Chorus Aviation Inc.

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

• 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 would benefit from the success of eCommerce, 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. It recently signed a three-year contract for air cargo charter services with Purolator.
• Registering sequential improvement: While the second quarter earnings were negatively impacted by certain aircraft being off-lease, negotiation of certain lease amendments including extensions, the 2021 CPA amendments, and a lower US dollar exchange rate, the company registered a healthy improvement on its operating matrix, which is appreciable.

• Healthy cash flows from operations: In the reported period the company clocked positive cash flows from operations of CAD 14.98 million compared to cash used in operations of CAD 28.18 million in the previous corresponding period.
• Minimizing debt: The company made a debt repayment of CAD 154.7 million related to scheduled repayments of CAD 49.1 million, early repayments of amortizing term loans on six aircraft totaling CAD 71.7 million and the repayment of all deferred amounts owing under aircraft loans with its largest lender in the amount of CAD 33.9 million. On a sequential basis the company also improved its debt-equity ratio to 2.96x from 3.57x.

Financial overview of Q2 2021 (expressed in thousands of CAD)

Source: Company

• In Q2 2021, the operating revenue increased 8.6% to CAD 199.87 million compared to CAD 184.00 million in the previous corresponding period.
• Total operating expenses increased to CAD 160.46 million compared to CAD 150.32 million in Q2 2020, primarily due to higher salaries along with higher airport and navigation fees, partially offset by lower depreciation cost.

• Operating income for the reported period stood at CAD 39.4 million, against a profit of CAD 33.6 million in the previous corresponding period.
• Income before income tax was at CAD 27.1 million against CAD 30.3 million in pcp. Decline in income before tax was mainly due to higher interest expense and lower foreign exchange gain.
• The company's net profit stood at CAD 21.5 million in the reported quarter, against CAD 29.1 million, primarily due to the above-stated reasons along higher income tax expense.  
  

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. 

Valuation Methodology (Illustrative): EV to EBITDA

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 would 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 eCommerce, and we believe this would provide fresh cash flows. Moreover, the company is continuously improving its operating matrix and debt equity ratio on sequential basis, which is a key positive. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 4.00 on September 7, 2021. We have considered Cargojet Inc, Southwest Airlines Co, Spirit Airlines 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 Analysis Summary

One-Year Price Chart (as on September 7, 2021). Source: REFINITIV, Analysis by Kalkine Group

Andrew Peller Ltd

Andrew Peller Ltd (TSX: ADW.A) is one of Canada’s leading producers and marketers of quality wines and craft beverage alcohol products. The Company markets wines produced from grapes grown in Ontario’s Niagara Peninsula, British Columbia’s Okanagan and Similkameen Valleys, and from vineyards around the world.

Key highlights

• Selling Port Coquitlam property: Recently, the company revealed that it will be selling its Port Coquitlam, British Columbia property and related assets. The Company will receive CAD 9.0 million for the assets. The assets have a net book value of approximately CAD 1.3 million and are reflected as assets held for sale in the Company’s consolidated financial statements.
• Made entry in spirits and craft beer categories: The Company has also entered the spirits and craft beer industries, as well as produced ciders and seltzers under its own brand labels, thanks to its strategic partnership with Wayne Gretzky. Moreover, the Company believes higher-priced premium wine and spirits sales will continue to grow in Canada, generating higher margins and increased profitability compared to its lower-priced products, which is a key positive.
• Expanding product offering: The Company will continue to expand product offerings outside the traditional table wine segment into other alcoholic beverages where it is able to leverage its detailed knowledge of growth opportunities in the Canadian market.
• Increase in dividend distribution: Despite the adverse situation, when most firms are restricting their dividend payout to maintain solid liquidity, the company boosted its dividend payout by 10%. The annual dividend on Class A Shares was increased to CAD 0.246 per share. This demonstrates the group's financial strength and implies that it is a good friend to its shareholders.

Financial overview of Q1 2022

Source: Company

• In Q1 2022, the company clocked revenue of CAD 92.3 million compared to CAD 98.4 million in the previous corresponding period. The lower revenue was mainly due to government-mandated closures of hospitality sector, also licensee and export channels remained impacted in the first quarter of fiscal 2022 due to and restricted international travel.
• Gross profit for the period stood at CAD 35.0 million compared to CAD 40.1 million in pcp.
• On the back of higher S&A expenses along higher amortization of equipment, the company posted lower earnings before tax of CAD 4.5 million compared to CAD 14.8 million in pcp.
• The company posted net income of CAD 3.2 million in Q1 2022, compared to CAD 11.2 million in pcp.

Risks associated with investment

The Company’s sales of wine and craft alcoholic beverages products are affected by the general economic conditions and social trends as changes in discretionary consumer spending and consumer confidence, future economic conditions, changes to inter-provincial trade laws, tax laws, the prices of its products and health trends. Moreover, it also faces competition from low-priced imported wines. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

Sales are expected to rise over time as a result of excellent brand positioning, the continuous launch of new and creative products in both its core wine business and new product categories, and general expansion in the Canadian beverage alcohol industry, according to the company. The management also believes in generating sufficient cash flow from operations to meet its debt servicing, principal payment, and working capital requirements over both the short and long-term through continued profitability and strong management of working capital and prioritization of capital expenditures. Furthermore, it re-opened the recently acquired Riverbend Inn to guests and expects strong and growing contribution from it. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 8.6 as on September 7, 2021.

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

Technical Analysis Summary

One-Year Technical Price Chart (as on September 7, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.