2018 earnings slightly miss our expectations
China Aircraft Leasing Group （CALC） announced FY18 results: Revenue grew16% to HK$3.3bn; net profit rose 10% to HK$809mn, missing consensus by7% and our estimate by 5%, mainly due to decreasing aircraft disposalincome. Dividend payout ratio remained 55% with a full year DPS of HK$1.19.
Trends to watch
Fleet expansion well on track. CALC expanded its fleet from 107 aircraft byend-2017 to 133 by end-2018 with 29 deliveries and 3 disposals. 115 aircraftare self-owned and 18 are managed by CAG in a young and modern fleet withan average age of 3.7 years and average remaining lease period of 8.3 years.
The company expects to expand its fleet to more than 150 by end-19 andmore than 365 by end-2023 supported by a strong delivery backlog of 232aircraft （assuming no aircraft trading）。
Total lease income increased 26% YoY to HK$2.3bn. Operating lease incomerose 86%YoY to HK$1.5bn with operating lease aircraft increasing from 37 in2017 to 52 in 2018 and lease yields falling to 9.2% （2017: 9.9%）。 Finance leaseincome dropped 22% YoY to HK$792mn due to disposal of finance leasereceivables on 3 aircraft and reclassification of 8 aircraft from finance tooperating, plus lease yield increasing from 10.9% to 11.7%. In addition,CALC’s average interest rate went up 32bps YoY to 5.17% in 2018, much lessthan the more than 100bps increase of LIBOR during the same period.
Ongoing transition into a global full value-chain solution provider. With theestablish of CAG & ARI and a focus on an asset light model, CALC isdiversifying its income sources from traditional leasing income to includemore income from ABS, from aircraft trading, from aircraft disassembly andcomponents sales, and from MRO services. In addition, CALC has expandedits oversea client presence to 31% of total aircraft leased in 2018 （2017: 28%）and aims to hit 50% by 2021.
Earnings forecast
Considering CALC’s robust fleet expansion and aircraft full solution valuechain layout, we raise our 2019e earnings forecast by 3% to HK$973mn andintroduce 2020e earnings forecast at HK$1.13bn.
Valuation and recommendation
The stock is trading at 1.4x 2019e P/B. We maintain our BUY and raise TP by14% to HK$10.81 implying 1.7x 2019e P/B and 21% upside, for earningslifting and business model upgrading which would diversify its incomesources and enhance overall competitive advantages.
Risks
Delay in aircraft deliveries, business expansion less than expected