Avation PLC (AVAP) — Research Note

Executive summary

Avation is a Singapore‑headquartered, UK‑listed commercial aircraft lessor that owns 33 modern passenger aircraft (predominantly ATR 72 turboprops and Airbus narrowbodies) leased to 16 airlines across 15 countries on long‑dated fixed‑rate operating leases. The trajectory across the period covered is a steady post‑Covid normalisation — fleet 100% utilised, net debt cut from US$922m (Jun‑2021) to US$543m (Dec‑2025), the near‑term 2026 bond refinanced with a 5‑year 8.5% issue, dividend reinstated and the share count cut ~6% via buybacks at 138–160p. The single most important point for valuation today is the persistent ~50% discount of the equity to the externally‑valued, lease‑encumbered NAV of £2.74 per share 2026‑02 half‑year.

Fair value estimate

Methodology: NAV‑based with a haircut for small‑cap, leverage and aircraft revaluation risk. Aircraft lessors are commonly valued on a P/Book basis; book here reflects independent lease‑encumbered valuations of the fleet.

• Dec‑2025 NAV per share: £2.74 (274p) on 62.3m shares ex‑treasury, equity of US$230m, GBP:USD 1.35 2026‑02 half‑year.
• Apply a 0.65x–0.85x P/NAV range — wider discount than the listed lessor average to reflect (i) 5.1x net debt/EBITDA, (ii) ATR/turboprop concentration, (iii) recent Air Baltic A220 hull loss (insurance at book value, US$33.4m), Braathens lease termination, and (iv) £83m float liquidity.
• Fair value range: ~178p – 233p per share, midpoint ~206p.
• Implied market cap range: £111m – £145m, mid ~£128m vs current £82.5m.
• Upside to mid: ~+55% (range +35% to +76%). The shares already trade well inside the buyback band management itself has been willing to pay (138–160p) 2026‑02 half‑year.

A sense‑check on earnings: H1‑26 operating profit was US$29.3m (annualised ~US$60m), and underlying H1 earnings ex‑US$13.0m of non‑recurring 2021 bond modification amortisation/redemption costs are clearly profitable 2026‑02 half‑year. At even 6x normalised pre‑tax of ~US$30m, equity value of ~£140m is plausible — consistent with the NAV approach.

Sector context

• Sector: Industrials / Industrial Goods & Services (aircraft leasing sub‑segment, financial in substance).
• Quality/growth: below typical large lessor peers. Leverage (net debt 54.7% of total assets, 5.1x EBITDA) is higher than peers; fleet is smaller and more turboprop‑weighted; rating is B/B/B2 vs investment grade for the largest peers.
• Listed peers: AerCap (AER), Air Lease (AL), BOC Aviation (2588.HK). All trade closer to or at book value with stronger ratings and scale; Avation is a deep‑value micro‑cap analogue.

Investment thesis

1. Trades at ~48% of independently appraised NAV with management actively buying stock back at 138–160p — a clear signal that internal value exceeds market price 2026‑02 half‑year.
2. Near‑term refinancing risk is gone: the US$298m 2026 unsecured notes were fully redeemed and replaced by US$300m 8.5% notes due May 2031 in Nov‑2025, giving a stable capital structure and a platform for fleet growth 2025‑11 AGM statement; 2026‑02 half‑year.
3. Tight new‑aircraft supply is supportive: IATA 2025 traffic +5.3%, record 83.6% load factors, OEM backlog ~17,000 aircraft and supply‑chain delays are pushing up lease rates and second‑hand values, evidenced by Avation's 4‑year early EVA Air A330 extension and ATR rates rising at re‑lease 2025‑07 trading statement; 2026‑02 half‑year.

Key risks

1. Counterparty risk: Braathens entered administration Oct‑2025 (two ATR leases terminated, financial impact still being evaluated); arrears risk has bitten before (Virgin Australia, PAL) 2026‑02 half‑year.
2. Leverage and rate sensitivity: 5.1x net debt/EBITDA, weighted average cost of debt 6.8% (rising as unsecured coupon moved from 8.25% to 8.5%); refinancing risk pushed out but cost of capital remains structurally elevated 2026‑02 half‑year.
3. Aircraft revaluation and total‑loss volatility: Air Baltic A220 just written off (US$33.4m insurance settlement at book); aircraft purchase rights valued via Black‑Scholes have produced large non‑cash swings (US$15.4m loss H1‑25; US$4.2m loss H1‑26) creating reported‑profit noise 2025‑02 half‑year; 2026‑02 half‑year.

Operating leverage

Avation's cost base is dominated by fixed items: depreciation (US$18.1m H1‑26, ~32% of revenue), interest (US$20.6m on borrowings, ~37% of revenue) and tiny SG&A (US$5.6m, ~10%). Once a plane is on a fixed‑rate long lease, incremental revenue from re‑leases at higher rates flows almost entirely to operating profit (gross margin on existing aircraft is ~55–60%). However, revenue is contractually slow‑moving: 33 aircraft, weighted average remaining lease term 4.3 years, all leases fixed‑rate, so the company cannot capture upside surprises in a single year — re‑leases and new ATR deliveries (9 firm by 2028) are the inflection. A 10–20% lift in fleet revenue (e.g. all transitions priced 15% above current rate) would add roughly US$10–20m to operating profit, lifting it ~35–70% — meaningful but not "multiples of profit". The bigger asymmetric value is in the 24 ATR purchase rights held to 2034: management itself notes "significant value" and previously carried these at US$112m 2024-05 trading statement; 2026‑02 half‑year. This is not classic high‑operating‑leverage software but is a capital‑light option that scales meaningfully.

Value‑trap signals

• Persistent NAV discount of ~50% for several years despite buybacks — the market clearly demands a structural discount.
• Aircraft‑lessor accounting is opaque: revaluation gains, IFRS 9 debt‑modification amortisation, derivative fair‑value swings and purchase‑right Black‑Scholes adjustments all produce profit volatility unrelated to cash flow.
• Customer concentration tail (recurring airline insolvencies — Virgin Australia, PAL, Braathens, prior India repossession) is a real and recurring drag.
• High weighted cost of total debt (6.8%) compresses ROE; B/B credit rating limits debt cost reduction.
• Standard Listing / Transition Category historically (board flagged possible move to ESCC) reduces index buying and float.

Earnings vs. expectations

• May‑2024 trading update: "profit … significantly ahead of current market expectations" — beat 2024‑05 trading statement.
• Feb‑2023 pre‑results update: "significantly ahead of market expectations" — beat 2023‑02 pre‑results trading update.
• Jul‑2025 trading update: revenue ~US$110m, "on track with expectations" — in line 2025‑07 trading statement.
• H1‑26 results: operating profit up 56% YoY — solid delivery; no explicit consensus referenced, but management's own AGM statement narrative was met. Pattern: positive bias of beats over misses, but sell‑side coverage is thin and explicit consensus is rarely cited, so the read is qualitative.

Conviction

Conviction: 3 (moderate).

• Anchors: independent lease‑encumbered fleet valuations support the NAV; management is candid and the buyback range itself benchmarks internal value; cash flows from contracted leases are visible 4+ years.
• Caveats: aircraft residual values and discount‑rate assumptions in the NAV are the swing factor (a 100bp shift moves equity meaningfully given 5.1x leverage); accounting volatility (Black‑Scholes, IFRS 9 modification, derivatives) makes earnings hard to model; airline counterparty defaults can hit at any time.