Elevator Pitch
BOC Aviation Limited (OTCPK:BCVVF) [2588:HK] stock is rated as a Hold. The company refers to itself as a “global aircraft operating leasing company” on its corporate website.
My previous September 21, 2020 article touched on BCVVF’s “focus on opportunistic purchase and leaseback transactions” and the “risk of further impairment losses” in the tough aviation market environment during the pandemic.
The current write-up assesses the read-throughs from BOC Aviation’s most recent quarterly operating and financing metrics. A key positive is the company’s narrow yield spread for its financing transaction in Q2 2024. On the flip side, a decrease in remaining lease term and an increase in aircraft age are negatives. Taking into account these factors, I stick with my existing Hold rating for BCVVF.
Readers should be aware that BOC Aviation’s shares are traded on the Stock Exchange of Hong Kong and the Over-The-Counter market. The trading liquidity for the company’s OTC shares is limited. But BOC Aviation’s Hong Kong-listed shares are pretty liquid, with a three-month mean daily trading value of $4 million (source: S&P Capital IQ). Investors can deal in the company’s Hong Kong shares with US brokerages such as Interactive Brokers or Hong Kong stockbrokers like Boom Securities.
Spotlight On Aircraft Age And Remaining Lease Term Metrics
BCVVF disclosed the company’s latest operating and financing data in the second week of July. A key highlight of BOC Aviation’s recent July 8, 2024 announcement is the updates regarding the company’s average aircraft age and remaining lease term.
BOC Aviation’s mean aircraft age increased from 4.6 years (source: annual report) as of end-2023 to 4.9 years as of June 30, 2024. During this same time frame, the company’s remaining lease term decreased from 8.1 years to 7.9 years.
BOC Aviation releases its financials twice every year as a Hong Kong-listed company, although it does offer quarterly operating and financing updates. At its FY 2023 earnings call (transcript sourced from S&P Capital IQ) in March this year, BCVVF highlighted that “both Boeing (BA) (BA:CA) and Airbus (OTCPK:EADSF) (OTCPK:EADSY)” had “difficulty in different aspects of the supply chain in terms of meeting the increased production.” This means that BOC Aviation’s aircraft suppliers are finding it tough to execute on new aircraft deliveries, and this has constrained BCVVF’s ability to refresh its fleet and sign new leases.
On the company’s website, BOC Aviation emphasized that it boasts “one of the youngest” aircraft in the “operating lease industry” of below 5 years, and “long-term contracted cash flows” as evidenced by its significant “remaining lease term” of approximately 8 years.
In other words, BCVVF’s key strengths are its low aircraft age and the long tenure of its leases. Having relatively newer aircraft is a validation of the overall quality of BOC Aviation’s fleet. On the other hand, the company’s future revenue is highly predictable thanks to its reasonably long remaining lease term.
As such, the changes in BOC Aviation’s aircraft age and remaining lease term metrics offer an indication of the company’s fleet quality and revenue visibility. Therefore, it is reasonable to view BCVVF’s shorter remaining lease term and higher aircraft age as negatives.
New Financing Transaction Draws Attention
BOC Aviation shared in its July 8, 2024 announcement that it “raised $500 million of five-year bonds at the tightest spread in the company’s history (my emphasis)” in Q2 2024.
The company’s financing expenses rose by +31.6% YoY to $636.4 million last year, as its cost of debt increased significantly from 3.1% in 2022 to 4.1% in 2023. BCVVF’s financing costs have a big impact on the company’s bottom line, as they represent a substantial proportion, or 39.8% of its FY 2023 operating expenses. These numbers were taken from BOC Aviation’s 2023 results release.
Therefore, there is a better chance of BOC Aviation registering higher-than-expected earnings, if there are positive surprises associated with its future financing expenses and cost of debt.
A Comparison Of The Spreads For Recently Issued Bonds
At the corporate level, it is encouraging that BCVVF has continued to secure new financing at competitive rates. As per the chart presented above, BOC Aviation’s latest $500 million bond’s spread over US treasuries was the narrowest as compared to the recent financing deals done by its aviation peers.
At the macroeconomic level, BOC Aviation might see its financing expenses and cost of debt decline going forward, assuming that rate cuts do happen. A recent July 9, 2024 Seeking Alpha News article mentioned that “Federal Reserve Chairman Jerome Powell signaled policymakers are moving closer to rate cuts.” BOC Aviation previously noted at the company’s FY 2023 results briefing that “we expect that we’ll start to see dollar interest rates reduce in” 2H 2024, which “should give us some positive tailwind in that respect.” It seems likely that BCVVF’s favorable expectations of lower rates in the latter half of the current year have a good chance of being realized.
Closing Thoughts
I remain Neutral on BOC Aviation after considering favorable disclosures like competitive funding rates, and unfavorable metrics such as a higher aircraft age and a lower remaining lease term. The stock also appears to be reasonably valued, as it is trading close to book value considering its 0.98 times (source: S&P Capital IQ) trailing P/B.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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