1 undervalued growth stock that I think could really take off…

Avation PLC (LON:AVAP) looks set to take off, 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.

sdf

An undervalued growth stock is the holy grail of investing. One stock that I believe is very attractive from both a valuation and growth viewpoint is Avation (LSE: AVAP). Avation specialises in leasing commercial aircraft to mid-market airlines. Basically, Avation profits from the difference between the rate that it borrows at (to fund aircraft acquisitions) and the rate that it leases its aircraft at.

Since 2014, operating profit is up by 75%, and revenues have more than doubled to $109 million, with average yearly revenue growth of 20% over the last four years. Net asset value – a key metric for an aircraft lessor – has increased by 85% since 2014. In fact, Avation has shown consistent growth right across the board, and shows no signs of slowing down. In the first half of this year, revenues were 40% higher than at the same point the year before, whilst operating profit is up 60%.

The current market backdrop and outlook for the future also bodes well for Avation. Recent history has seen the demand for air travel roughly double every 15 years, with annual growth of over 4% predicted for the period 2017-2032. Aircraft lessors are also playing an increasingly more important role in the global aviation industry, where leased aircraft now make up 40% of the entire global commercial aircraft fleet.

To date, Avation’s execution of its strategy has been impressive. The company is focused on adding aircraft, diversifying aircraft type, diversifying the customer base, reducing aircraft age, lengthening lease terms, and reducing borrowing costs. The portfolio now consists of 48 aircraft, with 10 added in the last year alone. The customer base has increased to 17 airlines in 13 countries – up from 13 airlines last year – including the likes of easyJet, Air France and Virgin Australia. The average age of the fleet is kept young, by strategic disposals of older aircraft. This reduces the risk of technology obsolescence. Meanwhile, long lease lengths ensure revenue visibility.

The shares currently trade at around 10 times last year’s earnings, making them cheap, in my opinion. Furthermore, they are priced at a discount to the net asset value. The market is undervaluing the shares, presumably due its high debt load. But interest expenses are easily covered by operating profit, and the true value creation comes through the increase in net asset value. Crucially, AVAP doesn’t own a Boeing 737 Max, and so has managed to avoid any fallout from the ongoing grounding. There is also a progressive 2% dividend thrown in for good measure.

The management own over 20% of the company, and so their interests are aligned with those of the shareholders. Their focus is on unlocking shareholder value, which includes the strategic trading of aircraft. Avation has consistently shown an ability to sell aircraft at prices that are at a premium to their book value. This means that the reported net asset value is actually lower than the realisable net asset value. I also believe that Avation’s size, discounted share price and diversified portfolio makes it an attractive takeover target for larger lessors. Taking this into account, I think the shares are undervalued by as much as 20% and expect them to kick on from here.

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 in Avation. 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

Businessman hand stacking up arrow on wooden block cubes
Investing Articles

Can the Lloyds share price surge even higher in 2025?

The Lloyds share price has been on a tearing run of late. Ken Hall has his say on the stock's…

Read more »

Two business people sitting at cafe working on new project using laptop. Young businesswoman taking notes and businessman working on laptop computer.
Investing Articles

The FTSE 100 is at record highs, but these stocks still look cheap to me

The FTSE 100’s latest surge has left these well-known stocks behind. Roland Head explains why these unloved firms have caught…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

2 top growth stocks that could help drive Scottish Mortgage higher by 2030! 

Ben McPoland thinks these two US growth stocks are among the most exciting in this FTSE 100 investment trust's portfolio.

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

Over the next 10 years, I think I’ll make money from these 3 stocks in my ISA

Our writer highlights a trio of different companies from his Stocks and Shares ISA that he thinks will benefit from…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

£10,000 invested in BT shares in May 2024 is now worth…

BT shares have been on the up since a potentially pivotal event just over a year ago. Are we just…

Read more »

Group of friends meet up in a pub
Investing Articles

1 FTSE 250 stock I just can’t stop buying

While UK bars and restaurants are under pressure, the pub industry is doing well. And Stephen Wright is enjoying the…

Read more »

Businessman hand stacking up arrow on wooden block cubes
Investing Articles

A PEG ratio of 1.15 and tonnes of IP: here’s why Nvidia stock still looks cheap

Nvidia stock is trading near its highs once again, and while it’s not as cheap as it was, Dr James…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

The Ashtead share price steadies ahead of US listing move. What should investors do now?

The Ashtead share price has soared 12,000% since 1988 in its life on the FTSE 100. As FY results come…

Read more »