Why now is not the right time to buy Chorus Aviation

Is Chorus Aviation (Chorus Aviation Stock Quote, Chart, News TSX:CHR) set to take off in 2020? The jury is still out, says portfolio manager Bruce Murray who still has questions about the company’s new aircraft leasing business.

Chorus gained a lot of attention last year through a new contract established with Air Canada, a $2.5-billion 17-year deal which includes $940 million in leasing income and fixed fees and firms up Chorus’ foreseeable future.

But it’s the company’s overall plan to expand its global leasing segment that adds a bit of risk to the name, says Murray, CEO of the Murray Wealth Group, who spoke to BNN Bloomberg on Thursday.

“I’d classify it as a hold here,” Murray said…

“I’d classify it as a hold here,” Murray said. “Chorus has a very solid contract with Air Canada but they’re facing a price decrease with them this year and they’re hoping to replace it with new businesses such as aircraft leasing.”

“I think that will be an interesting situation, so I’d hold it and see how that goes,” Murray said. “Meanwhile, you’re getting a pretty solid dividend so I don’t think that there’s anything too concerning about it and the Air Canada contract is solid.”

In November, Chorus announced a new sale and leaseback agreement with airBaltic of Latvia which will see Chorus acquire five Airbus A220-300 aircraft, giving the company a total of 60 aircraft acquired for about US$1.3 billion, with US$925.0 million already established in future lease revenue, according to management.

“The growth momentum in our leasing business continues,” said Chorus CEO and president Joe Randell in a November press release. “We’ve been conducting heavy maintenance work on Dash 8-400s operated by airBaltic and I’m pleased we’ve broadened our relationship to now include aircraft leasing. This clearly demonstrates the broad scope of services we can offer to airlines around the world. I applaud the Chorus team for reaching another milestone and for embracing our vision to become a worldwide provider of integrated regional aviation services.”

Chorus had a bounce-back year in 2019, rising 43 per cent in contrast with 2018’s 42-per-cent loss. The stock pays a healthy dividend yield of six per cent presently.

Chorus last delivered its quarterly results in mid-November where its third quarter brought a profit of $24.2 million, down from $43.6 million a year earlier. Operating revenue was $351.5 million up 2.8 per cent from last year’s Q3. On an adjusted basis, the company earned $29.2 million or $0.18 per share whereas analysts had been expecting $0.19 per share and a $353 million to line. (All figures in Cdn dollars unless where noted otherwise.)

Over the quarter, Chorus expanded its reach in the Southeast Asian market by adding Malindo Air, a member of the Lion Air Group, along with completing its first sale of leased assets, three Dash 8-400s for net proceeds of US$25.0 million.

“I’m very pleased with our performance in the third quarter,” said Randell in the quarterly press release. “We delivered or acquired 17 aircraft since the second quarter. This was a tremendous accomplishment by our technical team – truly an indication of the expertise we have at Chorus. Our revenues are starting to reflect the new leases we’ve added to our portfolio so far this year, as evidenced by the 22 per cent contribution to the overall adjusted EBT.”