Buy Chorus Aviation stock on a trade, this Scotia advisor says

The airline industry may still be flying through turbulence but Scotia Wealth advisor Greg Newman has his sights set on Chorus Aviation (Chorus Aviation Stock Quote, Charts, News, Analysts, Financials TSX:CHR). Newman has nominated Chorus as one of his top picks for the 12 months ahead, saying the stock is looking attractive right now.

”This is one of those satellite positions but I think it’s a good way to score points,” said Newman, senior wealth advisor and portfolio manager at Scotia Wealth Management, who spoke on BNN Bloomberg on Wednesday.

Halifax, Nova Scotia-based Chorus is both an airplane leasing business and regional airline through owning regional carriers Jazz Airlines and Voyageur Airways. With a market cap around $750 million and just over a billion in revenue last year, Chorus announced earlier this month a major acquisition in UK-based Falko Regional Aircraft, a competing regional aircraft lessor. The $1.1-billion deal would see Chorus add about 320 jet and turboprop aircraft to its stable along with equity interests in 126 owned and managed regional aircraft. 

Further, the deal will see Brookfield Asset Management take a US$374-million stake in Chorus, involving $300 million of preferred equity and $74 million of common equity, together amounting to a 12.5 per cent interest in Chorus.

“The acquisition of Falko is transformative for Chorus, creating a world premier full-service provider in regional aviation,” stated Joe Randell, Chorus President and CEO, in a press release. “We are extremely pleased to have Brookfield, a well-respected company with global reach, as our strategic cornerstone investor, bringing extensive experience in asset management, fundraising and capital markets. The equity investment is an important endorsement of our strategy and simultaneously reduces leverage.”

Chorus saw its share price plummet along with the rest of the airline space over the early stretch of the pandemic and while the stock has made some progress since hitting bottom two years ago, CHR is still valued at around half of its pre-pandemic price. 

That makes for a buying opportunity, says Newman.

“[Chorus] has been forgotten about and it’s been on its back,” Newman said. “They’re trying to do an acquisition of [Falko Regional Aircraft] which is a larger leasing competitor. Brookfield Asset Management is in on that deal, and where Brookfield goes you usually want to look.”

“And this name is trading very cheap again. It’s an aviation play with a nice recovery for the aviation leasing sector. It trades around 6.7x 2023 [earnings] with a growth rate we think is at 16 per cent. So, on a price to growth basis it’s really attractive with some catalysts here,” he said.

“It’s a satellite position and it’s a riskier bet — you don’t want to own this name necessarily forever. It’s cyclical. But if there’s a time to own it I think it’s probably now and I think it’s a way you can get some nice capital appreciation in your portfolio,” Newman said.

By the numbers, Chorus ended the 2021 year with operating revenue up almost eight per cent year-over-year to $1.023 billion and with a net loss of $20.5 million compared to a gain of $41.5 million a year earlier. Adjusted EBITDA was down 5.2 per cent year-over-year to $329.4 million.

Chorus last year revised its Capacity Purchase Agreement with Canadian carrier Air Canada, with Jazz now to provide all of Air Canada Express’s over-70-seat regional capacity business until 2025. The company said restructuring costs related to the new CPA were $58.9 million and had an impact on net income for the 2021 year. In the company’s fourth quarter press release, Chorus chalked up its Adjusted EBITDA drop of $18.0 million for the 2021 year to “lower lease revenue attributable to off-lease aircraft, negotiated lease amendments (including extensions) and decreased Fixed Margin, partially offset by additional aircraft earning leasing revenue and a lower expected credit loss provision.”

As for the path ahead, management struck an optimistic tone for a post-COVID global airline industry, saying, “Although the COVID-19 pandemic continues to impact airlines due to the emergence of the Omicron variant, demand for passenger air travel continued to increase throughout 2021 with the global roll-out of vaccines and proof of vaccination assisting the recovery.”

Chorus said its fourth quarter 2021 Regional Aviation Services business saw Jazz operating at about 76 per cent of its Q4 2019 numbers, with the Q1 2022 expected to be in the range of 50 to 65 per cent of its pre-COVID levels.