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As per your request for ideas, we are recommending to buy Air Lease (CS Rating: BUY; CS Target Price:
$57 or upside of 31%)

Investment Rationale:

• Leading company in the aircraft leasing industry which went public in 2011. Founder and CEO is
Steven Udvar-Házy, who co-founded one of the first aircraft leasing companies in the 1970s
(subsequently acquired by AIG) and continued to head the same company until 2010. He
continues to own 5.2% stake in Air Lease

• 2012-2017 CAGR for assets of 14%, revenue - 15% and adjusted EBT - 18%

• Debt to equity of 2.35x with fixed rate debt is 85% of total debt (7.7% maturing in next 3 years)

• Fleet of 294 aircraft as of December 2017 – increase of 10% YoY. Order book is 368, so the
company is going to more than double its fleet by 2022. This fleet growth is higher than what
the largest company in the sector AerCap expects with order book at 45% of fleet

• Portfolio yield of ~11% (virtually unchanged since 2011 despite increased competition), interest
rate on debt of ~3% for a net spread of ~8% (new aircraft financed with 50% debt)

• Strong aircraft leasing demand, driven by growing levels of passenger traffic, significant
replacement demand ahead, high levels of airline profitability and favorable economics of
leasing vs buying (e.g. low initial capital investment, shorter waiting time, eliminating residual
value risk, off-balance sheet reporting, etc.)

• In the current environment of rising interest rates and rising oil prices (or higher airline costs)
preference for leasing should prevail, resulting in continued growth in the leased fleet as
proportion of the total global fleet, which rose from <2% in 1980 to ~40% in 2015

• Valuation: company trades at 1.1x book value, >20% premium to peers. So not cheap, but
justified by the superior growth profile, lower leverage, younger fleet, longer average lease
maturity and maybe the best management in the industry. Also this premium has shrunk from
>50% on average over the last 5 years and the company trades at a discount to book on a
forward basis

• Company will report Q1 2018 earnings on 10 May at . Peers already reported Q1 results
generally showing continued solid business momentum with results beating consensus


Technically, shares broke the downward trend started in the end of Jan 2018:

The stock is testing $43.90 / $44.00 levels and seems it can rise further.
In the 2 last trading sessions, the stock broke the 50DMA and 200DMA as well as important resistances
before closing at the 200DMA (slightly below).

• The sector underperforms significantly in times of limited access to capital markets – AerCap
had a drawdown of 94% from 2007 to 2009

• Lease contracts are usually multi-year with fixed lease rates while 20% of debt is floating, so
sharp increases in interest rates would have a negative impact, although contracted lease rates
are adjusted at time of aircraft delivery based on current interest rate environment and OEM
price inflation is passed on to clients. In the end higher rates support higher lease rates and
consequently asset values

Best regards,