Chorus Aviation has price target chopped at Paradigm Capital

Weak quarterly numbers from Chorus Aviation (Chorus Aviation Stock Quote, Chart, News TSX:CHR) are a sign of the times for the airline industry, according to Corey Hammill, analyst for Paradigm Capital, whose May 15 report featured a significant target price reduction for Chorus.

Halifax-based Chorus runs regional airline services through a capacity purchase agreement with Air Canada while also having an aircraft leasing business with clients around the world. The company and stock had been flying high in 2019 through a renewal of its Air Canada contract and general positive mojo in the airline space, but as everyone knows, 2020 has proven a different story with COVID-19 decimating the
airlines worldwide. Yet at the same time, the nature of Chorus’ business has provided a modicum of security within these turbulent times.

With that backdrop, Chorus Aviation presented its first quarter 2020 financials last Thursday, showing a net loss of $17.3 million for the three months ended March 31 and adjusted EBITDA of $88.7 million, up from $74.7 million a year earlier. The company finished the quarter with cash of $90.6 million, while subsequent to the quarter’s end, Chorus obtained a US$100-million revolving credit facility and is currently in the process of raising between US$30 and US$50 million in financing. (All figures in Cdn dollars
except where noted otherwise.)

Among the measures taken in response to COVID-19, Chorus has suspended all future dividend payments as well as its DRIP until further notice and instituted a number of cost-cutting measures such as capex reductions and the temporary furlough of over 3,000 employees.

In his quarterly comments, president and CEO Joe Randell said Chorus began the year in the strongest position in its history, and he feels confident Chorus will handle the current crisis capably.

“Our efforts today are focused on ensuring the well-being of our employees, reducing costs and bolstering our liquidity as we prepare for the lifting of travel restrictions. At a time of great stress and uncertainty, I’m inspired by the energy, resilience, and commitment of our employees,” Randell said in the press release.

In his report, Hammill said Chorus Aviation missed his and the consensus estimates in its Q1 EBITDA and EPS, where Chorus’ $88.7 million EBITDA and $0.15 EPS compared to the analyst’s $94.5 million and $0.18 per share, respectively, and the Street’s $92 million and $0.16 per share, respectively.

Hammill noted that CHR’s regional leasing business as well as its contract with Air Canada have some immunity to the current crisis. Chorus is in negotiation with a number of its third-party leasing customers who are looking for temporary rent relief and reported having received just 25 per cent of lease payment for April so far. As for Air Canada, it’s a fixed margin contract based on fixed annual payments rather than volume, with so far no indication that the contract is to be revisited, Hammill said.

“We expect near-term risk given how hard the airline industry has been hit. We believe regional air travel will return before international, which should benefit Chorus’ third-party leasing business. We remain cautiously optimistic about our long-term view. When growth returns to normal, we expect the regional leasing business will be the dominant source of earnings growth. This is a double positive as it grows the company while greatly reducing customer concentration,” Hammill wrote.

“Unlike a typical airline, Chorus is sheltered by typical cost pressures faced by the airline industry (i.e., fuel price fluctuations) — COVID- 19 is a one-time exception. We believe this provides some level of protection to investors who are looking to enter the space without the volatility experienced by airlines,” he wrote.

Hammill has revised his estimates and is now calling for fiscal 2020 EBITDA and EPS of $355 million and $0.58 per share, respectively. With the update, he has left unchanged his “Buy” rating but dropped his target from $10.00 to $5.50 per share, which at press time indicated a projected 12-month return of 114 per cent.