Chorus Aviation Inc

Chorus Aviation Inc (TSX: CHR) provides a full suite of regional aviation support services which is related to the aircraft’s life cycle, including aircraft acquisition and leasing, aircraft refurbishment, engineering, modification, repurposing and preparation; contract flying; and aircraft and component maintenance etc.

Key Updates:

• Improved margins: The company reported its gross margin and EBITDA margin of 84.9% and 24%, respectively, higher than the industry median of 49.5% and 6.1%, respectively. The company’s net margin was recorded at 10.8%, as compared to the industry median of 8.7%. An improved profit margin indicates higher operational efficiencies.

• Strong growth in cash flows: The company reported a robust cash flow generation and reported cash from operations of CAD 53.218 million in H1FY21, significantly higher than CAD 20.794 million in pcp. A higher cash flow generation supports the company’s overall liquidity.
  

• Update on credit facility: On October 14, 2021, the company received a committed operating credit facility amounting to CAD 75 million from The Bank of Nova Scotia, payable on December 31, 2024. The above is likely to enhance the company’s liquidity and would support its working capital.

Q2FY21 Income Statement Highlights:

• CHR announced its quarterly result, wherein the company posted its topline of CAD 199.873 million, stood higher than CAD 184.006 million in the previous corresponding period (pcp). The increase was driven by strong growth from Regional Aviation Services segment (CAD 168.998 million v/s CAD 145.640 million in pcp).
• The quarter was marked by higher salaries, wages and benefits costs, significantly higher airport and navigation fees and higher aircraft maintenance materials, supplies and services costs, partially offset by a slide in terminal handling services cost.
• Operating income came at CAD 39.413 million, climbed from CAD 33.683 million in pcp.
• The group reported its net income of CAD 21.517 million, slide from CAD 29.165 million in pcp. The decline was primarily due to a lower foreign exchange gain in the current quarter.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s operation is directly related to the operations of the airline industry. Hence, further imposition of lockdown restriction would dampen the company’s order book. Moreover, the company witnessed higher input costs in Q2FY21, and the continuation of the above trend would dampen the company’s cash flow and profitability.

Valuation Methodology (Illustrative): EV to Sales based

Stock Recommendation:

The second quarter witnessed improved flying activity, which resulted in an improved topline for the company. We expect the airline sector to improve gradually, supported by improved vaccination across the country, which is likely to increase the aircraft leasing activity and would subsequently support the company’s operation. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Quarterhill Inc, CGI Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of CHR at the closing price of CAD 3.64 on October 27, 2021.

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

One-Year Technical Price Chart (as on October 27, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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