Sound fundamentals despite Russia saga
1HFY22 results consistent with profit warning; remain positive on longer-term outlook
- 1HFY22 net loss of US$312.5m was close to the higher end of BOCA’s profit warning range
- Interim dividend of US$0.0889 per share declared
- Positive medium-term outlook remains intact
- Maintain BUY with unchanged TP of HK$76
- BOCA booked a net loss of US$312.5m, towards the higher end of its profit warning range (net loss between US$310-330m). Net loss during the period was mainly attributable to the full write-off of its Russian fleet, which had a net after-tax negative impact of US$518m. Core profit before tax (excluding asset and bad debt impairments and recognition of cash collateral) declined to US$286.7m (-20.4% y-o-y, -16.3% q-o-q) in 1HFY22, primarily the result of lower lease rental income (-5.4% y-o-y, -6.6% q-o-q).
- Rental income fell for the first time on a sequential basis since FY15 by US$61.8m. We estimate that BOCA’s Russian aircraft accounted for around half of the shortfall (three months of non-payment in 1HFY22), while the remainder was largely due to 17 aircraft in transition between leases during the period. Meanwhile, BOCA’s net lease yield fell to 9.1% in 1HFY22 from 9.7% in FY21, primarily the function of the reduction in rental revenue as its cost of debt remained flat at 2.9%.
- Interim dividend of US$0.0889 per share declared, representing 30% (similar to previous years) of BOCA’s core net profit.
- Revised capex guidance to US$2.0bn in FY22, down from US$3.0bn previously. BOCA’s capital spending in 1HFY22 only amounted to US$0.6bn, and the lessor now expects to only invest around US$1.4bn in aircraft in 2HFY22 due to delivery delays among the OEMs. Coupled with BOCA’s strong operating cash flow of US$717m, net debt dipped slightly to US$16.3bn in 1HFY22 from US$16.7bn in 2HFY21.
- Impairments were recorded on non-Russian aircraft as well. BOCA incurred US$47m of asset impairment losses against other aircraft in 1HFY22.
- Bad debt impairment losses have subsided. BOCA recognised US$5.9m of impairment losses on its receivables in 1HFY22, a significant improvement compared to US$62.8m in 1HFY21. The lessor’s cash collection inched higher to 96.9% in 1HFY22, as compared to 95.9% in 1HFY21.
- Lease commitments for 14 out of 17 aircraft off lease have been secured, and these aircraft will be delivered to their aircraft customers in 2HFY22.
- Supply chain issues will persist, but OEM deliveries should gather momentum from FY23F. Airbus has announced that while it is maintaining its 2025 goal of 75 A320neos a month, it is moderating its interim target to 65 a month by early-2024 as compared to the second half of 2023 previously. Similarly, Boeing has announced that it will not be able to ramp up production of the B737 MAX in the near-term to 38 as initially planned and will maintain production at 31 aircraft per month until the supply chain is able to catch up. Nonetheless, both OEMs have indicated that aircraft demand is robust and production rates will improve in 2023. Additionally, Boeing was recently cleared by the FAA to resume deliveries of the B787 in August.
Outlook and recommendation
- We now project BOCA to dip into the red in FY22F with a minor net loss; cut FY23F net profit estimate by 11%. Our negative earnings revision reflects the loss of revenue and asset impairment losses related to its Russian fleet. While BOCA’s lease rate in 1HFY22 was below our expectations, we anticipate lease rates to recover from 2HFY22F given that there will be fewer aircraft off lease and collection rates should continue to improve. Our revised FY23F net profit estimate still points to a significant rebound in BOCA’s earnings, to close to 2019’s level. Apart from higher lease rates, a more pronounced increase in aircraft assets in FY23F as aircraft production bottlenecks are resolved and absence of aircraft impairment losses will drive a rebound in earnings.
- Maintain BUY with unchanged TP of HK$76. Despite the massive hit to BOCA’s equity base from the asset write-offs in 1HFY22, our TP is maintained at HK$76 as we roll forward our valuation peg to 1.2x FY22/23F book value from 1.2x FY22F book value previously. We still like BOCA given its promising recovery prospects and attractive valuation of 1.0x P/BV (FY23F), which is around 1.0 standard deviation below its five-year average. Furthermore, there could be further upside to its book value once the insurance claims on its Russian aircraft are resolved.