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. It operates through two segments: Regional Aviation Services segment and Regional Aircraft Leasing segment.

Key Highlights 

• Improving Industry scenarios: While the Company continues to deal with the impact of COVID-19, there has seen some encouraging signs since the second quarter of 2020, including: a) Increased flying under the CPA to approximately 23% in the third quarter from 10% during the second quarter, along with the re-opening of limited operations at 20 airports. b) Collected approximately 50% of lease revenue billed in Q3 2020 from its lessees, excluding repossessed aircraft, an improvement of 22% over Q2 2020, seems quite impressive. 

• Started earning leasing revenue:The company purchased and started making leasing revenue on three CRJ900s delivered under the CPA at the end of June 2020. The group deferred the delivery of the remaining six CRJ900s until the fourth quarter of 2020. In Q3 2020 funded the final equity investment for the six CRJ900s scheduled for delivery in the fourth quarter of 2020. Once the group receive this delivery, we expect that it will boost revenues further. 

• Improved Liquidity: In the reported quarter, the company increased its liquidity by CAD 30.0 million over Q2 2020. At present, it holds liquidity of approximately CAD 218.0 million, including cash of CAD 182.4 million and CAD 35.2 million of available operating credit facility. An improvement in liquidity is primarily due to positive operating cash flows, working capital improvements resulting from increased flight operations and the financing of previously unencumbered aircraft. For the upcoming quarter, the company expects its liquidity to be relatively constant.

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the group reported its operating revenue at CAD 196.4 million, compared to CAD 351.4 million in the previous corresponding period. Decreased revenue in the Regional Aviation Services segment was attributable to the decline in Controllable Revenue, Pass-Through Revenue and other revenue due to decreased third-party MRO activity. Although on Sequential basis, the company registered a growth of 7% in sales, reflects the change in scenario.
• Total operating expenses in Q3 2020 fell to CAD 161 million, compared to CAD 292.9 million in Q3 2019, primarily due to lower salaries, wages and benefits due to the CEWS government grant, coupled with softer aircraft maintenance material and quieter airport and navigation fees.
• Operating Income stood at CAD 35.3 million against CAD 58.5 million in Q3 2019.
• The company's Net Income was CAD 20.4 million in the reported quarter, against CAD 24.1 million, primarily due to the above-stated reasons.   

Risks associated with investments

Further extension of restrictive measures to contain Covid-19 would dampen the group’s performance. The company is likely to 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 led travel restrictions have created unprecedented challenges for the passenger aviation industry worldwide. However, on a sequential quarter basis, the group witnessed an increased flying under the CPA to approximately 23% in the third quarter from 10% during the second quarter, along with the re-opening of limited operations at 20 airports and collected around 50% of lease revenue billed in the third quarter from its lessees. Furthermore, the company boosted its liquidity by CAD 30 million to CAD 218 million in Q3 2020, over Q2 2020, on the back of positive operating cash flows, working capital improvements resulting from increased flight operations and the financing of previously unencumbered aircraft. However, the next wave of the covid-19 outbreak could have a potential impact on the group’s performance.

Therefore, based on the above rationale and valuation, we have given a "Speculative Buy" rating at the closing price of CAD 3.82 on January 14, 2021. We have considered Westshore Terminals Investment Corp, Bombardier Inc, Magellan Aerospace Corp etc. as the comparison's peer group.

1-year Price Chart (as on January 14^th, 2021). Source: Refinitiv (Thomson Reuters)

Medipharm Labs Corp

Medipharm Labs Corp. (TSX: LABS), is a Canada-based medicinal cannabis company specializing in the pharmaceutical grade production of cannabis. The Company is focused on distillation and cannabinoid isolation and purification. The Company actively builds an inventory of specialized consumer products in anticipation of federal legalization of Canada's adult-use market.

Key highlights 

• Company records finished goods shipments of 550,000 units:The shipment volume is a key measure that illustrates growing market demand and the company’s ability to meet that demand. During Q4 2020, total units shipped increased by 205% over Q3 2020 as production takes flight for many top cannabis brands.

• First producer to launch pure CBD isolate:MediPharm Labs also became the first and only producer in Canada to launch a consumer-sized, 99% pure CBD isolate in Canada. The company would broaden its marketplace to include consumers who favour an all-natural, high-quality/high-potency cannabinoid wellness supplement. We expect the initial sales to be strong as MediPharm Labs’ CBD Isolate remains the only product available in its class.

• Focused on international growth: The Company positioned themselves for the next wave of growth in global cannabis markets by purchasing 100% control of MediPharm Labs Australia from a local partner, making MediPharm Labs Australia a wholly owned subsidiary of the Company. The group also entered in a new supply contracts with companies in several South American and European markets, increasing its global reach. We believe this would enhance the group’s space worldwide in medicinal, wellness and adult-use markets. 

Financial overview of Q3 2020

Source: Company 

• In Q3 2020 the company posted Revenue of CAD 4.9 million, compared to CAD 43.3 million in Q2 2019 due to a reduction in the average selling price and volume of bulk extracts sold during these periods which was partially offset by growing sales of consumer-packaged goods to provincial distributors throughout Canada.

• Gross loss of CAD 10.6 million was recorded in Q3 2020, against a gross profit of CAD 14.7 million in the previous corresponding period, primarily due to the written down of inventory to its net realizable value owing to the continued oversupply in the Canadian domestic bulk concentrates market.

• The company reported a Net loss of CAD 15.3 million in Q3 2020, compared to a net profit of CAD 3.3 million in Q3 2019. The loss was booked due to write-down of inventory, coupled with high G&A expenses, higher selling expenses, partially offset by an unrealized gain in derivatives.

Risks associated with investment

Several risk factors could impact the Company’s ability to execute its key strategies successfully and materially affect future financial performance. Some of these risks include reliance on licences and authorization, disruption in the supply chain, inability to sustain pricing and inventory models, lack of long-term client commitments, etc. 

Stock recommendation 

The Company is willing to focus on creating and distributing finished formulated products throughout the Canadian and Australian domestic channels and into other international markets. The company is expecting the proportion of sales mix of finished formulated products to increase as they are continuously expanding the breadth (product formats) and depth (SKUs per product format) of the finished formulated product capabilities. With a record shipment of 550,000 units and the launch of new products in the market; the company is making all efforts to accelerate growth and to improve profitability in 2021. On the valuation front, the stock is available at forward EV/Sales multiple of 1.1x against the industry median of 4.3x. Hence, considering the aforesaid rationale, we have given a ‘Speculative Buy’ rating in the stock at the closing price of CAD 0.83 on January 14, 2021.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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