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Date : 15/06/2021

Alliance Aviation Services



Market Cap : $675.6 Million

Dividend Per Share : $0.088

Dividend Yield : 1.73 %


52 Week Range : $2.02 - $4.92

Share Price : $4.21

Alliance Aviation ticks all the boxes of a resiliant business. With dividends returning soon, its a growth + dividend play. A "Buy" from us.

Company Analysis

Alliance Aviation Services Ltd. (ASX: AQZ) is a Queensland headquartered provider of contract, charter and allied aviation and maintenance services. The Company operates as an air charter operator in Australia and provides service to various sectors, including mining, energy, tourism, and the government. The Company owns a fleet of approximately 24 Fokker 100 (F100), 14 Fokker 70LR (F70) jet aircraft and approximately five Fokker 50 (F50) turboprops. AQZ has operational bases in Brisbane, Townsville, Cairns, Melbourne, Adelaide, Perth, Darwin and Rockhampton and a dedicated engineering base located at Brisbane Airport. The Company offers inclusive and coordinated air charter services, including the transportation of equipment and personnel both domestically and internationally, for organizations, such as the Australian Defence Force (ADF) and the Australian Department of Immigration and Border Protection.

Source: Alliance Aviation

Tough year for the air travel industry but Alliance Aviation did pretty well during the pandemic

As we mentioned, Alliance Aviation’s main activity is the provision of contract, charter and aviation services to the mining, energy, tourism, and government sectors. But it doesn’t end there. We should not forget that AQZ is also a well-diversified group that also provides specialised aviation services to airlines such as wet leasing, airport management, aircraft trading, selling parts and engineering services. This is thus a unique proposition that covers almost all the segments of the aviation industry. A one stop shop in the B2B aviation space if you will. It goes without saying that diversification brings to the company multiple income streams which forms a bedrock for stability during the tough time. In fact, the group has successfully navigated the COVID-19 pandemic and has even delivered profits for FY20 with a reported net profit of A$ 26.97 million compared to A$ 22.73 million in the previous year. Even during the difficult economic condition, Alliance managed to increase its earnings by +18% year-over-year. The group has been continuously improving its earnings year on year and they also continued to operate profitably during the pandemic due to its diverse business model and its proven ability to adapt quickly in changing environment. We all know that the airline industry has been profoundly disrupted by the health crisis, but, COVID-19 did not affect Alliance’s flight hours much, remaining stable at about 37 thousand hours for FY20 compared to 38 thousand hours in the previous period. The main reason for this is the B2B model that it operates. Australia was under lockdown, yes, however, given that the outbreak here was handled exceptionally well, mining companies and the main customers of AQZ continued to function. This is the main difference between Qantas and Alliance Aviation. Furthermore, the group has managed to grow its fleet with four additional aircrafst bringing it to a total of 42 aircrafts by the end of FY20, contributing to a 44% year-over-year growth in the company’s assets. Earnings per share was only modestly affected demonstrating the resilience of the business.

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AQZ, a unique business model supported by consistent fundamentals

Alliance ticks all the boxes that define a resilient business, and it has been validated during the peak of the pandemic. The group reacted quickly and effectively in response to the unprecedented health crisis and avoided downturns seen elsewhere in the aviation industry, hence demonstrating great execution. Also, what we like about AQZ are its diversified five revenue streams derived from (1) contract, (2) wet lease, (3) Regular public transport services (RPT), (4) charter, and (5) aviation services. The various stream of income appeared to work seamlessly during the crisis. Despite inbound tourism charters ceasing operation in March last year, contract and charter revenue experienced substantial growth in the first half which could offset the losses caused by the disruption in the tourism sector due to COVID-19. Revenue from regular public transport services continued to operate but at a significant reduction in schedule.

Alliance supported the revenue growth and continued to provide strong margin contribution even in an unfavourable environment with reduced aircraft part sales in the second half of FY20. The diversified incomes proved to be a solid foundation for the company for further growth, and it has been reflected on AQZ share price which has gained traction over the past 12-month period, outperforming its competitors who are still lagging well behind. AQZ shares even reached an all-time high of A$ 4.92 per share last month.

Company Updates

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AQZ, the sky is the limit

Alliance’s commitment to reducing their leverage is another extremely positive property. Leverage is not usually good, and for an airline, it makes things worse during downturns in demand. AQZ has been consistently deleveraging for the past few years. In FY17, Alliance debt ratio was about 42% and it has recently dropped to 35% as of the end of FY20. The debt ratio went down significantly during FY20, declining by more than -19%. That represented a debt reduction of A$ 6 million during the period, bringing the debt balance to A$ 54.4 million. During FY20, Alliance did also successfully execute a placement to institutional investors to raise A$ 91.9 million. This was further followed by a raising of A$ 3.9 million via a share purchase plan (SPP) finalised by the second half of 2020. Approximately 1.3 million new shares were issued at A$ 2.85 per share. We think that these proceeds will lay the groundwork for Alliance to further expand its operation and get ready to strongly rebound once the pandemic is successfully behind us. Alliance has also recently announced its intention to kick-off its fleet expansion project that comprises the delivery of fourteen aircraft throughout FY21. The expansion of AQZ’s fleet is projected to materially contribute to the company’s earnings growth onward FY22. We are confident in a positive outlook for the business as Alliance has several key opportunities to tap into and more importantly, the firm has the financial backbone to support its plan. Hence, AQZ exhibits strong revenue growth year-over-year, even though registering a record profit in FY20. Also, AQZ has a net cash position with reduced debt. Operating income and cash from operating activities grew consistently over the last three years at 25% CAGR and 26% CAGR, respectively. All in all, Alliance did a great job to solidify its foundation during FY20 that will allow for the group’s continued expansion.

FY21 onward: Key opportunities
  1. Awarded ad-hoc contracts during the pandemic (FY20) to mature into a long-term charter contract
  1. Ramp up flight schedules as economic activities are expected to restart
  1. New routes because of new demands during FY20 will likely contribute to RPT revenue
  1. Wet lease revenue is expected to return gradually throughout FY21 upon the return to normal


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Investment Thesis

For the six months ended of December 31, 2020, Alliance Aviation revenues increased by 2% to A$ 154.9 million. Net income increased from A$10.7M to A$23.4M. Revenues reflect charter revenue grows from A$ 10.6 million to A$ 29.3 million; contract revenue increases by 12% to A$ 105.8 million. Net income benefited from administrative costs decline of 39% to A$ 2 million.

Alliance exhibits an impressive consistency in operating performance

In 2020, the global passenger traffic demand fell by more than 65% compared to 2019. That is by far the worst traffic decline in aviation history. However, for reasons outlined earlier, Alliance did relatively well and did not suffer much from the consequence of the pandemic, unlike its peers. The group had delivered consistently strong operational and financial metrics even during this period of uncertainty. We have recognised that FY20 was the year for Alliance to take the opportunity to build and strengthen its business foundation. The group has acquired new aircrafts in anticipation of a future expansion once the economy restarts. As Alliance is operating a very niche market within the aviation sector, the group had secured new contracts. Moreover, contract revenue has increased during FY20 due to increasing demand from a number of its clients. Contracted flight hours increased by more than 20% compared to FY19 and its derived revenue could offset the losses incurred in the other categories that have been impacted by COVID-19 such as wet lease, RPT and charter.

FY20 FY19 % chg.
Aircraft in service 42 38 10.5%
Flight hours – contracted 23,733 19,660 20.7%
Flight hours – wet lease 6,297 11,555 (83.5%)
Flight hours – RPT 4,612 5,158 (11.8%)
Flight hours charter 2,453 1,095 124.0%
Flight hours – other (incl. maintenance) 525 558 (6.2%)
Total flight hours 37,620 38,026 (1.1%)
Average staff numbers 551 532 3.6%
Revenue per employee (A$) 542,000 520,000 4.2%
Contract % of total Revenue 68% 60%

Expected dividends growth in FY22 onward supported by EPS positive momentum

Due to the unprecedented damages caused by COVID-19, Alliance decided to cancel its dividend distribution to ensure maximum flexibility in its capital management during this period of uncertainty. The firm now expects to use its retained earnings to work on its expansion plan and utilise its fund to acquire additional aircraft. As we see, historically, Alliance has been consistent in its dividend payout and we believe, dividend distribution will be back on track upon the restart of the economy. FY21 onwards, we expect a dividend per share increase by 13% CAGR in the next 3-year period.

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EPS has been slightly affected during FY20, but we believe it just a matter of time to see it on the upside by the end of FY21. With the ongoing expansion combined with an expected return to normal by FY22, we see revenue increasing steadily by 9.5% CAGR from FY21 to FY23. The low leverage means that EBITDA margins will expand given that Alliance will be making lesser debt payments. With a rise business demand translating to higher revenues, an increase in earnings, and better margins, Alliance is positioned extremely well.

The pattern that can be seen in the chart below is generally not associated with airline companies. Alliance’s income statements are thus extremely stable.

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AQZ has been really bullish since the COVID-19 global market sell-off in March last year and has since appreciated by an impressive 330% reflecting the company’s solid fundamentals. Looking at AQZ multiplesit is fairly valued with an estimated EV/EBITDA less than six times for FY20 and a projected EV/EBITDA of eight times for FY21 based on our revenues and earnings estimates. We believe AQZ has some rooms for further growth as supported by our forecasted revenue CAGR of 9.5% for the next 3-year period with a stable EBITDA margin which gives us strong confidence in Alliance.

The ASX 200 index has an average P/E ratio of 22.7x and an average EV/EBITDA ratio of 14.5x. Relatively, AQZ shares are cheaper than the premiere index. Alliance’s low trading multiples, expanding growth profile, and a return of dividends makes it a bargain in our opinion!

FY18 FY19 FY20 FY21E FY22E FY23E ASX/200
P/E ratio 13.1x 13.8x 14.5x 16.6x 15.5x 12.0x 22.7x
EV/Revenue 1.18x 1.35x 1.49x 2.42x 1.9x 1.4x
EV/EBITDA 4.86x 5.64 5.66x 8.33x 6.42x 4.85x 14.5x
P/B 1.51x 1.92x 1.70x 2.10x 1.95x 1.83x

Technical Analysis

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Since the peak of the global market sell-off in March last year, AQZ made quite an explosive return. The share has performed even better than its peers, not only recovering back to its pre-COVID level but surging to the upside by more than 330% reaching an all-time high in mid-April this year. AQZ paused from its bull run since then around its support and psychological level of four dollars per share. We think that the four dollars per share is a good candidate for a buy entry to capture the next upside momentum. The price action remains relatively bullish on a low volume which gives us confidence that market participants are holding their shares.

Key price levels

The key level to monitor is the A$ 4.0 per share which is the near-term support level that coincides with the 23.6% Fibonacci level from the March-2020 swing high. On the upside, the A$ 5.0 per share is the nearest resistance level. If a clear breakout occurs above the price area of A$ 4.92 and A$ 5 per share, a rally might take place pushing AQZ to new highs.

Volume and momentum

Volume decreases since the last 200-day with the 20-day volume average down by -51%. The price action remains bullish in the near term, evolving in a range between A$ 4.0 and 5.0 per share.

Trade consideration

  • Market participants might be interested to enter a key support level: A$ 4.0 per share.
  • Primary target price above $A 5.0 per share
  • Secondary target price at $A 5.4 per share
  • Consider reducing exposure below A$ 3.4 per share
  • It is recommended exiting the trade below A$ 3.0 per share

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Alliance has been really bullish, unlike its industry peers. The shares have performed even better than its peers, not only recovering back to its pre-COVID level but surging by over 330% and reaching an all-time high in mid-April this year. This performance is supported by the company’s impressive fundamentals. The group has been constantly improving its earnings every year and they continued to operate profitably even during the pandemic given its diverse business model and its proven ability to adapt quickly in changing environment.

The outlook for the business is extremely positive. Alliance has several key opportunities to tap into and more importantly, the firm has the financial backbone to support its plan. Strong revenue growth, record profit, and a net cash position are very good signs. Given our estimates for growth, a return of dividends, and the low multiples AQZ shares are trading on, we recommend long-term investors to “Buy”.


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