Chorus Aviation is an overlooked airline play, Paradigm Capital says

Paradigm Capital analyst Corey Hammill thinks that investors are missing the boat … er, plane … when it comes to Chorus Aviation (Chorus Aviation Stock Quote,Chart TSX:CHR), arguing that its regional aircraft leasing business is getting short shrift in valuing the company’s growth potential.

“Beginning in 2019, Chorus will switch to segmented reporting, separating its stable contract flying business from its growing leasing business,” says Hammill in a research note to clients on Wednesday. “The greater transparency in reporting will allow investors to better understand and value the aircraft leasing segment. Since the creation of the leasing business in 2017, we believe investors have assigned near zero value to this segment with the stock price primarily reflecting the contract flying business (CPA) at this time.”

Operated through its wholly owned subsidiary, Chorus Aviation Capital, CHR’s leasing business is comprised of a portfolio of 34 aircraft, which Hammill values at approximately US$750 million, and involves third-party leasing relationships with 12 airlines in 12 countries (not including Air Canada).

The analyst contends that regional leasing is the least competitive sub-sector of aircraft leasing and is less developed than the broader aircraft leasing industry, thus creating an opportunity for a strong competitor.

“We see significant potential in the expansion of the third-party leasing business with a fully funded growth plan in the near term,” says Hammill. “We believe investors are not pricing in value for segment of Chorus’ business. Over the next five years, this segment will be the dominant source of earnings growth. This is a double positive as it grows the company and greatly reduces customer concentration.”

Hammill expects CHR will generate fiscal 2018 EBITDA of $330 million on revenue of $1,459 million and fiscal 2019 EBITDA of $339 million on revenue of $1,477 million. (All figures in Canadian dollars unless noted otherwise.)

He is maintaining his “Buy” recommendation and 12-month target price of $10.00, representing a projected return including dividend of 44 per cent at the time of publication.