When the Doric Nimrod aircraft funds launched a few years ago, they offered some tempting asset-backed income from a portfolio of A380 superjumbos that were leased to Emirates. A later fund, Amedeo Air Four Plus (LSE: AA4) broadened out the concept with a portfolio of Airbus and Boeing planes that were let to both Emirates and Thai Airways.
But the security that these assets offer looked fragile when the pandemic hit. No A380s were flying. Many airlines were in trouble. And Airbus had already cancelled A380 manufacturing the previous year. All this made it difficult to work out what the aircraft would be worth once the leases expired. So the price of the funds crashed way below stated net asset value, even though all three Doric Nimrod funds kept paying regular dividends.
Analysts have tried to put a value on how much these stranded A380s might be worth, but this has been a largely fruitless exercise as second-hand values are not advertised – there is no Rightmove for planes. It also hasn’t helped that Thai Airways has fallen into bankruptcy, although Emirates looks in much better shape. But last month we finally got some concrete data. Doric Nimrod Air One (LSE: DNA), the very first fund, owns a single A380 that it let to Emirates back in 2008. It’s now agreed to sell the plane to Emirates for £25.3m ($30m) at the lease-end date in December.
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We can sensibly use this as a marker for the other Doric Nimrod funds, although with lots of caveats. For Doric Nimrod Air Two (LSE: DNA2), which owns seven A380s with leases ending in 2023 and 2024, Emirates has already given notice that it is exercising the option that allows it to redeliver the aircraft in half-life condition, or between two major overhauls in its maintenance cycle. If this happens, a return condition payment of $12m per aircraft will be made by Emirates.
At that stage Emirates could still buy the planes, although most analysts think that it probably wouldn’t offer exactly the same price given to DNA. Meanwhile, the third fund, Doric Nimrod Air Three (LSE: DNA3) has four A380s, whose leases expire in 2025. Analysts at Jefferies reckon a prudent valuation for DNA2 and DNA3 could be $25m per aircraft. If that materialises, investors could expect a return of 1.47 times the current share price for both funds, including future dividends. Nothing is guaranteed, but that’s potentially very good news.
A more complicated case
AA4’s situation is more complicated. It owns six A380s (leased to Emirates), two B777s (leased to Emirates) and four A350s (leased to Thai Airways). It had to suspend dividends for much of 2020 and 2021 while Thai Airways was restructuring and renegotiating its leasing deal. Dividends have now resumed at a lower level, although these are covered by Emirates’ leases only. But Thai Airways’ financial situation has improved and it is set to restart fixed payments next year (currently AA4 gets paid only for the time it uses the planes). The A380s are of uncertain value, though DNA’s deal is positive. Analysts at Liberum believe AA4 is building up its cash reserves to meet its debt obligations (the aircraft funds use a lot of debt to buy the planes, then pay it down over the course of the lease).
The wider story is that demand for aviation has picked up. Many airlines are struggling to get planes in the air. Emirates is experiencing capacity issues, partly due to problems with the delivery of Boeing’s 777X programme, says Liberium.
If all goes to plan, its analysts think AA4 could deliver an internal rate of return (before fund costs) of 14% from the current share price. Whether or not those exact numbers work out, the outlook for these funds might finally be improving.
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