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Up Up And Away With Alliance Aviation

Small Caps | May 21 2020


A surge in charter work has enabled Alliance Aviation to guide for a profit that is well ahead of previous broker forecasts.

-Potential to make temporary arrangements long-term contracts
-Strong balance sheet positions the company for opportunity
-Managing extra scheduling "well"


By Eva Brocklehurst

In one of those quirks that characterises the current disruption to marketplaces, Alliance Aviation ((AQZ)) has experienced additional work from its "fly in fly out" customer base, amid extra scheduling of services.

Not only has the company experienced heightened activity levels from its usual resources sector clientele but also, given a lack of scheduled flights by other operators, other charter work has increased.

Ord Minnett expects this will provide substantial opportunity for work on new routes with new customers, while structural changes that are occurring in the Western Australian and Queensland markets mean the company can sustain higher levels of demand.

The broker, with a Buy rating and $3.00 target, describes the numbers for contract and charter work as "attention grabbing" and suggests shareholders should be well rewarded. Alliance Aviation has guided to pre-tax profit in FY20 of more than $40m, well ahead of forecasts.

The update did signal a soft outlook for tourism and wet leasing (where one airline provides all the services to another airline or broker that pays by hours of operation), in line with expectations. However, there has been some benefit from government support and so the impact, financially, is modest.

Credit Suisse considers it overly simplistic to characterise the boom in work as just a result of pandemic-driven disruptions. Rather, the broker assesses the company has a market position that is indicative of a counter-cyclical approach to capital deployment.

Hence, temporary arrangements become long-term contracts. Moreover, Alliance Aviation is likely to be a winner from future developments at Virgin Australia ((VAH)), which is under administration.

Should that airline re-emerge, Credit Suisse suspects it would be rational to continue the profitable wet lease arrangement with Alliance Aviation. Should it cease to exist, there would then be a significant gap in the domestic market, and Alliance Aviation would be suitably placed to capitalise on this.

This second scenario would, on the other hand, require additional fleet, although the market for aircraft presents favourably for the buyer at present and the company has some headroom to make aircraft purchases.

Credit Suisse also expects depreciation to rise in FY21 as more planes enter its fleet on a full-year basis. There are no lease liabilities around the aircraft, so the broker considers much of the growth is sustainable, retaining an Outperform rating and $3.20 target.

Wilsons assesses Alliance Aviation is well-positioned to service regional flight routes on a wet lease basis, regardless of the customer. Stronger earnings should enhance the balance sheet and position the company for opportunities, which the broker finds particularly encouraging.

Wilsons believes the company has managed the sudden change in activity very well, noting an increase in margins. Moreover, while feedback has indicated stronger activity levels in resources sector over recent weeks, guidance implies the company is far stronger than previously assumed. The broker upgrades forecasts for earnings per share by 18-43% and retains a $3.01 target with an Overweight rating.

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