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 Industrial scenarios: The industry has started experiencing some encouraging signs of renewed travel demand, particularly in regional and short-haul markets. It was evidenced by the group’s recent long-term lease agreements with two new leasing customers, Sky Alps of Italy and Cobham Aviation Services of Australia.

• Rise in leasing revenue: The company clocked an increase in aircraft leasing revenue under the CPA of CAD 2.5 million due to nine incremental CRJ900s, partially offset by removing the Dash 8-300s and a lower US dollar exchange rate. Moreover, it collected approximately 62% of its lease revenue billed in the first quarter of 2021. In April 2021, it also executed leases for two Dash 8-400s with Sky Alps, with deliveries expected in the second quarter of 2021, which would boost the revenue further.

• Venturing into cargo market: The company is very thrilled to add cargo contract flying to its capabilities. The group sees the cargo business as a growth potential that would benefit from the success of e-commerce, and it is excited to be a part of it. This initiative has the potential to offer new avenues for additional cash flows.

• Ample liquidity: The company expects its liquidity to be relatively stable by the end of 2021 as it continues with measures to manage liquidity. On March 31, 2021, total liquidity stood at CAD 171.3 million, including cash of CAD 136.0 million and CAD 35.3 million of available room on its operating credit facility. Furthermore, it made a repayment of its debt by CAD 56.0 million, which is admirable.
  

Financial overview of Q1 2021 (expressed in thousands of CAD)

Source: Company

• In Q1 2021, the group reported operating revenue of CAD 202.4 million, which decreased 42.1% compared to CAD 349.9 million in the previous corresponding period. Decreased revenue in the RAS segment was attributable to the decline in Controllable Revenue, Pass-Through Revenue. 
• Total operating expenses in Q1 2021 fell to CAD 239.3 million, compared to CAD 303.2 million in Q1 2020, primarily due to lower salaries, decreased aircraft, along lower airport and navigation fees, partially offset by higher depreciation cost.
• Operating loss for the reported period stood at CAD 36.8 million, against a profit of CAD 46.6 million in the previous corresponding period.
• The company's net loss increased to CAD 38.0 million in the reported quarter, against CAD 17.2 million, primarily due to the above-stated reasons, partially offset by income tax recovery.  
  

Risks associated with investment

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

Valuation (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 it to generate more revenue. Furthermore, the company is planning to enter 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. Based on technical analysis, the stock has support at CAD 4.05 level. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 4.99 on June 16, 2021. We have considered Spirit Airlines Inc, Heroux Devtek Inc, Alaska Air Group 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 or if the price closes below the support level.

One-Year Price Chart (as on June 16, 2021). Analysis by Kalkine Group

Enerflex Ltd

Enerflex Ltd (TSX: EFX) engineers, designs, manufactures and provides aftermarket support for equipment, systems and turnkey facilities used to process and move natural gas from the wellhead to the pipeline. 

Key highlights

• Improved gross margin across segments: In Q1 2021, the company witnessed a higher gross margin in rental and aftermarket services segments at 63.8% and 24%, respectively V/s 62.4% and 22.6% in the previous corresponding period. However, the gross margin in engineered systems dropped to 14.7%.

• Positive free cash flow: The company has a solid track record of consistently generating free cash flows, which is commendable. In the first quarter of 2021, its free cash flow climbed to CAD 17.3 million, up from CAD 16.4 million in the previous equivalent period. The increase in free cash flow was mostly attributable to decreased property, plant, and equipment (PPE) costs and decreased growth capital expenditures on the rental fleet.

• Rising global energy demand: Today, the global energy demand is satisfied by a diverse fuel mix, and natural gas is the world’s fastest-growing source of fossil fuel. Global natural gas consumption is projected to increase by over 40% from 2020 to 2050. We believe this scenario would benefit the company as it is in the business of providing services and turnkey facilities used to process and move natural gas from the wellhead to the pipeline.

Source: Company

• Industry beating margins: The Company maintained its pace and witnessed spirited performance across its margin matrix. In addition, the management’s solid determination helped them leap the industry median margins on many fronts in Q1 2021, which exhibits the competitive advantage of the company within the industry. The chart below gives a glimpse of this. 

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company reported lower revenues which stood at CAD 203.2 million, against CAD 365.7 million in the previous corresponding period.
• The operating income stood at CAD 7.0 million in Q1 2021, against CAD 50.2 million in pcp. The decline in operating income primarily due to reduced Engineered Systems revenue on lower bookings in recent periods, driven by uncertainty around commodity price stability and the ramifications of COVID-19.
• The company reported an earning before income tax of CAD 1.5 million against CAD 44.0 million in pcp.
• Despite lower gross profit the company posted a net income of CAD 3.0 million, against CAD 37.4 million in pcp, primarily on the back of lower interest expense and negative income tax.

Risks associated with investment

The company caters to oil-producing companies, and due to uncertainty around commodity price stability and the ramifications of COVID-19, most of the clients have curtailed their capital investments. Continuation of such a trend would hamper the group’s performance.

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The group’s Engineered Systems bookings totaled CAD 98.7 million, down from CAD 155.4 million in the same period last year. Although first-quarter bookings were healthier than cycle lows, bookings activity continued to be impacted by restrained spending within the oil and gas industry. The increase in backlog in the quarter is good news. However, the company cautiously sees it as a strong signal of an inflection point in the market. Its pipeline of new opportunities is slowly improving both quality and quantity, but North American oil and gas operators continue to exhibit a cautious approach to growth capex. Moreover, it maintained its balance sheet strength by managing working capital and reducing debt. It reported bank-adjusted net debt to EBITDA ratio of 1.37:1, compared to a maximum ratio of 3:1. Based on technical analysis, the stock has support at CAD 7.1 level. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 8.70 on June 16, 2021. We have considered Precision Drilling Corp, Ensign Energy Services Inc and Trican Well Service Ltd etc., as a 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 or if the price closes below the support level.

One-Year Price Chart (as on June 16, 2021). 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.