Alliance Aviation Services: Still clear skies ahead

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Kurt Gelsomino
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By Kurt Gelsomino
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Date posted:
10 February 2021, 4:00 PM
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Building Materials, Industrials, Gaming

  • Alliance Aviation Services (ASX:AQZ) delivered another record interim result, which was in line with guidance and our forecast. Operating cashflow was strong and a standout.
  • AQZ’s outlook for the balance of FY21 remains positive and further growth is expected in FY22 and beyond. The group’s outlook comments suggest its strong 1H21 trading is expected to largely continue throughout 2H21.
  • Our FY21/22F underlying NPBT has risen 10%/8% and we forecast a 3-year NPBT CAGR of 25%.
  • With positive operating momentum and a strong track record of executing aircraft acquisitions, we maintain an Add rating.

Strong interim result, in line with guidance

AQZ posted another record interim result, delivering 1H21 underlying NPBT of A$26.7m (+72% on the pcp and 6% on 2H20), which was in line with guidance of A$26.5m and our forecast.

The change in business mix seen at the FY20 result due to COVID-19 persisted through 1H21, with overall group flight hours -3.3% on 1H20A (+6.4% on 2H20A) reflecting the combination of a 97% reduction in wet lease flight hours and 2.5% fall in RPT services, which was largely offset by 16.6% growth in contracted charter and 229% increase in short-term charter hours.

Operating cashflow was a highlight and extremely strong at A$47.5m (vs. A$14.6m the pcp).

Net debt was A$6.9m vs. net cash of A$44.4m at Jun20 as cash capex rose to A$101.4m (vs. A$19.8m the pcp) as AQZ invested A$87.4m in its E190 expansion and A$13.9m in its Fokker fleet (largely maintenance).

With US$90.2m (cA$117m) remaining to be settled on the E190 fleet (at 31-Dec), the Board prudently decided not to declare an interim dividend.

FY21 outlook is positive and growth expected in FY22 and beyond

In contrast to our thinking, formal FY21 guidance was not provided.

However, AQZ highlighted that its outlook for the balance of FY21 remained positive and further growth is expected in FY22 and beyond (supported by the recent Qantas wet lease agreement).

In 2H21, contracted charter revenue is expected to continue to grow due to the annualised benefit of increased flight schedules for its resource sector customers and upcoming mine maintenance programs.

RPT, wet lease activity and aviation services are also expected to recover as domestic travel demand gradually improves. While short-term charter activity is expected to remain strong, with AQZ also targeting further domestic tourism charters.

In aggregate, AQZ’s outlook comments suggests its 2H21 trading is expected to continue at largely similar levels to those enjoyed over 1H21.

Upgrade FY21/22F; still see FY23 as first full year of expanded fleet

Due to stronger than expected activity levels across the group’s short-term charter and RPT revenue streams, our FY21F underlying EBITDA and underlying NPBT has risen 6.0% to A$90.2m (+14.9% on FY20A) and 10.1% to A$50.7m (+24.5% yoy).

Our FY22F underlying NPBT has risen 7.6% to A$60.9m (+20.2% on FY21F) due to the benefit of the recent Qantas agreement (aircraft expected to operate at high utilisation levels).

We continue to assume FY23 is the first full year that AQZ’s 30 E190 aircraft are fully deployed and we forecast a 24.9% 3-year NPBT CAGR over this period.

Investment view – Add rating and new price target

Following forecast upgrades, our DCF based valuation and price target, previously A$5.00, has increased (login to view target price).

We continue to expect AQZ will secure further agreements to utilise the significant capacity its material fleet expansion has provided and we think further progress on this front will increase investor confidence in the group’s strong FY22/23 growth outlook.

A new wet lease agreement with Virgin remains the next most likely contract, in our view. With management’s strong track record of executing aircraft acquisitions and positive operating momentum, we maintain an Add rating.

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