As demand for commercial aircraft and engines has reached levels that OEMs cannot meet, currently deployed assets have appreciated significantly, meaning the environment is very favorable for aircraft lessor. Overall, I am bullish on the long-term prospects of large lessors such as AerCap (air response rate) and aviation leasing companies (AL). With significant consolidation over the years, it’s also interesting to evaluate some of the smaller lessors.In this report I will analyze FTAI Aviation Limited (NASDAQ: FTAI) to determine its year-over-year performance, I will provide a stock price target for the company.
What does FTAI Aviation do?
FTAI Aviation Ltd. has 97 commercial aircraft and owns and maintains commercial jet engines, with a focus on the CFM56 engine manufactured by a joint venture between General Electric and Safran.company’s The segment includes Air Leasing and Aerospace Products. The Aviation Leasing segment owns and manages aviation assets, including aircraft and aircraft engines, which are leased and sold to customers. The Aerospace Products segment develops and manufactures aircraft engines and aftermarket aircraft engine components through joint ventures, and arranges for their repair and sales. The company’s product portfolio, which includes The Module Factory and a joint venture to manufacture engine PMAs, enables it to provide cost savings and flexibility to its airline, lessor and maintenance, repair and operations customer base. In addition, it owns and leases jets, which often helps to buy engines at attractive prices. It invests in aerospace assets and aerospace products. It also owns and manages 344 aviation assets.
FTAI Aviation: Quarterly financial results fall sharply
Revenue climbed from $112.1 million to $274.3 million in the second quarter of 2023, representing a nearly 150% increase in revenue. However, this also includes $101.5 million in proceeds from asset sales. Correcting for this, revenue rose 30%, or $60.8 million. The $22 million was driven by higher rental and maintenance revenue, and the remaining $41 was driven by higher aerospace product revenue, partially offset by lower other revenue. Like revenue, expenses are a large one-time item in cost of sales because the net book value of the asset sale is recorded as an expense.
Pre-tax income was up 19% to $56.6 million, which doesn’t compare favorably to revenue growth, but it’s worth noting that sales gains were about $32 million in Q2 2023, compared to $63.6 million a year earlier, This represented a profit of $24.7 million from underlying recurring business, compared with a loss of $16.1 million a year earlier. Therefore, cost absorption is significantly better.
FTAI is expanding its business and as such, the company is considering continuous changes. This was followed by an almost 17 percent increase in Leasing Adjusted EBITDA and an 11 percent increase in Aerospace Products Adjusted EBITDA. Adjusted EBITDA increased approximately 1.5% year-over-year to $153.1 million. Adjusted EBITDA growth seems far from favorable if we look at top line growth, but this is due to the fact that a large part of the 2022 performance is driven by booked sales gains. Therefore, focusing solely on adjusted EBITDA can be deceptive, as the timing and size of asset sales can cause considerable volatility in results.
How Much Is FTAI Aviation Stock Worth?
Typically, I value aircraft lessors based on the price-to-book ratios they have historically traded at. Since FTAI Aviation stock is relatively new, there is no robust data set to make this type of valuation with confidence. In 2023, the company expects EBITDA of $350 million to $400 million in the leasing business, $100 million in sales proceeds, and more than $100 million in the aerospace products business. This puts the expected EBITDA in 2023 at $550 million to over $600 million. With an EBITDA run rate of $623 million for the second quarter of 2023, I’d say the company’s guidance may be a bit conservative.
I entered FTAI Aviation’s fundamentals as well as future projections into the evoX financial analysis model, and it turns out that the company has significant upside based on median EV/EBITDA, but given the fact that this may not be quite Accurate FTAI has spun off its infrastructure business. Based on valuations in line with other aircraft lessors, I see about a 2% upside for FTAI, but that doesn’t really mean it’s a buy. Wall Street analysts are taking a similar view, with a price target of 2.5% above its recent close. However, the stock is rated a Strong Buy, which I do agree with because FTAI is growing, so it should be able to absorb costs better as it grows, and its assets are in high demand. In addition, the company has no debt maturities until 2025, and expects to refinance approximately $650 million of senior notes due in 2025, freeing up cash flow, allowing the company to grow to better absorb scale.
Conclusion: FTAI Aviation is a good buy
Due to the lack of upside in 2023 compared to recent closing prices, I mark FTAI Aviation Ltd. as a Buy rather than a Potential Strong Buy. The company has upside in the next few years, and a debt-free runway through 2025 adds to the appeal, as the company can choose to grow the company faster, which should lead to better cost absorption. FTAI Aviation could also sell assets at attractive prices, which would allow the company to boost its cash reserves to buy future-proof assets such as next-generation aircraft and engines. As the market shifts to the production and OEM service of new generation engines, this does present an opportunity for other companies such as FTAI Aviation to expand cost-effective servicing of the current CFM56 engine, which needs to be serviced until 2045 with more annual price increases. High on parts sales.
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