Chorus Aviation has a 44 per cent upside, Paradigm Capital says

Shares in regional airline Chorus Aviation (Chorus Aviation Stock Quote, Chart TSX:CHR) got a boost yesterday on news of its revamped capacity purchase agreement (CPA) with Air Canada, one which is giving Paradigm Capital analyst Corey Hammill further confidence in the stock which he rates as a “Buy” with a 12-month target of $10.00, both unchanged.

Yesterday, Chorus and Air Canada announced the amendment to the CPA which extends their contract for ten more years (through to 2035) and comes with cumulative minimum revenue of about $2.5 billion, a $940-million increase on the previous CPA. The deal comes with Air Canada making an equity investment of $97.26 million in Chorus and with the appointment of Air Canada’s deputy CEO Michael Rousseau to Chorus’ board of directors.

Hammill says the new CPA now gives 17 years of cash flow visibility to CHR while the added capital entails that the company’s capex is now fully funded for 2019.

“The newly amended CPA with Air Canada provides more clarity on the long-term relationship. Given the trade-off of lower near-term revenue in exchange for longer-term visibility, an equity infusion and increased cost certainty, our overall conclusion is that the extended deal supports our current $10.00 target price,” says Hammill in a research note on Tuesday.

“The other significant part of the Chorus story is now the third-party leasing business, which is where we see the bulk of earnings growth over the next five years. This is a double positive as it grows the overall company and greatly reduces customer concentration,” he says.

Hammill has revised his projections for 2019, now calling for revenue of $1,477 million (previously $1,614 million) and EBITDAR of $437 million (previously $484 million).

The analyst’s target represents a projected return of 44 per cent at the time of publication.