes.com/sites/michaelgoldstein/2020/03/09/airbus-a380-value-continues-to-plummet/?sh=39d25afb489c

It also references the following article/research where the author projects the part out value of the A380 to fall to $35MM from over $80MM in 2019.

https://www.cirium.com/thoughtcloud/what-does-the-end-of-a380-production-mean-for-values/

 

Your aircraft valuation of GBP1820MM looks too high, particularly considering that the acquisition cost of those airplanes was just over GBP1.9BN. Also the undiscounted lease rentals over the next 9 years is just GBP1,484MM as per the latest annuals and it is likely to be even lower because Thai rental revenues will surely be negotiated much lower.

 

 

DP Aircraft, a similar leasing closed ended fund also listed in London which also has exposure to Thai Airways wrote the following in their latest annual report which gives an indication of the sort of arrangement that lessors might need to have with Thai Airways:

 

“In January 2021 the Company signed a Letter of Intent (‘LOI’) with Thai Airways under which the parties agreed to amend the existing lease terms. The new terms provide for a power by the hour (‘PBH’) arrangement until the end of 2022 (i.e. rent will be payable by reference to actual monthly utilisation of the Thai aircraft), with scaled back monthly lease payments thereafter, reflecting the reduced rates now seen in the market. The lease term will be extended by 3 years to December 2029, after consulting the Lenders with the Group retaining the right of early termination in 2026. The effective date for these amendments is yet to be confirmed and is dependent on the timing of the approval of the rehabilitation plan by the Central Bankruptcy Court of Thailand. Thai Airways has also undertaken to ensure that the Thai aircraft are airworthy and in flight ready condition in all respects by 30 June 2021, and on an ongoing basis. On 1 March 2021 a corresponding agreement has been reached with the bank providing finance for the aircraft leased to Thai airways as detailed below.”

 

Thai is disputing US$7.4BN of aircraft lessor claims:

https://www.businesstimes.com.sg/transport/thai-airways-disputes-us74b-of-aircraft-lessor-claims

 

The company might have to agree to a payment by the hour for 2021 and 2022 and lower rental terms going forward. Based on the latest Factsheets Amedeo’s Thai aircrafts only had combined 49 flight hours in Q1.

 

The leasing cashflows from Emirates are more predictable. I have attached a DCF for Amedeo looking at individual asset cashflows. Based on the company disclosures, the annual lease rentals amount to 9.6% and 9.7% of the aircraft acquisition cost for Emirates and Thai respectively and those rates can be applied to each aircraft. I am assuming that rental rates for Thai are just 20% of historical levels this year, 40% in 2022 and 70% afterwards (assuming a new agreement with a lower rate).

 

Assuming a terminal value of $50MM for each aircraft (higher than the $35MM analyst projection for the A380. But the other aircrafts, despite having a lower acquisition cost might have a higher terminal value) and a discount rate of 10% I get to a 37p value per share.

 

To make it simple I have included the terminal value for each aircraft in the year after the lease expiry, which might reduce the value slightly but should not be very material. On the other hand I am adding the net of current cash balance & other current assets and other liabilities to the valuation undiscounted, although a large part for that cash might be returned to shareholders towards the end of the lease terms resulting in a lower discounted value.

 

Adjusting upwards the aircraft terminal values you can get to values closer to double the current price, but given the downside risk to the valuation if terminal values are significantly lower, or if the lease terms with Thai are worse than projected, or if the Emirates leases end up having to be renegotiated (unlikely but also not accounted for in the model) I don’t think the current share price is that compelling.

AMEDEO AIR FOUR PLUS LIMITED DCF.xlsx

Edited June 7, 2021 by AG

[ContrarianValue44]

On 6/5/2021 at 9:19 PM, hasilp89 said:

Nice write up and interesting idea. How did you come across the company? Curious on why you think it is so undervalued / why this opportunity exists?  Huge upside assuming your £1.98/share NAV is correct. Is it purely covid, Thai airways or is there something else there? Assume there’s always be some discount given size & customer concentration but trading at 1/8th of NAV is a bit much.

 

edit: after a little more reading its seems the something else may be that the a380 is discontinued which has a big impact on resale / fair mkt value. Additionally Emirates will phase them out over the next 15 years. Leases expire in 2026-2028. Worst case have to assume emirates will not renew and you’re stuck in the secondary market for a380 which appears soft. Granted it seems they did ok on the etihad sale.  
 

https://www.flightglobal.com/fleets/emirates-begins-a380-retirements-to-support-in-service-fleet/134186.article

 

On 6/7/2021 at 11:11 AM, AG said:

Hi Contrarianvalue, thanks for the idea. I think halsip89 is spot on. I remember looking at another one of Nimrod’s air leasing funds and gave it a pass because of potential issues with the A380 terminal value.

This Forbes article sheds some light:

https://www.forbes.com/sites/michaelgoldstein/2020/03/09/airbus-a380-value-continues-to-plummet/?sh=39d25afb489c

It also references the following article/research where the author projects the part out value of the A380 to fall to $35MM from over $80MM in 2019.

https://www.cirium.com/thoughtcloud/what-does-the-end-of-a380-production-mean-for-values/

 

Your aircraft valuation of GBP1820MM looks too high, particularly considering that the acquisition cost of those airplanes was just over GBP1.9BN. Also the undiscounted lease rentals over the next 9 years is just GBP1,484MM as per the latest annuals and it is likely to be even lower because Thai rental revenues will surely be negotiated much lower.

 

 

DP Aircraft, a similar leasing closed ended fund also listed in London which also has exposure to Thai Airways wrote the following in their latest annual report which gives an indication of the sort of arrangement that lessors might need to have with Thai Airways:

 

“In January 2021 the Company signed a Letter of Intent (‘LOI’) with Thai Airways under which the parties agreed to amend the existing lease terms. The new terms provide for a power by the hour (‘PBH’) arrangement until the end of 2022 (i.e. rent will be payable by reference to actual monthly utilisation of the Thai aircraft), with scaled back monthly lease payments thereafter, reflecting the reduced rates now seen in the market. The lease term will be extended by 3 years to December 2029, after consulting the Lenders with the Group retaining the right of early termination in 2026. The effective date for these amendments is yet to be confirmed and is dependent on the timing of the approval of the rehabilitation plan by the Central Bankruptcy Court of Thailand. Thai Airways has also undertaken to ensure that the Thai aircraft are airworthy and in flight ready condition in all respects by 30 June 2021, and on an ongoing basis. On 1 March 2021 a corresponding agreement has been reached with the bank providing finance for the aircraft leased to Thai airways as detailed below.”

 

Thai is disputing US$7.4BN of aircraft lessor claims:

https://www.businesstimes.com.sg/transport/thai-airways-disputes-us74b-of-aircraft-lessor-claims

 

The company might have to agree to a payment by the hour for 2021 and 2022 and lower rental terms going forward. Based on the latest Factsheets Amedeo’s Thai aircrafts only had combined 49 flight hours in Q1.

 

The leasing cashflows from Emirates are more predictable. I have attached a DCF for Amedeo looking at individual asset cashflows. Based on the company disclosures, the annual lease rentals amount to 9.6% and 9.7% of the aircraft acquisition cost for Emirates and Thai respectively and those rates can be applied to each aircraft. I am assuming that rental rates for Thai are just 20% of historical levels this year, 40% in 2022 and 70% afterwards (assuming a new agreement with a lower rate).

 

Assuming a terminal value of $50MM for each aircraft (higher than the $35MM analyst projection for the A380. But the other aircrafts, despite having a lower acquisition cost might have a higher terminal value) and a discount rate of 10% I get to a 37p value per share.

 

To make it simple I have included the terminal value for each aircraft in the year after the lease expiry, which might reduce the value slightly but should not be very material. On the other hand I am adding the net of current cash balance & other current assets and other liabilities to the valuation undiscounted, although a large part for that cash might be returned to shareholders towards the end of the lease terms resulting in a lower discounted value.

 

Adjusting upwards the aircraft terminal values you can get to values closer to double the current price, but given the downside risk to the valuation if terminal values are significantly lower, or if the lease terms with Thai are worse than projected, or if the Emirates leases end up having to be renegotiated (unlikely but also not accounted for in the model) I don’t think the current share price is that compelling.

AMEDEO AIR FOUR PLUS LIMITED DCF.xlsx 25.74 kB · 9 downloads

Thank you so much for your help and comments! I see that I was wildly wrong on NAV.

 

Thank you for the DCF and the articles as well, they were both very helpful!

 

Users like you are what makes this community so great and educational!