Alliance Aviation Services: Positioned for growth to accelerate from 2H22

About the author:

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

  • We think Alliance Aviation Services' (ASX:AQZ) AGM update was better than potentially feared. While slightly delayed, its fleet expansion remains on track to deliver a strong FY23 result and comfort with FY22 consensus was reiterated.
  • We increase FY22F PBT 4.5% to A$59.0m (+16% yoy), with FY23/24F unchanged. We forecast AQZ to deliver a 2-yr PBT CAGR of ~25% pa.
  • We continue to view AQZ as well placed to capitalise on a rebound in domestic travel activity in 2022 as it executes its fleet expansion. Add rating maintained.

Confirms comfort with FY22 consensus

AQZ’s AGM update confirmed that it remained comfortable with FY22 consensus expectations, which we observe as underlying PBT of ~A$60.0m (up ~18% yoy).

In line with the deployment of the E190 fleet and expected improvement in aviation industry operating conditions, we expect earnings growth will be weighted to the 2H22 and the annualised result should provide a strong indication of the group’s earnings outlook heading into FY23.

Given the delayed deployment of the E190s over the 1Q22, we expect a more flattish interim result relative to a strong pcp (1H21 PBT A$26.7m; 2H21 A$24.3m), which should not come as a surprise to investors, in our view.

Pleasingly, AQZ’s FIFO contract book remains strong and flight hour growth has been achieved over the 1Q22. Management also reiterated that short-term charter services are expected to continue at its current levels, subject to aircraft availability.

While the entry into service of new aircraft and acquisition of spare parts can distort reported operating cashflow, AQZ noted that its underlying cash generation has remained strong YTD and the Board is expected to resume the payment of dividends with the FY22 result (no interim expected).

With the acquisition of the E190s complete, net debt is expected to peak at the 1H22 result before improving at year end (MorgansF FY22 ND of A$141.1m; ND/EBITDA 1.3x).

E190 deployment schedule slightly extended; still on track for a strong FY23

AQZ provided an updated E190 deployment schedule (included overleaf), which will still see it essentially operate its full, expanded operating fleet of 72 aircraft in FY23 (further 3 likely to be in maintenance on average). As expected, domestic border restrictions saw 5 E190s deployed during the 1Q22 (vs. initial target of 11) and 13 aircraft are expected by the 2Q22 (vs. 14 previously).

At present, AQZ expects to have the entire 29 aircraft fully deployed during 1Q23. While this timeline has been slightly delayed from the 4Q22, we expect AQZ has allowed for some conservatism in its new deployment schedule.

Wet lease services will absorb the majority of AQZ’s new capacity. AQZ expects to have between 12-16 aircraft operating wet lease services by the end of March 2022. This includes a recovery in services with Virgin, which AQZ expects are close to returning to pre-COVID levels (~7-9k hrs pa) on an annualised basis.

From 1 November 2021, AQZ will convert the prior RPT routes operated via a codeshare agreement with Virgin to wet lease. While a small part of the business, we view this decision positively as it eliminates AQZ’s commercial risk on these routes, arguably improving its overall earnings quality.

AQZ’s wet lease agreement with Qantas (QAN) is progressing. QAN have recently exercised a further 5 options, which takes its total committed aircraft to 8 and AQZ remains very confident the final 10 will be called upon (total options for 18 aircraft). These initial 8 aircraft will operate from AQZ’s bases in Adelaide, Darwin and Townsville and are currently planned to service 13 new domestic routes.

Australia’s high level of vaccination rates should support strong levels of domestic travel activity from 2022 and QAN has been quoted in the press as planning to operate at ~120% of pre-COVID domestic capacity by April 2022.

Investment view: Add rating

We have increased our FY22F underlying PBT 4.5% to A$59.0m (+16.0% yoy), while our FY23/24 forecasts remain unchanged. AQZ has underperformed the broader market since its FY21 result, which we attribute primarily to investor concerns around the potential for delays to its E190 fleet deployment.

While domestic border restrictions/policies will need to be monitored, today’s update highlighted that the group’s fleet expansion remains on track overall. We expect 1H22 outlook commentary will point to the positive initial results of the E190 fleet, which should start to build investor confidence in the group’s strong FY23 growth outlook.

With an impressive track record and strong medium-term growth outlook (2-yr PBT CAGR of ~25%), we maintain an Add rating. (login to view target price)

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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