Aercap
Full Year 2021
By Manuel Maurício
April 22, 2022
I hate mergers and acquisitions!
Wait! Before Afonso Pinto de Almeida closes this window (he works in M&A), let me explain:
Whenever a company buys another company, two different sets of financial statements must be combined. Now, in some cases the businesses are so easy to understand that this doesn’t constitute a problem.
But more often than not, that’s not what happens. And when we’re talking about specialty finance companies such as AerCap, it gets really complicated.
Yes, there are accounting conventions that stipulate how a company should state its financials, but those conventions allow for a lot of leeway making it hard to reconcile the two sets of financial information. That’s exactly what happened with the merger between AerCap and GECAS.
Let’s look at a quick example: GECAS was depreciating its airplanes over the course of 20 years while AerCap does it in 25 years. This means that the same airplane will be recorded at a lower value on GECAS’ books than on AerCap’s books. That means that AerCap made an even better deal than I was assuming. And we’ll see that in future years as the company sells airplanes at a premium to book-value to buy shares at a discount to book-value.
Russia
On my previous update I made an attempt at estimating the impact that the Ukrainian war would have on Aercap’s equity. But I did it based on AerCap’s numbers alone not taking into account GECAS.
Now AerCap tells us that they had 135 aircraft making up 5% of the fleet and 14 engines leased to Russian companies.
That amounts to $3.3 billion in carrying value.
From those, they were able to repossess 22 aircraft and 4 engines.
These 22 aircraft and 4 engines were on the books for $400 million. Add to that some letters of credit and maintenance rights amounting to $960 million and the total net exposure to Russia is $2.5 billion.
The question then becomes “aren’t these aricraft covered by insurance”?
Well… it’s complicated.
Not only were the clients required to have insurance for those planes, but AerCap itself purchased insurance covering its aircraft when they’re not subject to a lease or when they are subject to a lease, but a lessee’s policy fails to indemnify AerCap.
But, because of the sanctions, AerCap – not its clients – had to break the leases. I’m sure this will lead to a long legal battle between AerCap and the insurance companies.
So much so that the management said that they will take the impairment in the first quarter and then, if they ever get insurance money, they’ll recognize that income later.
So, now that we have the numbers, let’s update the math:
After the impairment, the bookvalue per share should be around $59. As I write this, the shares are trading for $52.5, or a discount of 11%, consistent with the historical discount.
If you follow AirLease, they’re not taking an impairment even as their exposure to Russia is similar to AerCap’s. This is another example of how hard it is to compare these companies.
But it’s not all bad news from the Ukrainian war. The new helicopter business just acquired from GECAS might be seeing an improvement related to the energy independence theme. Helicopters’ largest customers are Oil & Gas companies that use them to transport both workers and cargo to and from the offshore platforms. We’ll probably be seeing the USA ramp up its oil production.
Deferrals
The total amount deferred (owed to AerCap, but not yet paid by the clients) was $587 million, higher than the $427 million reported in the third quarter due to the combination of AerCap and Gecas. The management mentioned that there was a reduction in the deferral balances of both companies over the past quarters and that they expect that trend to continue going forward.
What about liquidity?
The total sources were $18 billion whereas the total uses for the next 12 months were $8 billion, meaning that the sources to uses coverage ratio is 2.2x, well above the target of 1.5x.
After writing my previous update, I mentioned on the Forum that a potential second order result of the Russia situation would be the leverage ratios going up leading to lower ratings from the rating agencies.
In a business where cost of capital is a competitive advantage, that would likely lead to higher cost of debt (the lower graded a company is, the more it has to pay on its debt to account for the added risk).
Even if the company were to write-down the $2.5 billion, that would take the leverage ratio to 3:1 from the current 2.7:1. The management has mentioned that they’re well below their debt covenants and that they would go back to 2.7:1 by the end of the year.
Net Income and Capital Allocation
Excluding the costs related to the GECAS acquisition, the net income for the full year was $1.294 billion or $8.68 per hare. This means that the Price/Earnings ratio is 6x – cheap!
When asked about what his priorities were regarding capital allocation, the CEO mentioned that he still wants to “move up on the rating spectrum” so I guess they’ll be paying down debt in order to get a better rating (which will, in turn, allow them to pay interest).
Conclusion
Now that AerCap and GECAS merger has been completed and, together with the fact that we’re coming out of a global pandemic, makes the comparison to historical numbers a bit pointless.
There are a lot of financial intricacies to these businesses that prevent us (and probably the CEO’s of those companies too) from comparing apples to apples.
Either way, I believe that Gus Kelly has done it again. He has bought a major competitor at a good price and he will now repeat the strategy of selling airplanes at a premium to book value just to buy shares at a discount to book value, thus creating value for the shareholders.
As such, Aercap will remain in the Portfolio as a long-term core holding.
DISCLAIMER
The material contained on this web-page is intended for informational purposes only and is neither an offer nor a recommendation to buy or sell any security. We disclaim any liability for loss, damage, cost or other expense which you might incur as a result of any information provided on this website. Always consult with a registered investment advisor or licensed stockbroker before investing. Please read All in Stock full Disclaimer.