Aircastle Limited: Tons Of Cash, Low PE, Sector Stabilizing

Introduction

Aircastle Limited (NYSE:AYR) engages in acquisition, lease and sale of high utility commercial jet aircraft to various airlines through its wholly owned subsidiaries. The company also makes investments in various aviation assets, including debt investments secured by commercial jet aircraft. As of 30th June’ 2012, the company’s aircraft portfolio consisted of 155 aircrafts and had 67 lessees spread across 36 countries.

Stock Snapshot

Aircastle Limited’s (NYSE:AYR) stock closed at USD 11.72 on 18th September’2012 with an average volume of 0.39 million shares over the last three months. The stock has a total market capitalization of USD 846.7 million. During the last 52 weeks, Aircastle Ltd’s stock has traded between USD 8.53 and USD 14.55. The stock has been trading at a trailing P/E of 7.95 and a trailing P/S of 1.3. The P/E ratio of the company is significantly lower than the P/E ratios for services sector (20.04) and the rental and leasing sub-sector (32.10). A brief snapshot of the key fundamentals for the company’s stock is presented below:

*Key Statistics*
Market Capitalization	USD 846.7 million
P/E (trailing)	7.95
P/S (trailing)	1.32
P/B (mrq)	0.58
Avg. volume (3 months)	0.39 million shares
Average Dividend Yield	6.30%
Payout Ratio	47%

Financial Highlights

Topline The Company’s revenues are mainly comprised of operating lease rentals on flight equipment held for lease, revenue from retained maintenance payments related to lease expirations, lease termination payments, lease incentive amortization and interest recognized from finance leases.

During six months ended 30 June 2012, the company recorded total revenues of USD 337 million which represented a YOY growth of 9.9% compared to same period last year. Lease rental revenue was recorded at USD 305 million which represented an YOY increase of approximately 7.52% over the same period last year. This increase was mainly attributable to acquisitions of new aircrafts of USD 27 million.

Bottom Line Earnings per share of the company declined from USD 0.84 in 1HFY11 to USD 0.68 in 1HFY12 mainly due to higher depreciation expense which increased to 0.131 million during 1HFY12 representing an YOY increase of 11.4% compared to the same period last year. Also impairment of aircraft increased by a staggering 94.4% during 1HFY12 compared to the same period last year (1HFY12: USD 10.1 million, 1HFY11: USD 5.2 million).

Capital Resources As of 30th June’ 2012, the company had total equity of USD 1,467 million which translates to a book value per share of USD 20.3. The company has a cash value per share of USD 4.03 as a result of its cash& cash equivalents of 291.06 million as at 30th June’ 2012. The company has a large amount of debt (June’2012: 3.35 billion) which is approximately 228 times of its equity however considering the company is in the rental and leasing subsector of the services industry, these debt levels can be justified.

Outlook

We think that investors should analyse the company further based on the following:

* Strong air traffic data during 1HFY12 from the airline industry has demonstrated improvement in the passenger markets (an increase of 6%) which bodes well for the whole sector.

* Despite tough economic conditions prevailing in the world, it is expected that industry will be driven by expansion of emerging market economies and rising levels of per capital air travel in these economies.

* The company presents undervaluation at current valuation levels when growth in top line is taken into account. In addition, the company’s strong dividend paying history and relative valuation measures all indicate towards a higher pricing level.