2023-09-07 06:40:20 ET
Summary
- AerCap settles with Russian Aeroflot Group, reducing the claim balance by $908 million.
- The settlement indicates that the remaining $2.75 billion in claims could potentially be settled.
- AerCap's book value increases by $645 million, offering potential upside in the stock price.
AerCap (AER) is one of the companies I have a Strong Buy rating on as I believe that demand for airplanes will continue to grow over the mid to long term and aircraft lessors are taking a bigger share of the market. The past few years have not been easy for airlines and subsequently airplane lessors. The pandemic eroded demand for air travel and put pressure on aircraft values and lease income while sanctions against Russia directly led to the country seizing leased jets leaving airplane lessors with significant damages to their business.
As a result, AerCap was forced to write off $3.2 billion on their flight equipment under the assumption that these would not be recovered, clearing the path for insurance claims in the amount of $3.4 billion. The most recent development is that AerCap has settled some of the claims. In this report, I will be discussing the settlement and how this affects the stock price using various valuation methods.
AerCap Settles With Russian Aeroflot Group
In total, the AerCap had $3.4 billion worth of claims against "All Risks" insurers. The company has now settled for $645 million for 17 airplanes and five spare engines which would reduce the $3.4 billion balance. The balance has been reduced by $908 million. The reduction in the claim balance is higher than the settlement, which most likely is caused because AerCap previously recognized maintenance reserves paid by the airlines and letters of credit as revenues transferring them from a liability to an asset. The $645 million likely is the outstanding balance left under the claim which is now added to the cash balance. Simultaneously, the Ireland based lessor has dropped the claims against insurance company NSK and the Aeroflot Group with regards to the 17 airplanes and spare engines. This has resulted in the claim balance to drop to $2.75 billion.
The Bigger Picture For The Multi-Billion Dollar AerCap Claim
While I don't want to make any forward projections based on this event, the settlement does provide some indication that the remaining $2.75 billion could eventually be settled. Furthermore, while I believe chances of repossessions which would likely reduce the claim amount as well there are possibilities for AerCap to eventually start selling claims for buying parties to pursue and the successful settlement that AerCap announced provide some base to assume that other settlements will follow in the future, but also give some conviction that the claims can be pursued successfully which could make the claims appealing to buy by legal companies.
A Higher Book Value For AerCap
Essentially, with the $645 million received AerCap's book value has increased by the same amount. AerCap has 237.54 million shares outstanding which indicates that $2.71 per share is added to the book value. AerCap's most recent closing price was $60.36. Simply adding that gives $63.07, providing 4.5% upside and 2.5% upside from the current price, meaning that the full positive impact has not yet been fully factored in the stock price.
Adding the cash receipt to the shareholder's equity, we get to a book value of $68.68 for AerCap which means the current stock price offers around 11.5% upside. If we add the discount that AerCap received when it bought GECAS, the leasing division of General Electric, the book value would even climb to $81.34. If we were to value AerCap according to its usual price-to-book of 0.86x, this would give a price target of $69.95 providing 13.5% upside which I would deem conservative since the actual fair value is $81.35 providing 32% upside. Both methods, however, do show significant upside against the current trading levels.
The evoX Financial Analytics Valuation For AerCap Stock
Stock price valuation using evoX Financial Analytics (The Aerospace Forum)
I also ran the stock price analysis for AerCap using the evoX Financial Analytics tool. Our base adjustments are as follows:
- Inclusion of the $645 million in cash and cash equivalents.
- A tapering share repurchase program in 2024 and 2025.
- Little to no debt repayment, apart from refinancing debt.
In this scenario, I have not included any future recoveries of Russian airplanes or settlements regarding the outstanding claims. In this scenario, AerCap stock would provide 30% upside for 2023 and incremental stock price target increases in the years beyond primarily driven by stock repurchase programs. As a result, I mark AerCap stock a strong buy with the note that based on EV/EBITDA valuations the company should be looking at ways to further adjust shareholder values as upside in the years to come is somewhat limited using an EV/EBITDA valuation.
Conclusion: AerCap Stock Remains A Strong Buy
I believe AerCap stock remains a strong buy after the $645 million settlement with the Aeroflot Group and the insurance company. The settlement could provide positive evidence that future settlements could be reached or litigation claims can be sold successfully, which would further enhance shareholder values. As a result, I maintain my strong buy rating on AerCap.
For further details see:
AerCap Stock: Strong Buy On Russia News