Chorus Aviation Inc. (TSX: CHR) is a Canada-based company that provides regional aviation solutions and offers a range of regional aviation support services.

Key highlights

• Collecting healthy lease revenues: The company managed to collect approximately 77% of its lease revenue in the third quarter from its lessees. Consistent with market norms, these leases are generally for a fixed term, contain an absolute payment obligation on the part of the lessee, and cannot be terminated early for convenience, which reflects regular lease revenue to be recognized in the upcoming tenure also.

• Ventured into cargo market: The addition of cargo contract flying to the company's capabilities is quite exciting. The cargo sector is seen as a potential development area that will benefit from the success of e-commerce, and the organization is delighted to be a part of it. We believe this initiative has the potential to open up new cash flow channels.

• Improved cash inflows from operations: Chorus has cash inflows from operations of CAD 82.8 million for the three months ended September 30, 2021, compared to cash inflows from operations of CAD 79.1 million for the three months ended September 30, 2020, related to higher accounts payable primarily due to increased.

• Minimized long term debts: The company witnessed a decline in its long-term debt in the reported period which stood at CAD 1,846.4 million against CAD 1,965.8 million on December 31, 2020. As a result of decline in long term debts the company’s leverage ratio (measured as Adjusted net debt to trailing 12-month Adjusted EBITDA) was 5.7x against 5.8x respectively.
  

Risks associated with investment

Further extension of restrictive measures to contain Covid-19 pandemic would dampen the group’s performance. Moreover, the company may witness a headwind from lower passenger footfalls. Additionally, the company has a huge burden of debt, which implies a balance sheet risk. 

 Financial overview of Q3 2021 (expressed in thousands of CAD)

Source: Company Filing

• In Q3 2021, the operating revenue increased 39.6% to CAD 274.3 million, compared to CAD 196.6 million in the previous corresponding period. Increased revenue in the RAS segment was attributable to the increase in Controllable Cost Revenue and Pass-Through Revenue as a result of increased flying activity.

• Total operating expenses increased to CAD 242.5 million compared to CAD 161.2 million in Q3 2020, primarily due to higher salaries along higher airport and navigation fees, partially offset by lower depreciation cost.

• Operating income for the reported period stood at CAD 31.8 million, against a profit of CAD 35.3 million in the previous corresponding period.

• The company had a net loss of CAD 14.0 million in the reported quarter, against a net profit of CAD 20.4 million, primarily due to the foreign exchange loss of CAD 20.2 million.
  

Valuation Methodology (Illustrative): EV to EBITDA

Analysis by Kalkine group

Stock recommendation

The COVID-19 pandemic and government sanctions have posed unparalleled obstacles for the passenger aviation industry worldwide. Still, the organization is excited by the development of various COVID-19 vaccinations and anticipates that flying volume will steadily increase, allowing them to generate more revenue. Furthermore, the company entered the cargo contract flying space as it seeks growth opportunities due to the rise in e-commerce, and we believe this would provide fresh cash flows. Moreover, the company improved its cash from operations and minimized its long-term debt, which is a key positive. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating at the closing price of CAD 3.50 as on January 4, 2022. We have considered Air Canada, Spirit Airlines Inc, Hawaiian Holdings Inc, etc., as the peer group for comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

 Technical Summary Analysis

One-Year Technical Price Chart (as on January 4, 2022). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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