air lease corporation drew szilagyi qiang (cindy) fu vedvati (vedu) shrotre vishal shah april 9,...
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Air Lease Corporation
Drew SzilagyiQiang (Cindy) FuVedvati (Vedu) ShrotreVishal Shah
April 9, 2015
Introduction
Macroeconomic Overview
Industry Overview
Business Overview
Financial Analysis
Financial Projection
Valuation
Recommendation
Agenda
3
Current Performance
Air Lease Corporation (Ticker: AL, NYSE)
Incorporated in Delaware
Purchased: 400 shares @ 22.32 on Dec 12, 2012
Stock Price: $38.51
Position: 9.2% of all stocks, 3.7% of portfolio
Return: 72.54%
Market Cap: 3.9B
P/E (ttm): 16.05
EPS (ttm): 2.40
Beta: 1.30
Source: Yahoo Finance, AL 2014 10-K
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
ABBV14.04%
ABT11.13%
AEO15.49%
AL9.19%COF
4.79%
JKHY8.25%
NHC3.79%
UNP12.91%
WBA15.70%
ZIXI4.72%
4
Business Model:
Sell aircrafts to third parties
Lease to airlines
Fleet Management
Services
Source: AL 2014 10-K , Page4
Introduction
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
Purchase new commercial
aircrafts from aircraft
manufactures
5
Macroeconomics
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
Source: FAA https://www.faa.gov/about/office_org/headquarters_offices/apl/aviation_forecasts/aerospace_forecasts/2015-2035/media/Forecast_Highlights.pdf; Boeing http://www.boeing.com/commercial/market/long-term-market/ IBISWorld http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=33
1995
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1999
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2009
2011
2013
0
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GDP (current US$ trillion)
U.S. carrier passenger growth over the next 20 year forecasted to be 2.0% per year
GDP is forecast to rise 3.2 percent over the next 20 years, which will drive passenger traffic to grow 5.0 percent annually
Stably increasing per capita disposable income (United States)
6
Macroeconomics
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
Source: IBISWorld http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=97
As Fed is committed to helping the American economy get back on its feet, yields are expected to stay low/ slightly higher than today through the outlook period
Domestic trips demand is increasing through the outlook period
7
Source: IBISWorld http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=112568
Industry Overview
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
Key Divers for the Industry Oil and natural gas prices: forecasted to increase over the next five years
to 2020
Interest Rate
8
Source: IBISWorld http://clients1.ibisworld.com/reports/us/iexpert/default.aspx?entid=4801
Industry Overview
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
One in three airplanes leased, expected to rise to one in two
Profit margin of 28.0% in 2014
Forecasted annual revenue growth of 3.3%
Passenger airlines accounting for 91% of revenue in the industry in 2014
9Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
Source: IBISWorld http://clients1.ibisworld.com/reports/us/industry/operatingconditions.aspx?entid=4801#RAP
Regulations
FAA (Federal Aviation Administration) Requires aircraft lessors to register all US owned or registered aircraft with
the agency Aircrafts under direct control of lessors need to obtain a “Certificate of
Airworthiness” or a ferry flight permit for the purpose of maintenance and storage
Department of Commerce and Department of Treasury Restricts the operation of US made aircrafts in certain countries May also restrict industry operator's ability to do business with specific
entities
Federal, state and local environmental health and safety regulations Relate to the discharge of materials into the air, water or ground and the
health and the safety of employees
10Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
Source: AL 2014 10-K, page 4
Supply Chain
The Boeing CompanyAirbus S.A.S
ATR
200 airlines across 70 countries in Asia, the
Pacific Rim, Latin America, the Middle
East and Eastern Europe
CustomersSuppliers
Confirmed purchases: 1. 118 aircrafts from Airbus2. 27 aircrafts from Boeing3. 7 aircrafts from ATR
364 aircraft on order from all three through 2023
Financed through unsecured debt
11Source: U.S. Food and Drug Administration; IBISWorld, http://clients1.ibisworld.com/reports/us/industry/currentperformance.aspx?entid=488#KED
Revenue Source
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
By Service Line 2014 Revenue by Geographic Region
41%
34%
11%
5%
3%5%
Asia
Europe
Central America, South America and Mexico
The Middle East and Africa
Pacific, Australia, New Zea-land
U.S. and Canada
12
Steven F. Udvar-Házy Chairman and Chief Executive Officer since 2010 Founder of Air Lease Corporation
Executive Compensation Annual cash incentive
Long-term equity incentive awards A mix of 50% RSUs that vest based on attainment of book value
goals and 50% RSUs that vest based on attainment of total stockholder return goals
65 employees by the end of 2014
Management Overview
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
Source: Air Lease 2015 Proxy Statement, page 26-27
Performance Measures
Overall Revenue 20 %Pre-Tax Operating Margin 20 %Pre-Tax Return on Equity 20 %Dollar Value of Aircraft Added to our Fleet 20 %Strategic Objectives 20 %
WeightingComponent
13
Key characteristics
Source components separately for new aircrafts
Enters lease agreement 18-36 months in advance of delivery
Own aircrafts only for 1st third of its life
WAL of aircraft fleet is 3.5 years
WAL of remaining operating lease term is 7.3 years
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
14
Operational Characteristics
Fully leased for
current year
High concentration in narrow-
body
95% international
revenue
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
15
Risk Factors
High concentration in
a specific country in a geographic
region
Aircraft ModelsConcen-tration
Finding a good price for
selling old aircrafts
Interest Rates
Lessee defaults
Source: AL 2014 10-K, page 14-33
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
16
Source: Yahoo Finance
Stock Performance Comparison vs. Competitors & S&P 500
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
17Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
Source: Team analysis
Porter’s Five Forces
Moderate• Large Customer Size
High• High Concentration
amongst Suppliers
High • Large Initial Investment • High Maintenance Costs• Regulations from Federal
Aviation Administration Moderate• Fierce Competition
Bargaining Power of Customers
Rivalry
Threat of SubstitutesBargaining Power of Suppliers
Barriers to Entry
0
1
2
3
4
5
Low• Few substitutes in
the Market
18
SWOT ANALYSIS
Strengths- Highly diversified product - portfolio- High number of ANDA approvals
Strengths- Geographically diversified customers
Weaknesses- Thin supplier base- Volatility due to oil price
Opportunities- Recovering economy drives
up demand for air travel- Increasing interest rate
makes leasing more attractive
Threats- Possible increase in interest
rate makes borrowing more expensive
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
19
Financial Analysis - Ratios
Source: 2014 10-K, Team analysis
2011 2012 2013 20140%
100%
200%
300%
400%
500%
600%
Revenue Growth
2011 2012 2013 20140%
50%
100%
150%
200%
250%
Net Income Growth
• Company has transitioned from it’s growth stage and now has a declining revenues growth with steady profit margin
Profitability 2010 2011 2012 2013 2014
Net profit margin -89.2% 15.8% 20.1% 22.2% 24.4%
Return on asset 0.0% 3.7% 5.1% 5.2% 5.3%
Return on equity -4.2% 3.1% 5.9% 7.8% 9.7%
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
20
Financial Analysis - Ratios
Source: 2014 10-K, Team analysis
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
2010 2011 2012 2013 2014
Return on Equity = -4.2% 3.1% 5.9% 7.8% 9.7%
Tax burden (NI/Pretax Income) 85% 64% 65% 65% 65%
x Interest burden (Pretax income/EBIT) 664% 59% 58% 60% 64%
x Operating margin(EBIT/Sales) -16% 42% 54% 57% 59%
x Asset turnover (Sales/asset) 0.03 0.09 0.10 0.10 0.10
x Leverage (Asset/Equity) 1.86 2.19 2.78 3.44 3.80
2011 2012 2013 2014
Greenblatt ratio 1 (EBIT/Tangible Assets) 3.1% 5.4% 5.9% 6.5%
Greenblatt ratio 2 (EBIT/EV) 3.0% 5.6% 5.5% 6.2%
Dupont analysis
Greenblatt Ratios
21
Financial Analysis - Capital Structure
71% debt financed 68% of debt is Unsecured Senior Notes, used to finance aircraft
purchases 3.64% composite cost of funds, 4.00% average fixed debt cost All aircrafts are leased as Operating leases
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
22
Financial Analysis - Ratios
Source: 2014 10-K, Team analysis
Solvency Ratios
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
Financial leverage 2010 2011 2012 2013 2014
Long-term debt to asset 40.1% 50.4% 59.6% 62.7% 62.3%
Interest Coverage Ratio -0.01 1.92 1.89 1.99 2.16
Solvency Ratio -0.04 0.06 0.08 0.08 0.09
Activity 2010 2011 2012 2013 2014
Total asset turnover 0.03 0.09 0.10 0.10 0.10
Fixed asset turnover 0.04 0.11 0.12 0.12 0.12
Activity Ratios
• High and steady debt levels coupled with improving interest coverage ratio
• Steady turnover ratios
23
Financial Projections – Revenue Assumptions
Source: 2014 10-K, Team analysis
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
Fleet Size Assumptions 2015 2016 2017 2018 2019
Incremental Fleet Purchases 40 32 27 33 49
Additional Purchase agreements not entered into yet
2 4 4 4
Total Incremental Fleet purchases 40 34 31 37 53
Current Lease Commitments 100% 78% 56% 36% 10%
Expected % of Fleet leased 100% 95% 95% 95% 95%
Fleet Leased 40 33 30 36 51
Less: Termination of lease contracts 5 12 15 7 32
Fleet Size 248 269 284 313 332
16.4% 8.5% 5.6% 10.2% 6.1%Growth
Revenue Growth Assumptions 2015 2016 2017 2018 2019
Revenue from rental of flight equipment / Plane 5,089 5,191 5,295 5,401 5,509
% Growth 1.0% 2.0% 2.0% 2.0% 2.0%
Revenue from rental of flight equipment (thousands) 1,262,166 1,396,424 1,503,777 1,690,478 1,828,957
% Growth 27% 11% 8% 12% 8%
24
Financial Projections – Balance Sheet Assumptions
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
Team Analysis
Capital Expenditure 2015 2016 2017 2018 2019
Purchase Cost per plane
59,546
72,352
70,635
88,466
81,604
Flight equipment subject to operating leases
9,832,421
12,214,278
14,674,259
16,863,935
20,137,166
Add: Additions to fleet (already contracted)
2,381,857
2,315,276
1,907,137
2,919,369
3,998,600
Add: Additions to fleet (assumption)
-
144,705
282,539
353,863
326,416
Total Flight equipment subject to operating lease
12,214,278
14,674,259
16,863,935
20,137,166
24,462,183
Financing the Capital Expenditure 2015 2016 2017 2018 2019
Debt Financing
6,714,362
8,305,709
9,978,496
11,467,476
13,693,273
Add: Debt Issued
1,762,905
2,543,469
2,904,399
3,768,504
4,603,744
Less: Debt Obligation
(171,558)
(870,682)
(1,415,419)
(1,542,706)
(1,173,489)
Debt outstanding at year end
8,305,709
9,978,496
11,467,476
13,693,273
17,123,528
% of Fleet size 68% 68% 68% 68% 70%
25
Financial Projections – Income Statement Assumptions
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
26
Valuation – Residual Income Method
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
ValuationResidual Income Model
2014 2015 2016 2017 2018 2019 Terminal
Beginning Common Stock Equity 2,523,434$ 2,772,062$ 3,117,723$ 3,481,422$ 3,851,691$ 4,263,466$
Plus: Net Income 255,998 350,129 370,729 378,221 421,652 425,175
Plus: Stock Issuances: 944 - - - - -
Plus: Stock-Based Comp 16,048 13,039 11,506 10,960 11,206 12,242
Less: Common Dividends (13,284) (17,506) (18,536) (18,911) (21,083) (21,259)
Ending Common Stock Equity 2,772,062$ 3,117,723$ 3,481,422$ 3,851,691$ 4,263,466$ 4,679,625$
Net Income 350,129 370,729 378,221 421,652 425,175
Less : Equity Charge 257,598 289,719 323,516 357,924 396,188
Plus: Depreciation - - - - - -
Modified Residual Income 92,532 81,010 54,705 63,728 28,987 319,733
PV of Residual Income 82,771$ 64,821$ 39,155$ 40,802$ 16,601$ 183,114$
Cost of Equity 9.3%
Business Risk Premium 2.5%
Discount Rate 11.8%
Terminal Growth Rate 2.5%
Current Value from Common Share Equity 2,772,062
Residual Income from Yr 2015-2019 244,149
Terminal Residual Income After 2019 183,114
Present Value of Equity 3,199,325$
Diluted Common Share Outstanding 110,193
Implied Share Price 29.03$
Cost of Equity
Risk Free rate 2.80%
Equity Risk premium 5.00%
Adjusted Beta 1.30
Cost of equity CAPM 9.29%
27
Valuation - Comparable Analysis
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
Comparable Companies Analysis
($ in thousands except per share data)
Current Enterprise Value / Price / Market Cap/
Share LTM LTM LTM
Company Ticker Price Sales EBIT EPS BV EBT
Air Lease Corp AL $37.99 9.8x 16.8x 16.0x 1.4x 9.9x
AerCap Holdings AER $42.34 10.6x 20.3x 9.9x 1.2x 8.5x
FLY Leasing Limited FLY $15.73 8.2x 18.1x 11.2x 0.8x 14.7x
Aircastle LTD AYR $19.70 6.8x 12.0x 17.9x 1.1x 8.1x
Avolon Holdings Ltd AVOL $21.50 10.2x 19.7x 18.5x 1.2x 16.1x
Mean 9.0x 17.5x 14.4x 1.1x 11.9x
Median 9.2x 18.9x 14.6x 1.2x 11.6x
High 10.6x 20.3x 18.5x 1.2x 16.1x
Low 6.8x 12.0x 9.9x 0.8x 8.1x
Comparable Companies Valuation
Implied Multiples Implied Share Price
Metric Statistics Low Median High Low Median High Weights
EV/LTM Sales $1,050,493 6.8x 9.2x 10.6x $6.46 $29.34 $42.69 15%
P/BV 0.8x 1.2x 1.2x $21.71 $31.21 $32.56 20%
P/E 9.9x 14.6x 18.5x $23.56 $34.63 $44.03 15%
M/EBT 8.1x 11.6x 16.1x $29.02 $41.56 $57.68 50%
Average Valuation $36.62
28
Source: Bloomberg
Technical Analysis
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation
29
Valuation Summary
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
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Graham Valuation
EPS 2.38 Growth 2.50 Value $ 32.13
Valuation Summary
Residual Income Model $ 29.03 Benjamin Graham $ 32.13 Comparable Method $ 36.62 Average Price $ 32.59 Current Market price $ 38.51
30
Recommendation
HOLD
Plans to increase fleet size coupled
with ability to convert purchases
into leases
ROE almost equals Cost of Equity
Approaching maturity
Anticipated rise in interest rates is a
double-edged sword
Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recomm
endation