Avation PLC (AVAP): A High-Conviction Buy in the Undervalued Aircraft Leasing Sector

The aircraft leasing sector is undergoing a transformative phase in 2025, driven by structural growth in aviation finance and asymmetric pricing dynamics that favor strategic players like Avation PLC (AVAP). Despite its recent financial challenges, Avation's strong balance sheet, asset sales, and alignment with industry tailwinds position it as a compelling high-conviction buy for investors seeking exposure to a sector poised for long-term gains.

Structural Growth Drivers Reshape Aviation Finance

The aircraft leasing industry is being propelled by several macroeconomic and technological forces. Airlines are increasingly adopting leasing models to preserve liquidity while modernizing fleets, a trend accelerated by supply chain bottlenecks at OEMs like Airbus and Boeing, which have extended delivery timelines. Narrow-body aircraft, which constitute 43.9% of the market in 2024, remain in high demand due to their fuel efficiency and versatility, particularly for low-cost carriers in emerging markets. Avation's focus on high-lease utilization rates and its recent sale of a Boeing 777-300ER for $33 million underscore its ability to capitalize on these trends.

Digitalization is another critical growth driver. Advanced analytics and AI-driven tools are enabling lessors to optimize asset utilization and reduce downtime. Avation's improved liquidity following refinancing efforts and its upgraded credit rating to 'B' reflect its capacity to leverage these innovations while mitigating risks. Meanwhile, environmental regulations are pushing demand for fuel-efficient aircraft, a segment where Avation's portfolio is well-positioned to benefit.

Asymmetric Pricing: A Tailwind for Strategic Players

The sector's asymmetric pricing dynamics create opportunities for companies like Avation to outperform. Post-pandemic recovery has led to divergent demand for leased aircraft: narrow-body aircraft remain in high demand, while wide-body aircraft face higher off-lease rates, negatively impacting lessor revenues. Avation's asset sales above book value and its 18% discount to net asset value (NAV) suggest undervaluation relative to its peers, particularly as narrow-body leasing remains a structural growth engine.

Innovative financing structures, such as green bonds and hybrid lease models, are also reshaping the sector. Avation's recent refinancing efforts and its ability to secure favorable terms highlight its agility in navigating these trends. For instance, the company's $33 million cash release from the Boeing 777-300ER sale demonstrates its capacity to monetize underperforming assets and reinvest in higher-yielding opportunities.

Avation's Financial Resilience and Valuation Outlook

While Avation reported a $0.11 loss per share in FY 2025 compared to a $0.28 profit in FY 2024, its financial challenges are largely structural rather than operational. High leverage and negative profitability have been mitigated by improved liquidity and a reduced refinancing risk profile. Analysts note that Avation trades at an 18% discount to NAV, a significant margin of safety given its strong lease utilization rates and asset sales.

The stock's low volatility (3% weekly) over the past year further enhances its appeal for risk-averse investors. With a price target of £135.00 and a "Hold" rating, the market appears to underprice Avation's potential to capitalize on the sector's asymmetric pricing trends and structural growth.

Conclusion: A High-Conviction Buy in a Resilient Sector

Avation PLC's alignment with the aircraft leasing sector's growth drivers-narrow-body demand, digitalization, and sustainability-combined with its undervaluation relative to NAV, makes it a high-conviction buy. The company's recent credit upgrade, asset sales, and improved liquidity position it to navigate near-term challenges while scaling its portfolio in line with industry tailwinds. As airlines continue to prioritize leasing over direct purchases, Avation's strategic positioning and operational flexibility offer a compelling risk-reward profile for investors.