We are reiterating our Strong Buy recommendation on AerSale Corporation (Nasdaq: ASLE) with a price target of $47.00.
Following the release of AerSale’s Q3 2021 earnings report on November 9th, Prescience Point continues to believe that AerSale is one of the most attractive and obvious investments that it has ever seen. Despite the delay of key catalysts related to AerAware to early next year, the Company is still on track to generate a run-rate of around $2.00 of adjusted EPS, on a fully diluted basis, by the end of 2022, which is more than double what it is projected to earn in 2021.
Information provided by AerSale management in the Q3 earnings report confirmed or strengthened most of the key points of Prescience Point’s long-term thesis, specifically:
- FAA approval of AerAware was confirmed to be a near certainty. During the Q3 conference call, AerSale management said that, despite delays in the certification process for its AerAware wearable head-up display (HUD) technology, completion of the process is expected before the end of February 2022 and final FAA approval should be granted shortly thereafter. AerSale management stated, “We’re highly confident it’s not a matter of if, rather it’s only a matter of when we will receive an AerAware STC (Supplemental Type Certificate).” If AerAware is approved in Q2 of next year, as management claims it is almost certain to be, the Company will be first-to-market with the only viable wearable HUD solution for the commercial airline market. The game-changing AerAware technology will significantly reduce delays and diversions by enabling commercial airline pilots to see through inclement weather such as snow, rain, sleet and fog.
- A large initial order for AerAware was confirmed to be highly likely. During prior earnings calls and investor presentations, AerSale management has repeatedly indicated that it expects to receive a large order for AerAware from a major domestic airline upon receipt of FAA approval. During its Q3 conference call, AerSale management confirmed this once again, and predicted that an initial order for AerAware would be in the range of 250 units. Assuming that AerSale is able fulfill the entire 250 unit order over a 12-month timeframe, Prescience Point projects that this initial order would contribute an additional $0.80 of EPS, almost doubling the Company’s annual earnings.
- Multiple, additional STCs are currently in process for AerAware. During its Q3 earnings call, AerSale management disclosed that it is currently working on multiple, additional STCs for AerAware beyond the Boeing 737 and is in the process of engineering the integration of the product into the Airbus A318, A319, A320 and A321. These additional STCs will greatly expand the addressable market for this product.
- AerSale projects a significant rebound in financial performance In Q4 2021. While the Company’s Q3 results were below expectations, this was largely the result of “lumpy” timing for sales of its fleet of converted Boeing 757 cargo planes, and not due to any deterioration in the fundamentals of the business. This conclusion is supported by management’s projection of a strong rebound in financial performance in Q4 2021. Based on the midpoint of AerSale’s revised full-year adjusted EBITDA guidance of $85 million and the $60.7 million of adjusted EBITDA generated through the first three quarters of 2021, the Company projects that it will generate almost $25 million of adjusted EBITDA in Q4 2021.
- The core business is poised to accelerate further in 2022. Prescience Point expects AerSale’s core business to grow significantly in 2022 due to several major tailwinds. First, the Company will greatly benefit from the monetization of its remaining fleet of 757s. Prescience Point projects that the Company will still have 13, or more than half, of its fleet of 757s remaining at the end of 2021. Given that ASLE already has all but three of its remaining 757s under contract or LOI, Prescience Point expects all 13 of these remaining planes will be monetized in FY 2022. Second, during its Q3 earnings call, management disclosed that it is starting to see an increase in the number of used aircraft available for sale at attractive prices, which could lead to opportunities for further growth in the Company’s core business as these assets are acquired and then monetized via leasing, whole asset sales and the sale of parts. Finally, AerSale should benefit from the continued recovery in domestic and international airline traffic, which should drive a significant increase in demand for the Company’s products and services.