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.
