Alliance Aviation Services: Short-term turbulence, but inflection point still in sight
About the author:
- Author name:
- By Kurt Gelsomino
- Job title:
- Former Analyst
- Date posted:
- 10 February 2022, 10:30 AM
- Sectors Covered:
- Building Materials, Industrials, Gaming
- Alliance Aviation Services' (ASX:AQZ) interim result and FY22 guidance was weaker than expected. However, significant progress on its E190 deployment has been achieved over the past ~18 months and cash generation in the underlying Fokker business remained robust.
- Our positive investment case on AQZ has been predicated on the step-change in FY23 earnings growth as its material fleet expansion is deployed and we continue to think the company is nearing this inflection point; Add rating maintained.
Weaker 1H22 result; foundation has been set for FY23
AQZ reported 1H22 underlying EBITDA of A$40.5m, -12% YoY and underlying NPBT of A$20.7m, -23% YoY. The results were materially weaker than MorgansF (A$49.0m/A$25.8m).
While COVID clearly delayed the deployment of its E190s (underlying result excluded A$19.1m net start-up costs), we think the weakness against 1H21 reflected the impact of reduced high-margin short-term charter activity (flight hours -72% YoY), deferral of some WA FIFO maintenance work due to border restrictions, incremental cost increases (e.g. the non-repeat of air navigation charge deferrals) and lagged recovery of increased fuel prices.
However, in far from perfect operating conditions, AQZ still delivered 9% growth in group flight hours, which was underpinned by 6% growth in contracted charter (cycling 17% growth).
Additionally, significant progress was made on advancing its E190 fleet deployment, with all 32 aircraft now purchased, 18 entry into service checks completed, ~191 E190 specific staff (pilots, crew and engineers) recruited and trained, construction on its Rockhampton Aircraft Maintenance Facility commencing and QAN exercising 10 (of 18) wet lease options to date. While the ramp up of the E190 fleet has been delayed, AQZ remains well placed to deliver strong earnings growth from the 4Q22 onwards.
Underlying cashflow (ex. A$24.3m in E190 costs + A$3.3m in inventory) remained solid at A$50.5m and illustrated the continued strong cash generation of the core Fokker fleet. With its final 6 E190s settled during the period, net debt rose to A$154.7m from A$120.1m at Jun-21 and LTM leverage was more elevated at 1.8x. We forecast FY23 leverage to reduce to 1.0x as the E190 fleet is deployed.
FY22 guidance below expectations; medium-term outlook still positive
AQZ provided FY22 underlying PBT guidance of A$45-50m (vs. A$51.0m in FY21), which was 15-24% below our previous forecast of A$59.0m (consensus in-line). While the interim result was below expectations, we think the majority of the miss (with comfort in consensus noted at the Nov-21 AGM) reflects the slower than expected ramp-up of wet lease services with QAN following the spread of Omicron.
FY22 guidance assumes a significant increase in wet lease activity in the 4Q22 underpinned by its QAN agreement. QAN has currently retained its 4Q22 domestic capacity guidance of ~117% and AQZ expects its 10 E190s will be deployed by Apr-22, with the remaining 8 options expected to be exercised over Apr-Oct.
Additionally, continued growth in contracted FIFO activity is expected, with three renewals in the 2H, new tenders being pursued and catch-up of deferred shutdown work expected. Further dry lease opportunities are also being evaluated.
AQZ now expects full deployment of the 32 E190 aircraft by the end of CY22 (~3- 6 months behind its initial target). However, the targeted annualised hours generated from the E190 fleet (at its full run-rate) of ~96k pa was greater than previously guided (~80k hours), which reflects the combination of an additional three E190s in the operating fleet and slightly stronger targeted utilisation. As a result, AQZ expects its annual operating capacity will increase to 135k hours at full deployment (vs. 37.9k in FY21).
FY22F PBT revised 20% to A$47.0m (in line with the mid-point of guidance). However, our FY23 PBT forecast has fallen just 2.2% to A$78.4m, with the larger operating fleet size and stronger targeted aircraft utilisation largely offsetting the delay to full ramp up and resulting in modest FY24 PBT upgrades (1.4%).
Investment view: maintain Add rating
While AQZ’s interim result and FY22 guidance was weaker than expected, our positive investment case has always been predicated on the step-change in FY23 earnings growth (MorgansF 3-year NPAT CAGR of ~17% to FY24F) as its material capacity expansion is deployed.
With significant operational initiatives completed and domestic travel conditions expected to rebound in the 4Q22, we think AQZ is nearing this inflection point and maintain an Add rating.
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