BOC Aviation Earnings: Performance In Line; Industry Trend Remains Positive

Following first-half results from BOC Aviation 02588, we fine-tune our cost assumptions, lowering our full-year 2023 net profit to USD 601 million from USD 646 million, but leaving our fair value estimate at HKD 68. Revenue was in line with our expectation, but we factor in higher professional fees paid out and a slight rise in our average cost of debt assumption. There is minimal change to our midterm forecast. BOC Aviation trades at a 10% discount to our fair value estimate, which prices the company at 1.1 times forward price/book, but we would wait for a slightly more attractive entry point before buying. We think the business environment is supportive, with strong airline profits and a tight aircraft market likely to keep demand for aircraft leases robust.

We raise our cost of debt assumptions for 2023 and 2024 to 3.9% and 3.8%—from 3.8% and 3.5% respectively—to reflect the possibility for the interest rates to stay higher for longer. The increase in finance costs and other operating expenses has been largely offset by lower-than-expected income tax. We now assume an effective tax rate of 12.5%, in line with the historical average. The first-half net profit of USD 262 million now makes up 44% of our full-year projection. We expect a stronger second half from a rising lease rate factor.

Although there’s a delay in our original view for BOC Aviation to benefit from a widening margin as interest rates turn lower, we continue to see the company managing the current environment well. We’re also comfortable that the company is able to manage the continued tight supply of new aircraft. Management has guided that aircraft deliveries are generally secured for the rest of 2023. This helps alleviate concerns over constrained earnings growth if fleet growth is limited due to the delays at Airbus and Boeing.