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Non-Tech : Genesis Lease

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From: SirWalterRalegh	10/29/2008 5:49:43 PM
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Genesis Lease Ltd (GLS) Estimate change Earnings Forecasts Lowered on Reduced Activity Y * 3Q08 earnings expectation lowered slightly - We now expect a pre-exceptional EPS of $0.27, down from $0.32 previously, when GLS reports results on 30th October. The reason is that we estimate a $0.5m re-possession cost and $1.0m write-off associated with the re-possession of 2 B737-800s from Futura, a Spanish airline that closed in September. These costs would be similar to those when GLS re-possessed 2 B373-700s from Aloha in April. Loss of rentals should be covered by security deposits for 2-3 months. However, we doubt that GLS will be able to re-lease the aircraft at higher rates, despite their attractiveness, given uncertain macro and aviation sector conditions. * 2008-2010 earnings forecasts lowered on reduced activity - We now expect GLS to acquire no more aircraft until 2011 in order avoid future debt and equity issues and while aircraft values are uncertain. We also calculate higher amortisation of financing fees following recent financings. The result is to lower EPS forecasts by 11% for 2008 and c.20% for 2009 and 2010. * Dividend is theoretically safe but could be cut - GLS can maintain a $1.88 annual DPS from its existing portfolio. It does not need to re-finance until 2012 when its debt securitisation has to be paid off before dividend can be paid out. However, at a yield of 41%, there is always the risk a Board may cut the dividend given that the high yield does nothing for the share price. We would not expect such a cut until well into 2009 and assuming that the status quo of closed capital markets and uncertain values remains. See Figure 1 for Liquidity analysis. * Very attractive valuation - Current share price implies a 35% fall in aircraft valuations, very much a worst case scenario. Forward P/E is just 4.5x on contracted revenues for an average 5 years. See Appendix A-1 for Analyst Certification and important disclosures. Buy/High Risk 1H Price (27 Oct 08) US$4.62 Target price US$16.80 Expected share price return 263.6% Expected dividend yield 40.7% Expected total return 304.3% Market Cap US$167M Price Performance (RIC:GLS.N, BB:GLS US) Andrew Light1 009E 2010E Sales ($M) 153.2

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