Aircastle Remains On Course

Aircastle Ltd (AYR) came out with 2nd quarter earnings pretty much as expected. This is actually very positive after the turmoil around the stock back in June. At that time the stock was hit by the double whammy of worries about financial companies and record oil prices put anything related to airlines into a tailspin. Since Aircastle leases commercial aircraft the market pushed the stock down to as low as $7.79. Neither of these worries have had any actual effect on the company’s operations and revenue growth continues nicely.

I reviewed the earnings release and the conference call there are a couple of points I would like to point out concerning Aircastle’s current valuation:

• Free cash flow, defined as net income plus depreciation, is running at a $4.40 annual rate. The stock at its low traded at less than two times this number and is still just over 3 times free cash flow.
• Aircastle’s fleet has a net book value of $4.1 billion and total debt of $2.7 billion giving equity of $1.4 billion. Recent aircraft sales indicate that book value is probably significantly under the current market value of the aircraft.
• Unrestricted cash has increased to $77 million from $13 million at the start of 2008.

I see a company with a market capitalization of $1.05 billion generating free cash at 32% of market cap and trading at somewhere near 60% of the equity in the assets. After the dividend the cash pile is growing by $60 million per quarter. The current dividend is less than 25% of free cash flow and the stock still yields over 8%. To put a value on the stock just looking at the cash flow, I take 10 times free cash flow after the dividend and get a $34 stock.

Company management is very noncommittal when asked about increasing the dividend, buying back stock or other uses for its cash. They keep repeating that they are looking at all options, but are very interested in increasing shareholder value. I look forward to finding out what they plan they come up with. AYR is a component of this site’s Income Portfolio.

Note: I have a long position in AYR.

Comments

[kj:]

Tim,

Any info on near term debt maturities?

Thanks

2008 Aug 10 02:51 PM

[JNM:]

Both the revolver and warehouse mature in 12/08. The revolver is flat, but the warehouse has $255M drawn. It's backed by 11 aircraft. AYR is in active talks to sell the 11th plane and wrap the balance of 10 in a term facility spanning 5Ys totaling ~$215M. The other financing hurdle is raising capital for the pre-delivery payments (PDP) on the A330 order of 12 aircraft. They owe $17M this year and another $153M in '09. Management expects to have both items cleared up by YE08.

2008 Aug 12 10:52 AM