Financial Shenanigans

The Forensic Verdict

Avation's reported numbers are a directionally faithful picture of an aircraft lessor that is steadily de-leveraging — but the surface-level FY2025 results are stitched together from a small number of large, judgment-heavy items that materially affect what investors see. The forensic risk score is 50 (Elevated): not because management appears to be doing anything regulators would object to, but because three or four discretionary accounting choices — the maintenance reserve release, the Black-Scholes mark on aircraft purchase rights, the IFRS revaluation of fleet through OCI, and the working-capital tailwinds in operating cash flow — are doing most of the work. The cleanest offsetting evidence is that the FY2025 audit was unqualified, leverage continues to fall, and the October 2026 unsecured note maturity has now been refinanced through 2031. The single data point that would most change the grade would be a recurring-CFO disclosure that strips out maintenance-reserve liability inflows and one-off receivable collection — that would either confirm or break the "$91 million CFO" headline.

Shenanigan scorecard

The pattern is consistent: the income statement and balance sheet are not lying, but they are aggressively reliant on a small number of estimates and on customer cash that is contractually owed back. None of the items would be flagged in isolation; together they materially compress the gap between reported economic performance and the recurring economic performance of leasing 33 aircraft.

Breeding Ground

Avation's governance is unusually concentrated for a US$100M-equity London-listed lessor and amplifies — rather than dampens — the accounting judgments below. The structural conditions are not "off-side" by UK law, but they are exactly the conditions Schilit-style screens flag as conducive to aggressive reporting.

The combination of founder dominance, dual chair-CEO role, an executive director on the audit committee, and the chairman on his own remuneration committee is precisely the structural setup that a forensic screen treats as "elevated." The mitigating evidence is real — five years of zero bonus payouts, an unqualified audit opinion, and a disciplined de-leveraging track record — but the scaffolding around the numbers is weak enough that the discretionary accounting choices below need to be underwritten on their merits, not on management trust.

Earnings Quality

The income statement is dominated by three swing items: maintenance reserves released into revenue, the Black-Scholes mark on the 24 ATR purchase rights, and the asset revaluation reserve flowing through OCI. Each is disclosed; together, they explain almost all of the year-over-year operating-profit volatility.

Revenue is steady; reported revenue is not

Lease-rental revenue — the recurring economic engine — grew only 2.5% (from $87.7M to $89.9M). Reported revenue grew 19.2% to $110.1M because maintenance reserves income jumped from $5.4M to $22.1M after a "review of forecasted maintenance events" pushed expected events beyond current lease end-dates, releasing previously accrued reserves into revenue. This is a permitted accounting estimate, but it is also a discretionary one: the same review can take revenue down again next year. Stripping it out, FY2025 revenue rose 1.4%.

The Black-Scholes purchase-rights mark drives operating profit

The 24 ATR aircraft purchase rights — carried at $91.7M as a Level-3 fair-value asset — generated a $46.9M unrealised gain in FY2024 and a $21.6M unrealised loss in FY2025, a $68.5M swing through operating profit driven by changes in the risk-free rate and time-to-expiry inside a Black-Scholes model. This single mark explains the bulk of the 44% drop in operating profit. Investors evaluating Avation's "operating margin" need to neutralise this line; the underlying leasing margin is far less volatile than the headline.

OCI absorbs further fair-value movement

The fleet itself is held under the IFRS revaluation model rather than historical cost. In FY2025, a $14.8M revaluation gain on property, plant and equipment flowed through Other Comprehensive Income, lifting equity without touching the reported P&L. In FY2024 the same line was a $3.4M loss. The asset revaluation reserve sits at $62.2M as of 30 June 2025, up from $47.3M. Net asset value per share — the metric management leads with — is therefore a fair-value construct, not a historical-cost balance.

Reserves and impairments

Impairment charges of $5.6M in FY2024 were partially reversed (+$4.8M) in FY2025, a permitted IFRS treatment but one that adds another swing to the operating-profit line. Expected credit losses moved trivially. There is no big-bath pattern around any specific event.

Cash Flow Quality

Reported operating cash flow looks impressive — $91.5M in FY2025 against a $7.7M reported loss — but the composition matters. Roughly half of the year's CFO comes from line items that are either non-recurring or economically a customer prepayment.

CFO/Net Income looks superb (negative denominator notwithstanding) because depreciation of $37.5M, the IFRS 9 non-cash debt-modification accretion of $13.9M, and the unrealised purchase-rights mark of $21.6M are all add-backs above the working-capital line. Once aircraft acquisitions are netted out (FY2025 capex of $63.2M minus aircraft sale proceeds of $39.6M), FCF after acquisitions turned negative in FY2025.

Working capital is doing the heavy lifting

Two items deserve emphasis:

1. Receivable collection of $32.1M is the recovery of a customer payment-plan agreement that "was fully repaid by 30 June 2025" (per the FY2025 strategic report). It is genuine cash, but it is not repeatable — the customer is paid up.
2. Maintenance-reserve liability inflow of $17.9M represents lessee cash deposits that the lessor is contractually obliged to refund or apply to future major maintenance events. Booking it in CFO is standard IFRS, but it is economically closer to a customer prepayment than to lease cash.

Strip those two items and recurring CFO lands closer to $40-50M, not $91.5M. The HY2026 disclosure supports this: operating cash flow before working-capital movements was $39.9M for the half — running below the FY2025 implied $82.2M before working capital.

Metric Hygiene

Avation's investor materials lead with EBITDA, FFO, lease yield, NAV per share, and net debt to EBITDA. Each of these is internally consistent but each carries an embedded discretionary input — and three of them omit obligations that a credit analyst would re-add.

The non-GAAP definitions are stable year-on-year and are reconciled in the results announcement. The issue is not that they are inconsistent — they are not — but that the same headline can be reached two different ways depending on which discretionary items are in or out. The right discipline is to look at lease-rental revenue (recurring and contractually visible: $350M of unearned contracted revenue at H1 FY26), and to back out the maintenance-reserve and Black-Scholes line items from EBITDA before reaching for leverage ratios.

What to Underwrite Next

Three forensic items will determine whether this is a "watch" or a "real problem" by the next reporting cycle:

1. The maintenance-reserve liability balance and revenue line. Watch the FY2026 maintenance-reserves liability and the maintenance-reserve revenue split. A repeat $20M+ release would suggest the FY2025 release was not a one-time true-up; a near-zero release would confirm it was. Source: notes to the financial statements.
2. Operating cash flow before working capital. The FY2025 number was $82M; HY2026 ran at $39.9M. Annualised, the underlying cash-generating engine is closer to $80M than the headline $91.5M. If FY2026 operating cash flow before working capital prints below $80M, the recurring CFO base case has been confirmed; if it prints above $90M, the headline is durable.
3. The Black-Scholes mark on aircraft purchase rights. Carrying value walked from $112.8M (FY24) to $91.7M (FY25) to $87.5M (HY26). Continued downward marks would chip at operating profit and book value; a reversal upward would lift them. Either way, this is non-cash and should be evaluated separately from leasing economics.
4. Audit committee composition. Removing the Executive Director from the Audit Committee, or splitting the Chairman/CEO role, would meaningfully reduce the breeding-ground risk score. Either change would be visible in the FY2026 corporate governance statement.
5. Refinancing follow-through. The October 2026 unsecured note has now been refinanced with a US$300M unsecured note due 2031 (per HY2026 deck). The forensic risk score would tighten by 5-10 points if this refinancing is reflected in a clean FY2026 debt-modification disclosure that does not require another large IFRS 9 accretion entry.

Signal that would downgrade the grade (improve risk profile): disclosure of recurring CFO that excludes maintenance-reserve liability movements; removal of the Executive Director from the Audit Committee; appointment of an independent Chair distinct from the CEO.

Signal that would upgrade the grade (worsen risk profile): a second consecutive year of $20M+ maintenance-reserve revenue without a fall in the liability balance; a written-down NAV per share driven by the asset revaluation reserve; or any auditor change, qualification, emphasis-of-matter on going concern, or restatement.

The accounting risk here is a valuation haircut and a position-sizing limiter, not a thesis breaker. There is no evidence of fraud, no auditor concern, and no regulatory action; what there is, is a small-cap lessor whose reported earnings depend on three discretionary fair-value and reserve estimates that can move the headline by tens of millions in either direction. An institutional investor should size the position recognising that the "true" recurring earnings power is materially below the FY2025 EBITDA and CFO headlines, and should require a margin of safety against equity that includes $62M of revaluation reserve and $92M of Level-3 purchase rights.