BOC Aviation offers an attractive valuation as well as a solid balance sheet

BOC Aviation offers an attractive valuation as well as a solid balance sheet

BOC Aviation is an investment grade name offering an attractive valuation as well as both a solid balance sheet and financial ratios.


Background –



BOC Aviation is an aircraft leasing company. The company was wholly owned by Bank of China, but the bank spun off the entity and listed it on the Hong Kong stock exchange in June 2016. Bank of China remains the majority shareholder with a 70% stake in BOC Aviation.


Total revenues in 2017 amounted to USD 1.4bln. With 318 aircraft the company ranks 8th when measured by a number of aircraft and 6th by a value of its fleet, which amounts to USD 13bln. As a comparison, the market leader, GE Capital Aviation Services owns more than 1400 aircraft for a value of more than USD 30bln.

BOC aviation portfolio is mainly composed of short to medium range narrow-body aircraft, such as the Airbus A320 and the Boeing 737. The company has currently 173 aircraft on order. The fleet average aircraft age is 3 years, making it one of the youngest in the aircraft operating lease industry, and the average remaining lease term is 8.2 years. Airlines usually lease some or all of their aircraft as it offers greater financial and fleet flexibility.

They have a diversified portfolio of leases in terms of customers, with their five biggest customers accounting for less than 30% of the net book value. They are focused on the Asia Pacific region as well as mainland China but retain a globally diversified geographic exposure.

BOC Aviation Graph

The aviation sector is highly cyclical, but the company’s fundamentals are strong.

 

Despite bankruptcies, mainly in Europe, amongst Germany’s Air Berlin, UK’s Monarch Airlines and Switzerland’s Darwin Airlines, the airline industry is in good shape. The Financial Analysis carried out by the International Air Transport Association, IATA, state that passenger numbers are set to increase to 4.3bln in 2018 and a 9.4% yoy rise in overall revenues to USD 824bln. This strong performance is supported by robust worldwide GDP growth as well as growing employment.

The company has a strong financial profile, being rated A- by both Fitch and Standard and Poor’s. Liquidity ratios are good and the company has a good cash flow stability from its long leases.

The shared branding with Bank of China, the strong presence of Bank’s key executive on BOC Aviation board as well as the cross-selling initiatives taken, lead us to think that BOC Aviation is strategically important to its parent company and would benefit from the support of its ultimate parent, Bank of China, should it be required.

Risks-

Airline demand for leased aircraft is the primary driver of lease rental income. Demand for leased aircraft by airlines, in turn, is driven by growth in air travel. Travel demand can be sensitive to external shocks, through terrorism, pandemic or restrictions on travel or trade flows.

BOC Aviation solvency highly depends on profitability, cash flows and the performance of lessee airlines. Multiple factors can affect those key factors, such as oil price, competition amongst airlines or regulation.


Being closely linked to its majority shareholder, any negative event or change in rating at Bank of China is likely to have a negative impact on BOC Aviation.

From a market perspective, BOC Aviation has many issues outstanding, mainly in USD, with maturities up to 10 years.

BOC Aviation GraphBOC Aviation Graph

 

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