Unusually for an airline, Alliance Aviation ((AQZ)) continues to thrive in the current environment, delivering a record interim result. FY21 contracted revenue is growing and the second half should show the benefit from annualising increased flight schedules.
First half pre-tax profit was up 72%, amid higher fleet utilisation and a more favourable mix of activity. This was delivered on an asset base that was only 10% ahead of average and amid lower hours per plane, Credit Suisse points out.
The broker is even more impressed when noting the higher-margin parts business, aviation services, provided only a small amount of revenue, at $2m compared with $6m in the prior corresponding half.
In fact, Credit Suisse finds it difficult to have something negative to say about Alliance Aviation as concerns surrounding cash flow and the uncertainty regarding the $200m in deployed aircraft capital are being put to rest.
The recent wet lease agreement with Qantas ((QAN)) and the outlook commentary regarding charter and contract services underpins Wilsons’ confidence in the deployment of the expanded fleet.
Alliance Aviation expects the shift to closed charter from regular passenger services will be a permanent change in the market and additional domestic tourism charters should be encountered in the second half. Contracted charter revenue is likely to grow because of the annualised benefit of increased flight schedules to resource sector customers and the upcoming mine maintenance programs.
Regular passenger transport, wet lease activity and aviation services should also recover as domestic demand improves. Morgans increases estimates for profit in FY22 stemming from the recent Qantas agreement, with the aircraft expected to operate at high utilisation rates.
Wilsons makes significant upgrades to estimates for the outer years as additional fleet purchases are incorporated. As activity becomes more skewed to charter and wet lease and less weighted to regular passenger routes, this suggest margins will be better and, in turn, offer more appeal to investors.
Further progress on increasing the capacity utilisation of the expanded fleet is likely to impress investors, Morgans agrees, while a new wet lease agreement with Virgin Australia is the next most likely contract.
The interim report has revealed rapidly improving unit economics and the main theme that should drive a further re-rating, Credit Suisse asserts, is further announcements regarding the remaining 15-16 E190s yet to be contracted.
For this, Virgin is the most obvious albeit not the only prospect, as Credit Suisse notes the market for 100-seaters is well bid. From FY23, the broker envisages Alliance Aviation will generate more than $45m per annum in free cash flow.
Credit Suisse does revise down revenue expectations to reflect an increasing mix of FIFO (fly in, fly out) in the business, given the lower fuel prices which are charged through to FIFO customers but grossed up at a revenue level.
Hence, the resulting revenue per hour from these customers declines. Nevertheless, operating cash flow assumptions are stepped up. As the Fokker fleet matures into a consistent service the broker envisages cash flow will become more streamlined.
Management has reiterated the view that the 43 Fokker aircraft will remain key to operations for many years, with Morgans understanding this means the fleet will be in operation for 7-9 years to come.
While accepting, against expectations, there was no formal FY21 guidance, Morgans still assesses the outlook is positive and further growth is likely in FY22 and beyond. The broker assumes FY23 is the first full year that the 30 E190 aircraft are fully deployed.
Morgans notes the auditor has raised concerns regarding the company’s ability to meet the remaining commitments for the E190 transaction, with the majority due by June 30, 2021.The amount remaining to be settled is in excess of current available facilities.
Nevertheless, the board is confident it can secure necessary funding to cover contractual commitments and did not declare an interim dividend, opting to preserve cash given the significant capital commitments.
Wilsons, not one of seven stockbrokers monitored daily on the FNArena database, has a $4.58 target and a Market Weight rating. The database has three Buy ratings for Alliance Aviation. The consensus target is $5.22, signalling 19.6% upside to the last share price.
