Chorus Aviation has a great business model, this investor says

Canada’s airlines have been the talk of the town lately, with WestJet announcing a friendly takeover by Onex Corp and Air Canada’s move to buy Transat, but one stock that’s been flying under the radar is Chorus Aviation (Chorus Aviation Stock Quote, Chart TSX:CHR), whose share price is up a sparkling 31 per cent this year.

Yet even with the stock appreciation, investors looking for some stability in the airline space should be thinking about Chorus, says Lyle Stein of Vestcap Investment Management.

“We own Chorus Aviation because of the yield. It has a great yield,” says Stein, in conversation with BNN Bloomberg on Wednesday. “It’s in the leasing business as opposed to the operating business that [for example] WestJet is in. They are the operator, in effect, of Air Canada Jazz.”

“One of the knocks on the stock was that the Air Canada contract was going to be over —you can see the decline over 2018, the first half of which was pretty much the result of the Air Canada [contract],” he says. “They’ve resolved that. In the near term, they don’t get quite as much cash, but they’ve solved it for 17 years, which is now a very steady source of cash income that will wind up in the hands of [shareholders].” he says.

Chorus firmed up its long-term agreement with Air Canada in January, with Chorus president and CEO Joe Randell speaking to the importance of the deal during the company’s latest quarterly earnings.

“Our strengthened partnership with Air Canada was a pivotal development in our transformation, securing Jazz’s place in the Air Canada Express network for an unprecedented 17 years to the end of 2035. The implementation of the amended CPA is progressing well, and we expect Jazz’s fleet modernization to commence with the delivery of five CRJ900s, leased from Air Canada, beginning in June,” said Randell, in a press release.

Stein says Chorus comes without the ups and downs common to investing in airlines.

“They’ve got a great business model and I think it’s a well-run company. They’ve got a unique expertise in the regional jet segment of the leasing business,” Stein says. “It’s a nice, simple company to understand, but it won’t get the bump that you’ll see from WestJet because it’s not really an operating company, it’s not really an airline. The operation they do for Jazz is more of a take-or-pay arrangement than it is a fill-the-seats kind of thing that WestJet and Air Canada manage.”

Halifax-based Chorus released its first quarter financial results last week, coming in with operating revenue of $343.9 million and adjusted earnings of $19 million or $0.13 per share. Analysts had been expecting $345 million in revenue and earnings of $0.16 per share.

Stein says that with aircraft manufacturer Boeing still dealing with issues related to its 737 Max 8 airplane, leasing companies like Chorus might see an uptick in business.

“Chorus is in the leasing business and the fact is that as the delay of the Max reintroduction goes on, the value of alternative aircraft could go up a little. So, it’s not going to hurt them,” says Stein.