Research Report Update Investors should consider this report as only a single factor in making their investment decision.

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1 Research Report Update Investors should consider this report as only a single factor in making their investment decision. AeroCentury Corp. Please view our Disclosures pages New York Ave, Huntington, N.Y (800) Fax (631) Rating: Speculative Buy Howard Halpern ACY $9.31 (NYSE-MKT) May 19, A 2013 A 2014 E 2015 E 2016 E Lease revenue* (millions) $23.7 $18.8 $21.9 $25.1 $25.6 Earnings per share (diluted) $3.32 $2.03 ($7.32)* ($0.05) $ Week range $17.19 $7.61 Fiscal year ends: December Shares out a/o 05/12/ million Lease revenue/share (ttm) $14.54 Approximate float 0.9 million Price/Sales (ttm) 0.6X Market Capitalization $14 million Price/Sales (2016) E 0.6X Book value/share $23.06 Price/Earnings (ttm) NMF Price/Book 0.4X Price/Earnings (2016) E 7.3X *** Includes impairment in the value of aircraft in 2014 of $18.7 million or approximately $7.95 per share AeroCentury Corp. is engaged in the ownership, management, leasing and acquisition of aircraft. The primary focus is on used commercial turboprop aircraft equipment for lease to foreign and domestic regional air carriers. Key investment considerations: Maintaining Speculative Buy and lowering our (12-month) price target to $11.75 per share from $14.15 per share due to our diminished 2016 income forecast. In 2014 ACY increased its average aircraft asset utilization to 82% from 76% due to replacement of older aircraft with newer aircraft. In 1Q15, utilization increased to 90%. Diversification enabled the company to reduce the average age of its aircraft to 13 years and increase the average aircraft lease term to five years from three years. For 2015, we project approximately 27 aircraft/engines on lease for most of the year. At the end of 2014, ACY had 28 of 33 aircraft owned on a current lease. During the last nine months of 2015, nine aircraft leases will expire. The company anticipates three of those aircraft will likely be returned, while six are likely to be extended. 1Q15 lease revenue (reported on ) increased by 10% to $6.4 million. Net income was $0.49 per share compared to EPS of $0.24 in the year-ago quarter. Net income in 1Q15 included $1.9 million gain on disposal of assets. Excluding the disposal of assets the company lost approximately ($0.30) per share. We forecasted sales of $5.9 million and income of $0.48 per share. In 2015 we project lease revenue to increase 14.8% to $25.1 million (prior was $23.7 million), reflecting 27 assets on lease and a $54,981 increase in the average lease rate to $948,981 due to the purchase of higher lease rate aircraft in the 2H14. We project a ($0.07) loss per share vs. our prior forecast of earnings of $1.19 per share due primarily to higher than anticipated operating expenses, partly offset by operating lease revenue growth. We reduced our 2016 EPS projection to $1.27 per share from $1.53 per share on lease revenue increasing 1.6% to $25.6 million, reflecting 29 assets on lease, up from 27 in 2015, partly offset by a decrease of $75,477 in the average lease rate to $873,504 and higher than anticipated operating expenses.

2 Recommendation Maintaining Speculative Buy and lowering our (12-month) price target to $11.75 per share from $14.15 per share due to our diminished 2016 income forecast. Our rating reflects diversification of the company s aircraft portfolio, which resulted in more diversified sources of operating lease revenue. In 2014 the company increased its average aircraft asset utilization to 82% from 76% due to replacement of older aircraft with newer aircraft. In 1Q15, utilization increased to 90%. Diversification of its aircraft portfolio enabled the company to reduce the average age of its aircraft by 28% to 13 years and increase the average aircraft lease term to five years from three years. Name Symbol Price Market Cap in $mil P/E 2015 E P/E 2016 E Trailing P/S Forward P/S Aercap Holdings N.V. Ordinary S AER Aircastle Limited Common Stock AYR Fly Leasing Limited FLY Willis Lease Finance Corporatio WLFC Company AeroCentury Corp. ACY Source: Taglich Brothers estimates and Yahoo Finance NMF The four comparative rental and leasing airline companies we profile, all with larger market capitalizations than ACY, have an aggregate price to (trailing) sales multiple of 1.9X (prior was 2X) versus 0.6X (prior was 0.8X) for AeroCentury. ACY s 2016 P/E of 7.4X is based on our EPS forecast of $1.27 per share. ACY s P/E is below that of the peer group, which is trading at an average 2015/2016 P/E of 11.5X (prior was 10.8X). The discount from the comparative group should narrow as ACY generates profits in We applied a 10X multiple to our 2016 estimate of $1.27 per share, discounted by 7.5% to obtain a year ahead price target of $11.75 per share. In our view this stock is suitable for highly risk-tolerant investors. Earnings gains could slow if maintenance costs exceed maintenance reserves, a possibility, if off-lease aircraft need more extensive refurbishment once a new lessee is identified. The Company AeroCentury Corp., based in Burlingame, California, was formed in ACY leases used commercial mid-life (loosely defined as engine maintenance life for valuation purposes) regional jet aircraft and a new generation of turboprop aircraft and equipment (i.e., engines) to foreign and domestic regional air carriers. ACY uses JetFleet Management (affiliated by common management and ownership) to manage the operations of ACY. The company earns a return on the aircraft and engines it owns through lease and eventual sale. ACY reinvests cash flow in more assets that are then leased. As of March 31, 2015 the company s aircraft portfolio consisted of 33 aircraft (28 on lease), five aircraft engines (all off lease), with five aircraft classified as being held for sale. In March 2015 the company sold an older turboprop aircraft for a net gain of $460,000. During the 1H15 seven aircraft leases will expire with three likely to be returned at lease-end. During the last nine months of 2015, nine aircraft leases will expire. The company anticipates three of those aircraft will likely be returned, while six are likely to be extended. 2

3 Projections Basis of Forecasts 2010 and 2011 customer bankruptcies in Mexico and 2012 and 2013 customer bankruptcies in the US, Sweden, Germany and the Netherlands Antilles, forced ACY to turn to stronger geographical markets. As the chart at right shows, lease revenue decreased in four out of six regions. The two regions that increased were Australia with an initial lease and North America with lease revenue of $6.4 million, up from $1.5 million in This transition to a higher-growth region should continue through 2016 due to the 2H14 purchase of newer mid-life regional jets and one new ATR turboprop and selling older aircraft. This diversification effort enabled the company to reduce the average age of its aircraft to 13 years and increase the average aircraft lease term to five years from three years. In 2015 and 2016 the company expects to receive minimum future lease revenue payments under non-cancelable leases of $22.9 million and $21.3 million, respectively. US and Global Economic Forecasts 1Q15 US GDP annual growth was 0.2% (advance estimate) compared to annual growth of 2.2% in 4Q14. In 2014 annual GDP growth was 2.4%, up from 2.2% in The 2014 increase in GDP was due to higher personal consumption expenditures, nonresidential fixed investment, exports, private inventory investment, state and local government spending, and residential fixed investment, partly offset by a decrease in federal government spending. The slowing of GDP growth from 4Q14 was due to a decrease in US business investment and exports. A consensus of economists anticipates GDP growth will accelerate in 2Q15 compared to 1Q15. In April 2015, the International Monetary Fund maintained its 2015 global GDP forecast of 3.5%, but increased its 2016 forecast by 0.1% to 3.8%. The higher 2016 expectation will be driven by a rebound in economic activity in emerging markets. The IMF reduced its US forecast due primarily to the strong US dollar. The IMF decreased its 2015 and 2016 global GDP forecast by 0.3% respectively, to 3.5% and 3.7%. The IMF projects GDP growth in Sub-Saharan Africa of 4.5% and 5.1%, respectively in 2015 and For Asia the IMF GDP forecast for 2015 and 2016 is 5.2% and 5.3%, respectively. The IMF April 2015 forecast for 2015 and 2016 in Latin America and the Caribbean is 0.9% and 2%, respectively. Aircraft Portfolio Evolution In 2014 the company transformed its aircraft portfolio through the purchase of three CRJ-700 and two CRJ-900 mid-life regional jets and one new ATR turboprop. All six aircraft have long-term leases in-place. The company s future lies in its strategic growth plan to add mid-life regional jet aircraft and new generation turboprops, while reducing the reliance on its older aircraft. The 2014 purchases enabled the company to reduce the average age of its leasing portfolio by 28% to 13 years compared to 18 years at December 31, The aircraft purchases also increased by 66% the average lease term to approximately 60 months from 36 months in For 2015 we forecast 27 aircraft/engines on lease for a majority of each year compared to our prior forecast of 28. In 2015 we forecast the assets available for lease should decrease to approximate 37 from an average of 43 in 2014, due to the sale of aircraft/engines. Operations We increased our 2015 operating lease revenue estimate by $1.5 million to $25.1 million due to a $54,981 increase in the average lease rate to $948,981 reflecting the purchase of higher lease rate aircraft in the 2H14 and sale of lower lease rate aircraft assets in 1Q15. Our total revenue forecast includes gains from disposal of aircraft 3

4 of approximately $1.9 million stemming from the 1Q15 the sale of an aircraft and a finance lease and $327,000 of maintenance reserves income. Operating expense margin (based on operating lease revenue) should improve to 109.2% from 124% (2014 calculation excludes impairment charges of $18.7 million stemming from reappraisal aircraft that are being held for sale). SG&A expense, management fees, and depreciation expense, in aggregate, should increase by $1.9 million to $16.1 million due primarily to the expense run rate established in 1Q15 due to the 2H14 purchase of newer regional jets and turboprop aircraft. If the company purchases additional aircraft, expenses could be greater than forecasted. The timing of the actual purchase and lease revenue has not been disclosed. We project 2015 interest expense of $7 million, up from $5.1 million in 2014 due to higher notes payable balances and amortization of debt issuance costs. Due to the increase in aircraft being held for sale and fewer aircraft scheduled to come off lease, we forecast maintenance expense to decrease by $3.1 million to $4.4 million. We project a small operating loss of $118,000 compared to a loss of $1.5 million in 2014 due to higher than anticipated operating expenses, partly offset by operating lease revenue growth. The operating loss in 2014 excludes an $18.7 million impairment charge. Operating margin will improve to a negative 0.4% from a negative 60.1% in Including the impairment charge the operating loss in 2014 was $17.2 million. In 2015 we forecast a modest net loss of $78,000 or ($0.05) per share. Our prior forecast was net income $1.9 million or $1.19 per share. We project an income tax rate of approximately 34%. We project a 2016 increase of 1.6% in operating lease revenue or $550,000 above our prior forecast to $25.6 million due to 29 assets on lease, up from 27 in 2015, partly offset by a decrease of $75,477 in the average lease rate to $873,504. We are projecting no maintenance reserve income or gains or losses on sale of assets. SG&A expense, management fees, and depreciation expense, in aggregate, should decrease by $2.7 million to $13.4 million due primarily to lower depreciation expense and management fees, partly offset by higher SG&A costs. If the company purchases additional aircraft, expenses could be greater than forecasted. The timing of the actual purchase and lease revenue has not been disclosed. We project a $1.1 million decrease in interest expense to $5.9 million due to lower outstanding balances, partly offset by higher interest rates. We forecast maintenance expense to decrease by $1.2 million to $3.2 million. Operating expense margin (based on operating lease revenue) should improve to 88% from 109.2% we project in We project operating income of $3.1 million and improvement from the operating loss of $118,000 we forecast for 2015 forecast due primarily to lower operating expenses. We forecast operating margin to improve to 12% from a negative (0.4%) in In 2016 we reduced our net income forecast by $400,000 to $2 million or $1.27 per share after applying an income tax rate of approximately 34.5%. Our prior EPS projection was $1.53 per share. Finances For 2015, we project cash earnings of $8.7 million, an increase in working capital of $596,000, and cash from operations of $8.1 million. The increase in working capital is due to an increase in receivables and decrease in payables, accruals, and security deposits. Cash from operations and borrowings will cover debt repayment and capital expenditures, increasing cash by $1.1 million to $2.9 million in For 2016, we project cash earnings of $11.1 million, a decrease in working capital of $1.2 million, and cash from operations of $12.3 million. The decrease in working capital is due to an increase in payables, accruals, and security deposits, partly offset by an increase in prepaid assets and reduction in unearned revenue. Cash from operations will not cover debt repayment and capital expenditures, decreasing cash by $691,000 to $2.2 million in

5 Future growth is dependent on the availability of additional financing for acquisitions of leased assets. ACY s aircraft portfolio and renewal of aircraft leases should provide the resources to sustain operations through Outlook In October 2014 (most recent), the US Travel Association forecasted that US domestic travel expenditures should grow by 4.3% and 4.1%, respectively, in 2014 and 2015 to $926 billion and $963.6 billion. In December 2014 (latest available), the International Air Transport Association (IATA) increased its June 2014 airline industry forecast for 2014 by $1.9 million to a net profit of $19.9 billion. In 2013 the net profit was $12.9 billion. Its initial 2015 forecast calls for net profit to grow by 25.6% to $25 billion. The 2015 projection reflects lower oil prices and stronger worldwide GDP growth. North America should have the strongest financial performance with profits increasing to $13.2 billion from an estimated $11.9 billion in ACY s business is influenced by general economic conditions and the strength of the travel and transportation industry. The industry is just beginning to recover from a prolonged period of financial difficulty and economic contraction. Financing constraints stemming from the credit crisis and a protracted economic downturn weakened the industry. During periods of economic contraction, carriers generally reduce capacity in response to lower passenger loads. As a result, there is reduced demand for aircraft, and potentially a corresponding decrease in market lease rental rates and aircraft values. 1Q15 Results In 1Q15 operating lease revenue increased 10% to $6.4 million due to purchasing (eight) newer aircraft and selling older aircraft in 2014, which increased average aircraft asset utilization to 90% from 76% in the year-ago period. The average lease rate increased to $230,000 from $167,165 in 1Q14 due to the purchase of newer aircraft mid-life regional jets and a turboprop aircraft. We projected operating lease revenue of $5.9 million. Maintenance reserves revenue is dependent upon reserves retained at lease terminations and aircraft returned during 1Q15 vs. 1Q14. Maintenance reserves revenue was $327,400 vs. $1.7 million. In the year-ago period the amount recorded was related to maintenance reserves retained at lease end for two aircraft. During 1Q15, the company recorded gains totaling $1.8 million due primarily to net gains on the sale of an aircraft and a finance lease. In the year-ago period the company recorded a net gain of $400,000 related to the sale of two aircraft. In 1Q15 total revenue was $8.6 million, up from $58 million due to higher operating lease revenue reflecting the purchase of newer aircraft that commanded higher lease rates. Interest expense increased 43.7% to $1.9 million due to a higher average credit facility balance, increased amortization of debt issuance costs, and a higher average interest rate of 3.8% from 3.6% in the year-ago period. Maintenance expenses decreased 41% to $1.4 million due primarily to a decrease in maintenance performed on off-lease aircraft. In 1Q15 no aircraft assets were added to ACY s portfolio, however, older aircraft assets were sold with book values of $3.7 million compared to $2.6 million in the year-ago period. The timing of asset acquisitions, disposals, and changes in residual value assumptions caused 1Q15 depreciation to increase 24.8% to $2.3 million. Management fees, which are based on the net asset value of aircraft assets, increased 8% to $1.4 million. Professional fees, G&A (including insurance and other) decreased 28.5% to $453,800 due primarily to a benefit of stemming from a retroactive reduction in insurance premiums charged on its off lease assets. Total operating expenses were flat at $7.5 million as lower maintenance and professional fees, G&A (including insurance and other) were offset by higher depreciation, interest, and management fees. 5

6 Operating income in 1Q15 was $1.2 million compared to income of $524,200. Net income was $752,200 or $0.48 per share, compared $369,700 or $0.24 per share. We forecasted net income of $760,000 or $0.48 per share. Finances The company s debt to equity ratio is 3.5 versus 3.6 for the industry, indicating that ACY is leveraged slightly less than other rental and leasing services companies. In 1Q15 cash from operations of $3 million and gain on sale of assets covered cover capital expenditures and repayment of debt. Cash increased by $40,200 to $1.9 million at March 31, The company s quarterly cash flow statements do not report changes in working capital. Credit Facility At March 31, 2015, the company was in compliance with all covenants. In November 2014, the company and lenders agreed to an amendment to the credit facility, which resolved the September 30, 2014 non-compliance, revised the compliance requirements through September 30, 2015, decreased the amount of the credit facility to $150 million, and decreased the maximum amount to which the credit facility can be expanded ($180 million, down from $200 million. Based on the revised compliance requirements, compliance should be maintained at least through September 30, At March 31, 2015, ACY had $20.6 million of unused borrowing capacity under its credit facility. Competition The company leases aircraft and aircraft engines to regional commercial aircraft operators. Competition is based on price and lease terms. Competition includes leasing companies, banks and other financial institutions, and aircraft leasing partnerships. The large non-public participants in the aircraft leasing industry are GE Capital Aviation Services, a subsidiary of General Electric Commercial Finance, and AIRFUND Corporation, a USbased commercial aircraft asset manager founded in The public companies (chart above) are Willis Lease Finance Corp., AerCap Holdings N.V., Aircastle Limited, Fly Leasing Limited. All four public competitors reported net income growth for the quarter ended March 31, Risks Lessee Credit Risk The company may be unable to enforce remedies as a result of defaults by its customers on lease obligations. Lessees are small regional passenger airlines, which are more vulnerable to business risks than the major airlines. The company entered 2Q15 with the same number of aircraft/engines on lease at December 31, Interest Rates The company s credit facility carries a floating interest rate based upon short-term interest rate indices. Also, lease rates typically, but not always, move with interest rates, but market demand for the asset also affects lease rates. Because lease rates are fixed at the origination of leases, interest rate changes during the term of a lease have no effect on existing lease payments. A sharp increase in interest rates would raise interest expense and existing lease payments would be undervalued relative to the market in a rising interest rate environment. 6

7 Customer Concentration In 2014 and 2013, ACY s four largest customers accounted for approximately 63% of monthly lease revenue, respectively. In the event of a lease default or cessation of operations by a large customer, operating lease revenue could fall. At April 30, 2015 ACY s three largest customers accounted for approximately 50% of monthly lease revenue compared to 64% for the company s four largest customer in the year-ago period. Economic Risk A downturn in a key region in which the company leases its assets could have a negative impact on operations. In April 2015 approximately 27%, 26%, 20%, 15%, 7%, and 5% of operating lease revenue came from Europe, North America, Africa, Asia, Central and South America, and Australia, respectively, with three, two, two, three, one, and one lessees, respectively. Credit Risk ACY evaluates the credit risk of each customer and attempts to obtain a third party guaranty, letters of credit or other credit enhancements, in addition to security deposits. Since some customers reside outside of the US, bankruptcy laws in those jurisdictions may make collection and enforcement more difficult and complicated. Stockholder Rights Plan A rights plan is executable upon the acquisition of 15% of the company s outstanding common stock by a person/group. The plan expires December If executed, significant dilution would occur. Shareholder Challenge Failure Lee Beaumont, an individual, owns or controlled approximately 9.8% of ACY s outstanding shares as of April 22, While Mr. Beaumont failed to get himself elected as a director of the company, his ownership, if sold on the open market could put pressure on ACY s share price due to a very low float and shares traded on a daily basis. Shareholder Control The proxy statement filed with the SEC of March 2014 (the most recent filing) stated that Neal Crispin, chairman, president, and principal stockholder, and Toni Perazzo, its CFO (wife of the company s chairman) have combined control of approximately 20.4% of AeroCentury Inc. common stock. They are potentially able to exercise influence on company decisions that may not be in the best interests of shareholders at large. Miscellaneous The company s financial results are subject to other risks and uncertainties including competition, operations, financial markets, regulatory risk, and/or other events. These risks may cause actual results to differ from expected results. Trading Volume An equity specific concern relates to liquidity. During 2013, average daily volume was 5,146 shares traded a day, which decreased to 3,700 shares a day in Over the last three months to May 18, 2015, average daily volume increased to 5,659 shares. A small float (approximately 943,000 shares) could lead to price volatility. 7

8 Consolidated Balance Sheet E (in thousands) Source: Company reports and Taglich Brothers estimates 8

9 Annual Income Statement E (in thousands) Note: 2015 other income estimate is $300, as reported in 1Q15 Source: Company reports and Taglich Brothers estimates 9

10 Quarterly Income Statement E (in thousands) Source: Company reports and Taglich Brothers estimates 10

11 Cash Flow Statement E (in thousands) Source: Company reports and Taglich Brothers estimate 11

12 Price Chart Taglich Brothers Current Ratings Distribution Investment Banking Services for Companies Covered in the Past 12 Months Rating # % Buy 2 8 Hold Sell Not Rated 12

13 Important Disclosures As of the date of this report, we, our affiliates, any officer, director or stockholder, or any member of their families do not have a position in the stock of the company mentioned in this report. Taglich Brothers, Inc. does not currently have an Investment Banking relationship with the company mentioned in this report and was not a manager or co-manager of any offering for the company with in the last three years. All research issued by is based on public information. Since February 2000, the company pays a monthly monetary fee of $1,250 (USD) to for the creation and dissemination of research reports. General Disclosures The information and statistical data contained herein have been obtained from sources, which we believe to be reliable but in no way are warranted by us as to accuracy or completeness. We do not undertake to advise you as to changes in figures or our views. This is not a solicitation of any order to buy or sell. is fully disclosed with its clearing firm, Pershing, LLC, is not a market maker and does not sell to or buy from customers on a principal basis. The above statement is the opinion of and is not a guarantee that the target price for the stock will be met or that predicted business results for the company will occur. There may be instances when fundamental, technical and quantitative opinions contained in this report are not in concert. We, our affiliates, any officer, director or stockholder or any member of their families may from time to time purchase or sell any of the above-mentioned or related securities. Analysts and members of the Research Department are prohibited from buying or selling securities issued by the companies that has a research relationship with, except if ownership of such securities was prior to the start of such relationship, then an Analyst or member of the Research Department may sell such securities after obtaining expressed written permission from Compliance. Analyst Certification I, Howard Halpern, the research analyst of this report, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers; and that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Public Companies mentioned in this report: AerCap Holdings N.V. Aircastle Limited American International Group Fly Leasing Limited Willis Lease Finance Corp. (NYSE: AER) (NYSE: AYR) (NYSE: AIG) (NYSE: FLY) (NasdaqGM: WLFC) 13

14 Meaning of Ratings Buy The growth prospects, degree of investment risk, and valuation make the stock attractive relative to the general market or comparable stocks. Speculative Buy Long-term prospects of the company are promising but investment risk is significantly higher than it is in our BUY-rated stocks. Risk-reward considerations justify purchase mainly by high risk-tolerant accounts. In the short run, the stock may be subject to high volatility and could continue to trade at a discount to its market. Neutral Based on our outlook the stock is adequately valued. If investment risks are within acceptable parameters, this equity could remain a holding if already owned. Sell Based on our outlook the stock is significantly overvalued. A weak company or sector outlook and a high degree of investment risk make it likely that the stock will underperform relative to the general market. Dropping Coverage Research coverage discontinued due to the acquisition of the company, termination of research services, non-payment for such services, diminished investor interest, or departure of the analyst. Some notable Risks within the Microcap Market Stocks in the Microcap segment of the market have many risks that are not as prevalent in Large-cap, Blue Chips or even Small-cap stocks. Often it is these risks that cause Microcap stocks to trade at discounts to their peers. The most common of these risks is liquidity risk, which is typically caused by small trading floats and very low trading volume which can lead to large spreads and high volatility in stock price. In addition, Microcaps tend to have significant company specific risks that contribute to lower valuations. Investors need to be aware of the higher probability of financial default and higher degree of financial distress inherent in the microcap segment of the market. From time to time our analysts may choose to withhold or suspend a rating on a company. We continue to publish informational reports on such companies; however, they have no ratings or price targets. In general, we will not rate any company that has too much business or financial uncertainty for our analysts to form an investment conclusion, or that is currently in the process of being acquired. 14