Alliance Aviation Services: Continuing to fly above the pack

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Kurt Gelsomino
Author name:
By Kurt Gelsomino
Job title:
Analyst
Date posted:
12 August 2021, 9:00 AM
Sectors Covered:
Building Materials, Industrials, Gaming

  • Alliance Aviation Services (ASX:AQZ) delivered a strong FY21 result, with NPBT of A$51.0m (+25.3% yoy) in line with our forecast and just 2% below consensus.
  • FY22 outlook comments remained positive and AQZ outlined a clear timeline to fully deploy 29 E190 aircraft by the end of FY22. This will see its operating fleet rise 67% to 72 aircraft and support a >210% increase in FY23 flight hours.
  • We lower our FY22 forecasts but leave our FY23 forecasts unchanged. With a strong growth outlook and track record of execution, we maintain an Add rating.

Delivers another record result

Alliance Aviation Services (ASX:AQZ) posted FY21 underlying EBITDA of A$90.5m, +15.3% yoy and underlying NPBT of A$51.0m, +25.3% on the pcp. The results were in line with our forecasts (PBT A$50.7m) and slightly below Factset consensus (PBT A$52.0m).

Total flight hours rose 0.8% yoy, with solid growth in contracted hours (+9.0%) and elevated short-term charter activity (+82.6%) more than offsetting COVID-impacted results across the group’s wet lease, RPT and aviation services revenue streams. As expected, 2H21 profitability reduced against a very strong 1H21 result.

Underlying cashflow (ex. A$33.4m of E190 inventory acquired and one-off costs) rose 73% to A$75.9m and illustrated the strong cash generation of the Fokker fleet. AQZ settled 26 E190 aircraft during the period (A$175.9m), with total cash capex of A$205.7m (maintenance A$30.5m).

Net debt exited at A$120.1m (leverage 1.3x) and is forecast to peak at A$156m at 1H22 as the remaining six E190s are settled by Oct-21. We forecast FY22 net debt of A$146.7m (leverage 1.4x) before degearing occurs from FY23 onwards (leverage 0.8x).

Clear E190 deployment timeline provided; FY22 outlook remains positive

In a strong sign of its confidence and despite general uncertainty across the broader aviation industry, AQZ clearly outlined its deployment timeline for its 32 E190 aircraft. Management expects to have 14 aircraft fully deployed by the end of 1H22 (operational fleet of 57 vs. 48 at Jun-21) and 29 in service by the end of FY22 (72 in service), with three retained to cover base maintenance checks. The 29 E190s are expected to generate c80k flight hours pa, which will increase the business by >210% from FY21 levels of 37.9k hours. 

The Qantas wet lease agreement is expected to utilise up to 18 of the aircraft and we estimate account for c54k of the uplift in the group’s flying. While the recent border restrictions have delayed the ramp up of this work by approximately one month, we expect the agreement’s initial wet lease routes based out of Adelaide and Darwin are well placed to see an increase in activity with the recent opening of the SA-NT border.

We understand AQZ’s Qantas wet lease work has no material exposure to the NSW/VIC markets, but does require a reopening of QLD’s border to SA. Additionally, AQZ will utilise five of its E190s on its Central Australian FIFO routes to reallocate an additional five Fokker aircraft to the WA market to capitalise on new organic FIFO opportunities. It will also dry lease two aircraft and retain the remaining four to pursue other growth options.

While no formal guidance was provided, AQZ highlighted that it retains a positive outlook for FY22 driven by its organic growth opportunities across its contract, charter and wet lease revenue streams. It noted the business is entering FY22 with strong momentum and will build on its position through its E190 fleet expansion.

Forecast changes

We have lowered our FY22 forecasts (EBITDA -6.3% to A$108.0m) to account for the slower near-term ramp up of AQZ’s wet lease services with Qantas due to COVID and to more accurately align our fleet deployment assumptions based on the increased disclosure provided with the result. However, our FY23 forecasts remain unchanged.

In FY23, we assume AQZ’s full fleet of 72 aircraft is operational and generates EBITDA of A$145.2m, up 34.4% on FY22 (~A$2m EBITDA/aircraft), with the Qantas wet lease agreement a key driver of growth.

Investment view: Add rating maintained

FY21 has been a transformational year for AQZ, with its strong levels of profitability and operational expertise enabling it to undertake a material fleet expansion and capitalise on new opportunities, which positions the business to deliver strong earnings growth over FY22-23.

In FY22, investor focus will remain on the execution of its fleet expansion and we expect the stock will gradually re-rate as confidence builds in AQZ’s deployment.

With an impressive track record, continued positive operating momentum and a strong medium-term growth outlook, Add maintained.

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