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Air Lease Corporation Wu Qianwen (Joven) Xu Wenqiang (Wayne) Presented 10-29-2013
Agenda
• • • • • • • Introduction & Current Holding Macroeconomic Factors & Industry Overview Company Overview Management Outlook Financial Analysis Valuation Conclusion & Recommendation
Introduction: Air Lease Corp. is an aircraft leasing company
• • • • Business: Principally engaged in purchasing commercial aircraft which the Company, in turn, lease to airlines around the world Fleet: 174 aircraft as of Jun, 2013 98% of revenue is rental income 132 single-aisle narrowbody jet aircraft, 30 twin-aisle widebody jet aircraft and 12 turboprop aircraft Weighted average age of 3.5 years Net book value grew by 11.7% to $7.0 billion as of June 30, 2013 compared to $6.3 billion as of December 31, 2012 Employees: 52 in 2012, far fewer than competitors Financials: 2012 annual sales: $ 645.853 million 2012 net income: $ 131.919 million Revenue Million $ 800 600 400 200 0 2010 2011 Revenue, million $ Net Income Million $ 150 100 50 0 2010 2011 (50) (100) 2012 YOY Grwoth Net Income, million $ 2012 600% 500% 400% 300% 200% 100% 0% Source: 2012 Annual Report, Jun 30 2013 10-Q P15
Current Holding: We bought 400 shares at $ 22.32 on Dec 18, 2012
• Cost basis = $ 8,928 • Closed @ $ 30.47 on Oct 28, 2013 • Market value = $ 12,188 • Gain = 36.51% Source: Yahoo Finance
Industry & Macro: International airline industry demands drive aircraft leasing industry historically Aircraft Operating Leases as a Percentage of Total Worldwide Aircraft Fleet • • • Late 1960s and early 1970s, airlines generally own all of their aircraft Airlines outsourced ownership of many of their airplanes through leases as fleets expanded and fixed costs grew Leasing companies can provide airlines with a diversity of aircraft types, capacities, as well as economic flexibility Source: Air Lease Prospectus P75
Industry & Macro: Aircraft leasing industry was expected to grow in 2010...
Aircraft Lease vs. Other Ownership-History and Extrapolation • • • • Number of aircraft on operating lease in 2010: 6,800 Expected number of aircraft on operating lease in 2015: 8,500 Implied CAGR: 4.56% This increase will be driven by both new aircraft deliveries as well as sale leaseback transactions Source: Air Lease Prospectus P76
Industry & Macro: ... And the story doesn’t change much today
IMF GDP Growth Forecast %, Oct, 2013 World RPK 1 Growth Projection %, By Major Regions Country Group Name 2012 2013 2014 2015 Region 2012 2013 2012-2031 World Euro area European Union 3.177 2.871 3.588 3.964
-0.641 -0.437 0.961 1.352
Major advanced economies (G7) 1.747 1.225 1.992 2.452
-0.302 0.022 1.251
1.6
World North America Europe Asia Pacific Latin America Middle East Africa 5.90
1.70
4.40
8.20
7.90
16.60
8.30
4.00
3.00
1.30
6.60
6.10
6.60
5.10
5.10
3.70
4.00
6.20
6.60
7.10
6.90
Emerging market and developing economies ASEAN-5 4.915 4.549 5.074 5.348
6.161 4.963 5.416 5.538
Global New Aircraft Deliveries 2013-2032 40000 Latin America and the Caribbean 2.934 2.681 3.111 3.53
Middle East and North Africa 4.608 2.146 3.774 4.174
20000 4,5 Commercial air travel and air freight activity are broadly correlated with world economic activity and expanding at a rate of 1 to 2 times the rate of global GDP growth. – AYR 2012 annual report 0 Boeing Forecast Number of Aircraft (Left Axis) 4 Airbus Forecast Value, trillion $ (Right Axis) Footnote: 1. revenue passenger kilometers (RPKs) are measures of traffic for an airline flight, bus, or train calculated by multiplying the number of revenue-paying passengers aboard the vehicle by the distance traveled Source: IMF World Economic Outlook Database, AVITAS, Boeing and Airbus 2013 Market Outlook, AYR 2012 Annual Report 5
Industry & Macro: Emerging markets are driving the future growth of the industry
Emerging Economies 2013 VS. 2032 Source: Airbus 2013 Market Outlook, IHS Global Insight
Industry & Macro: Overall, aircraft leasing is a highly competitive market
Rivalry Competition • Strong (4) 1 Competition from aircraft manufacturers, banks, financial institutions, other leasing companies, aircraft brokers and airlines Similar products Internationalized market Fragmented market with 100 lessors in 2010, top 5 control 50%+ number of aircraft and 60%+ of aircraft value Suppliers’ Bargaining Power • Strong (4.5) Only a few huge suppliers in the market such as Airbus and Boeing Buyers’ Bargaining Power • Medium (3), emerging market (2.5) and mature market (3.5) Large numbers of relatively smaller airlines in emerging market, with few financing channels for aircraft and weak pricing power Relatively concentrated airline market in mature economies, with larger and more mature airline companies Substitutes • Medium (3) Only substitute is for airlines to own aircraft themselves, which is common but not as efficient as leasing with lessors Often airlines enter into “Sale and Lease Back” contract Operating leasing is the trend Threat of New Entrants • Weak (2) The industry requires expertise and customer relationships Smaller companies tend to own more aged aircraft, which is not a very direct threat to the large players Footnote: 1. Number in the brackets is the overall rating for this factor, larger number means stronger power Source: AL Prospectus, AL Annual Reports
Company Overview: As a relatively young company, AL business is growing fast...
Revenue Million $ 800 600 400 200 0 2010 2011 Revenue, million $ Net Income Million $ 200 98% of revenue is rental income 600% 477% 400% 95% 2012 YOY Grwoth 200% 0% 100 0 2010 2011 2012 (100) Net Income, million $ Fleet Size and Age 200 150 100 50 4 3,5 0 2010 Fleet Size (Left Axis) 2011 3 2012 2013H1 Fleet Weight-Average Age (Right Axis) Planned Aircraft Acquisition As of Dec 31, 2012 15 10 5 0 40 35 30 25 20 2013 2014 2015 Planned 2013-2023 total acquisition number is 325, as of the end of 2012 2016 2017 Source: AL 2012 Annual Report
Company Overview: ... With an increasing focus on emerging markets
Percentage of Net Book Value of Fleet by Region % 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 4,60% 9,10% 12,20% 32,00% 42,10% 5,80% 7,30% 12,60% 35,90% 38,40% The Middle East and Africa U.S. and Canada Central America, South America and Mexico Asia/Pacific Europe 2011 2012 Percentage of Rental Revenues by Region % 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 5,40% 11,80% 9,20% 28,00% 45,60% 6,10% 8,20% 13,10% 33,40% 39,20% The Middle East and Africa U.S. and Canada Central America, South America and Mexico Asia/Pacific Europe 2011 2012 Source: AL 2012 Annual Report
Management Outlook
• • • • •
Increasing Percentage of Unsecure Debt Borrowing Consistently adding new aircraft to the portfolio Owned 155 aircrafts as of December 31, 2012 Operating in 49 countries Net income increases 148% from 2011 to 2012
Source: AL 2012 Annual Report, Air Lease Website
SWOT Analysis
SWOT Analysis Strengths • • • • Young Fleet with average age of 3.5 years High percentage of unsecured financing • Diversified markets, especially its focus on the emerging markets • Small number of employees • Highly skilled management team with established networks Opportunities Economy recovery GDP growth in the emerging market Weaknesses • Stringent requirements to fulfill in order to secure financing from the bank (restricted cash) • Highly dependence on few aircraft manufacturers Threats • • Rising interest environment, 40% of the debt is on floating terms • Inflation, with most of the rental stated as a fixed amount Exchange rate fluctuation Source: AL 2012 Annual Report
Financial Analysis (1)
Liquidity Ratios Profitability Ratios Current Ratio Quick Ratio Cash Ratio Operating Profit Margin Net Profit Margin ROA ROE Cash Return on Equity 1 2010 11.22
11.22
0.31
2010 -104.37% -89.16% -2.29% -4.25% -2.68% 2011 3.49
3.49
0.09
2011 24.60% 15.81% 1.03% 2.45% 7.61% 2012 1.75
1.75
0.05
2012 31.11% 20.12% 1.79% 5.66% 14.92% Solvency Ratios Debt/Assets Debt/Equity Interest overage 2010 46% 86% 1.13
2011 58% 137% 5.84
2012 68% 215% 4.45
Footnote: 1. Cash Return on Equity=(Net Income + Depreciation)/Equity, this is to take the large depreciation into account when evaluating investor return Source: AL 2012 Annual Report
Financial Analysis (2)
Activity Ratios Fixed Assets Turnover Total Assets Turnover DuPont Analysis Tax Burden Interest Burden Operating Profit Margin Asset Turnover Leverage ROE 2010 4% 3% 2010 85% 1 -104% 3% 1.86
-4% 2011 8% 7% 2011 64% 1 25% 7% 2.37
2% 2012 10% 9% 2012 65% 1 31% 9% 3.15
6% Source: AL 2012 Annual Report
DCF Analysis-Discount Rate
CAPM Risk Free Rate Market Risk Premium Beta Cost of Equity 3% 7% 1.35
12.45% Weighted Average Cost of Capital Share Price shares outstanding (thousands) Market Capitalization Market value of debt Weight of Equity Weight of Debt Cost of equity CAPM return Realized return Weighted cost of equity Composite cost of debt Effective tax rate WACC Other Business risk premium* Adjusted WACC 30.47
101,247 3,085,006 4,384,732 0.41 0.59 12.45% 2.39% 9.93% 3.94% 35.5% 5.59% 2% risk, sales volatility, and etc.
7.59% *Note: Rising interest rate risk and emerging market Source: AL 2012 Annual Report, Stock Price
DCF Analysis
Air Lease Discounted Cash Flow Analysis (in thousands of dollars) Net CFO Interest*(1-t) Capital Expenditure Free Cash Flow Present Value 2013E 2014E 2015E 2016E 2017E Terminal Value 797,691 131,139 668,489 564,030 715,007 758,219 169,448 208,155 225,008 263,860 -1,386,833 -1,362,593 -1,013,108 -628,104 -553,686 -458,003 -524,656 -240,923 311,911 468,394 11,270,772 -425,682 -453,218 -193,431 232,753 324,857 7,816,893 Implied Enterprise Value Less Debt 7,302,173 4,384,732 Implied Market Cap Shares Outstanding Implied Share Price 2,917,441 101,247 28.81 Terminal Growth Rate WACC 3.30% 7.59% Source: AL 2012 Annual Report, Stock Price
DCF Analysis-Sensitivity Test
$28.81 5.59% 6.59% 7.59% 8.59% 9.59% 2.9% Implied Share Price Terminal Growth Rate $86.40 $45.35 $21.96 $6.93 $(3.51) 3.1% $97.49 $50.90 $25.24 $9.05 $(2.03) 3.3% $110.51 $57.13 $28.81 $11.34 $(0.46) 3.5% $126.02 $64.17 $ 32.74 $13.81 $1.21 3.7% $144.80 $72.18 $37.08 $16.48 $3.00 Source: AL 2012 Annual Report, Stock Price
Comps Analysis-Stock Performance
Source: Google Finance
Comparable Analysis
Air Lease Corporation Comparable Company Analysis, Millions $ Target Company Air Lease Comparable Ticket Symbol AL (NYSE) Ticket Symbol Price as of 10/25/2013 30.23
Price as of 10/25/2013 Shares Outstanding 101.25
Shares Outstanding Enterprise Value 8070 AerCap Holdings N.V.
Aircastle LTD FLY Leasing Limited AER (NYSE) AYR (NYSE) FLY (NYSE) 20.68
19.15
14.71
113.4
80.78
28.16
8210 4660 2330 Comparable Statistics High PEG P/B P/E P/S AL 22 23.99
2.21
7.52
High .66X
1.02X
10.66X
2.38X
Multiples Median Source: AL 2012 Annual Report .48X
.9X
2.2X
low -.56X
.71X
10.24X 7.95X 10.45X 23.56
1.1X
Mean .2X
.88X
High Median 32 24.47
1.89X 17.90
23 21.59
22.63
16.54
Median low Mean Implied Value low -27 17.03
17.57
8.27
Mean 9 21.03
23.09
14.24
Price/B ook PEG 1.26X 13.68X 4.02X .61X
PEG 1.02X 7.95X 2.38X .66X
.9X
10.24X 2.2X .48X
.71X 10.66X 1.1X -.56X
Price/B ook PEG 1.02X 10.66X 2.38X .66X
.9X
.71X
10.24X 2.2X .48X
7.95X
1.1X -.56X
.88X 10.45X 1.89X
.2X
Decision Drivers
• •
Strengths
– Young fleet: 3.5 years – – Diversified portfolio of airlines lessees High percentage of unsecure debt – Management expertise and established network
Concerns:
– – Rising interest rate environment Emerging market economy volatility
Recommendation
• •
Valuation Summary
– Current Stock Price: $30.47 – – DCF Valuation: $28.81
Comps Valuation: $23
Recommendation
– Hold