AerAware's Flight Vision System Expected To Offer High Margins Upon Market Acceptance

Key Takeaways

• Expansion of the lease pool and MRO facilities is anticipated to drive stable revenue growth and improved net margins.
  
• New product and program monetization, such as 757 P2F and AerAware, are expected to boost earnings and revenue significantly.
  
• Challenges in feedstock availability, competition, commercialization delays, and unresolved insurance claims may impact AerSale's revenue, margins, and cash flow stability.

Catalysts

Provides aftermarket commercial aircraft, engines, and its parts to passenger and cargo airlines, leasing companies, original equipment manufacturers, and government and defense contractors, as well as maintenance, repair, and overhaul (MRO) service providers worldwide.

• AerSale's expansion of its lease pool is expected to drive recurring leasing revenue, which could enhance revenue stability and growth over the duration of lease terms.
  
• The completion and operationalization of MRO (Maintenance, Repair, and Overhaul) facility expansions by early 2025 are projected to incrementally increase revenue each quarter in 2025 and 2026, enhancing both revenue and net margins as the investment phase concludes.
  
• AerSale anticipates significant future cash flow from the monetization of its 757 P2F (Passenger to Freighter) conversion program, potentially impacting earnings positively.
  
• The AerAware enhanced flight vision system, targeting market acceptance, offers a promising opportunity for revenue growth and increased margins due to its high expected sales margins, should the system gain traction with major airlines.
  
• As the regulatory deadline for fuel tank flammability protection approaches in 2026, AerSale expects sales of its AerSafe system to accelerate, potentially doubling their current order backlog, which would positively affect revenue and contribute high margins to earnings.

AerSale Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AerSale's revenue will grow by 12.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.1% today to 9.8% in 3 years time.
• Analysts expect earnings to reach $48.3 million (and earnings per share of $0.87) by about February 2028, up from $417.0 thousand today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2028 earnings, down from 871.5x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 33.9x.
• Analysts expect the number of shares outstanding to grow by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

AerSale Future Earnings Per Share Growth

Risks

• The availability and pricing of feedstock remain a challenge, with fewer midlife aircraft available due to production delays and higher asset pricing, leading to a lower acquisition rate and potentially impacting future revenue and net margins.
  
• Competition for USM feedstock has intensified, with AerSale's win rate dropping significantly, which could impede their ability to maintain or grow their Asset Management segment revenue.
  
• The commercialization phase for AerAware, a new product offering, is taking longer than expected, which carries the risk of delayed or lower-than-anticipated contribution to revenue and earnings.
  
• The Millington MRO facility, while operational, is not yet profitable due to low initial volume, which is currently a drag on EBITDA, impacting overall margins in the near term.
  
• Insurance claims related to a significant loss from a fire and engine detained in Russia are still outstanding, and the resolution and exact amounts to be recovered remain uncertain, which could affect liquidity and potential future cash flows.

Valuation

• The analysts have a consensus price target of $7.667 for AerSale based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $492.6 million, earnings will come to $48.3 million, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $6.83, the analyst price target of $7.67 is 10.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.