Why I’d still buy this UK stock despite shares rising on takeover talks

This company’s shares are set to jump on the back of takeover rumours, but I think it’s good value, sale or no sale, writes Thomas Carr.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Last week saw aircraft lessor Avation (LSE: AVAP) – one of my favourite shareholdings – announce that it has effectively put itself up for sale. More accurately, the company is conducting a strategic review, which could result in M&A, a partial sale of its aircraft portfolio, or a sale of the whole company. Indeed, it confirmed that it’s in talks with a suitor for the whole company, and has encouraged offers from other possible buyers.

Re-rating of the share price

At the time of writing, Avation’s market capitalisation is around equal to the company’s last published net asset value (the book value) at around £188m. However, this net asset valuation related to the end of June last year. I’m convinced that the net asset value has increased since, paving the way for a re-rating of the share price.

Over the last four years, Avation’s net asset value has increased by an average of 17% per year, almost doubling from $128m in 2015, to $240m in 2019. What’s more, the company has already reported lease revenue growth of 12% in the first half of FY 2020, compared to the prior year. Based on its track record and proven operating model, I think it’s more than likely that this growth has also led to an increase in the company’s book value.

Intriguingly, Avation may also be conservative in its valuation of aircraft on its balance sheet. In fact, the company has repeatedly shown an ability to sell its aircraft at prices that are over 10% greater than book value.

The book value also fails to take into account profitability and the return that the company is able to generate from its assets, not to mention future growth. The shares have already risen by 10%, since the news that it’s up for sale became public last week. But considering all these factors, I believe that the shares are still undervalued by anything from 15% to 30% — showing just how undervalued they were before.

Takeover wars

Here at the Motley Fool, we take a long-term view of investing and I wouldn’t suggest buying a share just for a quick profit. Yes, I think this extra value would be reflected in the sale price of the company’s assets, through a higher transaction price, regardless of whether it’s a partial or complete sale. There’s even the possibility that a bidding war could ensue, potentially pushing the asking price higher.

But there’s also the possibility that there will be no sale, in which case, buyers of these shares will have acquired a top-quality company, that has an impressive track record of growing revenues, profits, net asset value and its dividend. I like companies like that, and sale or no sale, I reckon these shares are only going one way in the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Thomas owns shares of Avation plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Closeup of "interest rates" text in a newspaper
Investing Articles

Interest rates fall again! Here are 3 FTSE dividend growth shares to consider buying

As interest on cash savings becomes increasingly less attractive, Paul Summers has been looking at dividend growth shares for passive…

Read more »

Investing Articles

Up 10% today, I think this FTSE 250 growth share could continue to surge!

Babcock International's flying after upgrading its full-year forecasts. I think the FTSE 250 defence share might just be getting started.

Read more »

Investing Articles

The AstraZeneca share price jumps 5% on today’s strong results – but is it too expensive?

Harvey Jones hails the brilliant long-term performance of the AstraZeneca share price, but wonders whether the FTSE 100's biggest company…

Read more »

Investing Articles

Is this my chance to buy Alphabet shares?

A big step up in AI spending at Google has investors nervous, but has it created an opportunity to buy…

Read more »

Senior woman potting plant in garden at home
Investing Articles

£10k in savings? Here’s how an investor could aim for a monthly second income of £1,200

Mark David Hartley considers how investors could build towards an early retirement plan with a second income from a portfolio…

Read more »

Investing Articles

2 cheap shares to consider buying in a £20k ISA for income of £1,000 a year

Harvey Jones loves buying cheap shares and says these two FTSE 100 stocks look tempting today, especially as they offer…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Is it worth me buying Lloyds shares for 61p after a 49% rise?

Lloyds shares have risen significantly from their one-year traded low seen last February, which could mean no value is left…

Read more »

Investing Articles

I think this FTSE 100 fashion stock could skyrocket in 2025

JD Sports has had a disastrous few months of losses but 2025 looks primed to be the year for this…

Read more »