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

• Improving Industry scenarios: The Company continues to deal with the impact of COVID-19, but it saw some encouraging signs since Q2 2020, like increased flying under the CPA to approximately 23% in the last quarter from 10% earlier. Furthermore, the company collected around 60% of lease revenue billed in the fourth quarter from its lessees, excluding repossessed aircraft, an improvement of 10% over Q3 2020, seems quite impressive.

• Started earning leasing revenue: The company began making leasing revenue on five additional CRJ900s delivered under the CPA near the end of Q4 2020, bringing the total CRJ900 aircraft received in 2020 to eight. Recently, they delivered the ninth CRJ900 in February 2021; we expect it would boost their revenues further.

• Industry beating margins: Despite the hard time for the industry and economy, the management’s solid determination helped them leaping the industry median margins on many fronts. The matrix below gives a glimpse of this. To come out with more conclusive numbers, we took the company's average margins of the past ten quarters.

Source: Refinitiv (Thomson Reuters)

• Strong liquidity: The company expects its liquidity to be relatively stable by the end of 2021 as it continues with measures to manage liquidity. On December 31, 2020, total liquidity stood at CAD 201.0 million, including cash of CAD 165.7 million and CAD 35.3 million of available room on its operating credit facility. 

Financial overview of Q4 2020

Source: Company

• In Q4 2020, the group reported its operating revenue of CAD 218.1 million, compared to CAD 338.6 million in the previous corresponding period. Revenue from RAS segment, Pass-Through Revenue and third-party MRO activity dragged total revenues. Although on Sequential basis the company registered a growth of 11% in sales, which reflects the change in scenario.
• Total operating expenses in Q4 2020 fell to CAD 219.3 million, compared to CAD 287.1 million in Q4 2019, primarily due to lower salaries, decreased engine overhaul maintenance events and decreased Pass-Through Costs.
• Adjusted EBT stood at CAD 9.5 million against CAD 28.6 million in Q4 2019, the decline in EBT was mainly due to lower leasing margins.
• The company's Net Income was CAD 9.1 million in the reported quarter, against CAD 36.5 million, primarily due to the above-stated reasons.   

Risks associated with investment

Further extension of restrictive measures to contain Covid-19 would dampen the group’s performance. The company may witness a headwind from lower passenger footfalls. 

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Thomson Reuters

 Stock recommendation

The COVID-19 pandemic and government restrictions have created unprecedented challenges for the passenger aviation industry worldwide, but now the company is encouraged by the development of various COVID-19 vaccines and expects the flying volume to improve, which would help them to propel more revenue and cash flows. Furthermore, despite the hard times, the company is still leaping the industry median margins on many fronts, reflecting the strength. The company also expects its liquidity to be relatively stable to the end of 2021. It continues with measures to manage liquidity by reducing non-essential capital expenditures and reducing overhead costs. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating at the closing price of CAD 4.0 on February 22, 2021. We have considered Cargojet Inc, Bombardier Inc, Magellan Aerospace Corp, etc., as the peer group for comparison.

Source: Refinitiv (Thomson Reuters)

AirBoss of America Corp

AirBoss of America Corp (TSX: BOS) is a Canada based manufacturer of rubber-based products for the resource, military, automotive and industrial markets. The group is mainly operating in three segments: Rubber Compounding, Engineered Products and Automotive.

• Preliminary numbers for Full-year 2020:The management shared its preliminary numbers for FY2020, where it anticipates posting the revenue in the range of USD 498 to 503 million, with an Adjusted EBITDA margin to be approximately 19.5% to 21.0%. 

• Robust financial matrix:The Company is continuously showing a spirited performance across the revenues, gross profit, and EBITDA. On and LTM basis, the company registered a growth of 39% in revenue, 127% in the Gross margin and 146% in EBITDA, respectively. AirBoss Defense has been a game-changer for the company as it helped the company to post record numbers.

Source: Company

• A consistent generator of Free cash flow: The company is consistently generating free cash flows. In Q3 2020, the company generated a net free cash flow of USD 13.9 million against USD 7 million in the previous corresponding period. Also, on LTM basis, the group has generated CFO of USD 61million, making a jump of almost three times, compared to 23 million in the previous corresponding period.

Source: Company

• Strongest financial position in its history: The Company expects exiting FY2020with estimated zero net debt, which would further enable them for potential Mergers & Acquisitions to increase growth and sustainability of EBITDA. At present, the Company has an operating revolving loan facility up to USD 60 million as on 30th Sep 2020, which was the same level as it was in the last sequential period, reflecting that the Company can manage its operations from internal sources only.

Source: Company

Financial overview of Q3 2020

Source: Company

• The Company's consolidated net sales in Q3 2020 increased by 110.9% to USD 162.745 million compared to USD 77.1 million in the previous corresponding period, due to PAPR sales under the FEMA and HHS contracts, supported by the completion of the merger between the AirBoss Defense business.

• In Q3 2020, Operating income increased by USD 26.3 million to USD 28.9 million, against USD 2.6 million in Q3 2019, based on low COGS and high revenues.

• COGS as a % to revenues in Q3 2020 stood at 71.9%, compared to 86.2% in the previous corresponding period.

• Net profit in the reported quarter came to USD 21.1 million, against USD 1.5 million in Q3 2019, while the profit attributable to shareholders of the Company for this quarter is USD 11.6 million.

Risk associated with investment

The Company is exposed to volatility in commodity prices. Commodity price risk has the potential to adverse impact on its business, operations, and financial results.

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The group reported robust numbers in Q3FY20, which is commendable. During the fourth quarter, the group witnessed a rebound in demand for rubber products, with levels approaching 2019 in many areas. Furthermore, on the back of a rebound in demand for its rubber products, the management anticipates posting revenues in the range of USD 498 to 503 million, with Adjusted EBITDA margin to be approximately 19.5% to 21.0% with zero debt on its book for FY2020, looks admirable. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 19.21 on February 22, 2021. We have considered Chorus Aviation Inc, Algoma Central Corp, GDI Integrated Facility Services Inc, etc., as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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