Alliance Aviation Cleared For Dividend Takeoff

This story features ALLIANCE AVIATION SERVICES LIMITED, and other companies. For more info SHARE ANALYSIS: AQZ

Improving cash flows at Alliance Aviation are set to reduce debt and reintroduce a dividend.

-Flight activity remains strong for Alliance Aviation
-As fleet expansion nears completion, free cash flows are set to rise
-Lower debt forecast, resumption of final dividend in FY26

By Mark Woodruff

Alliance Aviation ((AQZ)) has significant earnings upside potential driven by a slower fleet expansion, combined with full deployment and increased utilisation of its E190 fleet.

Analysts at Wilsons anticipate improving cash flows will reduce debt levels and enable the reinstatement of a final dividend in FY26.

A leading provider of contract and ad hoc charter services for Australia’s mining, energy, tourism, and government sectors, Alliance also supplies wet leasing services to Qantas Airways ((QAN)) and Virgin Australia.

Wet leasing allows these companies to adjust fleet size to meet fluctuating demand or cover temporary disruptions.

Alliance is also the market leader in the fly-in, fly-out (FIFO) air charter market, with services delivered under multi-year contracts to some of Australia’s leading mining operators.

By the end of FY27, the company will be operating a fleet of 92 aircraft consisting of 38 Fokker 70 and Fokker 100 aircraft, and 52 Embraer E190s, noted Morgans, following another record result in FY24, released in late-August.

At the time, Ord Minnett welcomed the $150m expansion of Alliance’s debt facility, which offers sufficient headroom to fund the acquisition of the remaining 20 Embraer jets through FY26.

Morgans expects ongoing earnings growth momentum into FY25, supported by the deployment of additional E190 aircraft and increased utilisation, expressing confidence in the founder-led management team’s strong execution track record.

Certainly, Ord Minnett feels the acquisition and rollout to around 90 active jets by the end of FY26 will solidify Alliance as a major player in the domestic aviation market, with a focus on the wet leasing and FIFO contract segments.

In a scenario pitched by Morgans, FIFO contract revenue will continue to increase organically from existing clients as well as from potential new client wins in Western Australia and Queensland.

Wilsons latest thoughts

Current industry feedback and data sources suggest to Wilsons flight activity remains strong for Alliance.

This broker sees an opportunity for management to focus on optimising metrics for free cash flow (FCF) generation and return on capital employed (ROCE) as the company’s fleet expansion nears completion.

Adjusted cash conversion will return to historical levels of around 75% from around 30-40% over FY23 and FY24, predicts Wilsons, as the inventory build associated with the fleet expansion and new maintenance facilities eases.

Following FY24 results, Morgans felt a strong second half of FY24 augured well for another year of decent earnings growth in FY25.

The analysts highlighted FCF generation and deleveraging were still the key for a share price re-rating, which makes subsequent analysis by Wilsons even more interesting.

Free cash flow and return on capital employed

Wilsons’ latest research update points out Alliance’s FCF has been significantly negative for four years and is expected to remain so through FY25 and FY26, driven by fleet expansion investment, before turning positive in FY27 as the expansion completes.

The broker forecasts net debt will peak at the end of FY26 at $460m and estimates a 5% dividend yield for shareholders (based on the current share price), with remaining FCF available for debt reduction at a rate of $50m per annum.

Apart for raising earnings-per-aircraft, management’s ability to optimise the asset base, particularly inventory and capex, will be critical to lift return on capital employed (ROCE) up by a few percentage points, explain the analysts.

FY24 results

Alliance reported another record result in FY24, with underlying pre-tax profit (NPBT) up 52% on the previous corresponding period, slightly ahead of the consensus forecast.

Record flying hours were driven by a significant increase in wet leasing activity which saw revenue from this source climb by 63% over the previous year, highlighted Ord Minnett.

Morgans attributed the increase in wet lease hours to additional aircraft and higher utilisation.

Contract charter activity increased by 5% over the period, supported by several major contract renewals, with Morgans noting the FIFO book was in its strongest position ever.

Outlook

Management stated at FY24 results the outlook for FY25 remained strong with additional aircraft due for deployment on wet lease services and stable FIFO charter operations.

At the time, Morgans felt the Alliance share price was unlikely to materially re-rate until nearer to FCF generation resuming in the second half of FY26.

In terms of risks, a slower rollout of new jets would jeopardise Ord Minnet’s forecasts, as would a downturn in demand for FIFO services and/or less-than-expected sales of aircraft parts.

Covered daily by FNArena, both Ord Minnett and Morgans have Buy (or equivalent) ratings with both setting a $4.10 target price, representing 47% upside to the latest share price.

Outside daily coverage, Overweight-rated Wilsons has a $4.32 target.

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