Chorus Aviation is not a compelling stock right now, this investor says

Chorus Aviation (Chorus Aviation Stock Quote, Chart, News TSX:CHR) did well last year to right the ship after a period of turbulence at the end of 2018 but investors looking for more upside might have to content themselves with a now-riskier prospect in Chorus.

So says Jamie Murray, portfolio manager and head of research at the Murray Wealth Group.

Halifax-based Chorus has two businesses on the go, a regional carrier service through its partnership with Air Canada and a newer aircraft leasing segment operating globally. The former was bolstered last January by a new 17-year agreement with Air Canada, of which the market seemed to approve, sending the stock to gains of 42 per cent for 2019.

Chorus’ plan has been to augment its leasing business as time goes by, acquiring new planes and finding airlines to either lease them or work on a sale-leaseback arrangement. This past December, the company closed on a $75-million bought deal meant to fund the growth of its leasing business called Chorus Aviation Capital, while last month the company announced that it had added 34 aircraft on-lease in 2019, bringing its total portfolio to 64 planes.

“Our strong focus on execution resulted in a significant expansion of our portfolio and the achievement of several significant milestones in the advancement of our leasing company,” said Steve Ridolfi, President, Chorus Aviation Capital, in a January 13 press release. “In the three short years since the establishment of CAC, we have grown the third-party leasing portfolio to 641 aircraft valued at approximately US$1.3 billion with US$960 million in future contract lease revenue.”

But the two sides to Chorus end up being quite different when it comes to cash flow, said Murray, who appeared on BNN Bloomberg about Chorus Aviation Tuesday.

“This is a company we’ve owned for a while in our income growth strategy. We’ve been starting to trim it around the $8 level,” Murray said. “Chorus renegotiated their contract with Air Canada to extend it but in doing so they took a bit of a cut on the total income that they received, so you got a little tradeoff of a longer contract but less cash flow coming from that contract every year.”

“We don’t think there was ever too much risk to that contract. Air Canada likes to use Chorus to offset their labour arbitrage so you can pay the employees on the domestic Chorus lines a little bit lower rate than what Air Canada would charge on their domestics. It works out for both companies,” he said. “But Chorus is trying to offset that lost revenue —which is really just a cost-plus contract, a really nice contract with guaranteed income every year as long as they operate well — with an aircraft leasing business and we think there’s a little more risk in the aircraft leasing. It’s not as certain as that cash flow.”

Ahead of Chorus’ fourth quarter 2019 financials due on Thursday, Chorus saw its top line grow in its Q3, which showed $351.4 million in revenue compared to $342 million a year earlier, while earnings came in at $29.2 million on an adjusted basis or $0.18 per share.

Analysts had been expected revenue of $353 million and a profit of $0.19 per share. “[The stock] has moved up, especially after that dip in 2018 [but] you’re replacing your cash flow with a lower quality cash flow, we think, so we trimmed it,” said Murray. “We still own it but it wouldn’t our first choice to put new money into it at this price.”