UBS has increased its core net profit forecast for BOC Aviation (02588) by 6% to 16% for the 2025-2027 period, reflecting anticipated lower debt costs projected to peak in 2026. The bank expects return on equity (ROE) to reach 11%-13% during these years, down from 15% recorded during the pandemic period. Consequently, UBS raised its target price for the aircraft lessor from HK$76.2 to HK$85 while reiterating its "Buy" recommendation.

With BOC Aviation scheduled to announce interim results in August, UBS anticipates a 14% year-on-year increase in core net profit. This growth is primarily attributed to reaccelerating aircraft asset expansion, as the company is expected to take delivery of 24 aircraft in the first half, significantly higher than the 18 received during the same period last year. The expanded fleet should bolster operating lease rental revenue, with newly acquired aircraft likely commanding higher rental yields than the existing portfolio average due to robust leasing demand.

However, the bank foresees a potential decline in disposal margins as aircraft sold during this period carry a higher average age compared to those divested in the prior-year period. On the cost front, average debt costs may experience a modest increase in the first half. Nevertheless, with approximately 30% of the debt portfolio carrying floating rates, the upcoming interest rate cut cycle presents opportunities for reduced borrowing costs moving forward.