CA - Chorus Aviation: A Diversified Regional Airline Buy?

2023-05-11 09:05:11 ET

Summary

• Chorus Aviation is a diversified aviation business.
• There aren't a lot of bundled businesses like Chorus Aviation.
• I like the business structure and see significant upside.

We’re always looking for value and sometimes we find it in odd places and sometimes we don’t. Over the years that I have been writing about aerospace companies, one thing I have found is that there is always reason to look into certain names. Sometimes because there is value where you didn’t expect it to be and sometimes there is no value where you would expect it. So, I am always keeping an open mind when analyzing aerospace and airline companies. In this report, I will be analyzing Chorus Aviation (CHRRF).

What Does Chorus Aviation Do?

Simply speaking Chorus has four lines of business: Regional operations under capacity purchase agreements, regional aircraft leasing, MRO (maintenance, repair and overhaul) and pilot training. However, Jazz is not just generating revenues from CPAs but also has an MRO division. Similarly, Voyageur does not only do MRO but also does specialty specialized charters.

So, assigning each business to a certain type of business is not fully reflective of the capabilities of each business. Instead, Chorus Aviation is composed of two reporting segments namely Regional Aviation Services or RAS and Regional Aircraft Leasing or RAL.

Regional Aviation Services generates revenues from the following activities:

• Contract flying or wet leasing via Jazz and Voyageur.
• Aircraft leasing and engine leasing via CPAs.
• MRO
• Pilot Training

Regional Aircraft Leasing generates its revenues from the following activities:

• Earnings from managed aircraft
• Earnings from controlling ownership of airplanes.

What I like about Chorus Aviation is that it is a regional airline, aircraft lessor, MRO provider and pilot training academy in one. I do not think it would be appropriate to view them as a vertically integrated company, but it is clear they focus on value extraction from pilot to airplane to airplane operations and servicing. Separately, Falko is not the traditional lessor taking on significant debt to finance airplanes. It is transforming into an asset-light model where it basically gets its revenues from managing aircraft leasing funds. So, it co-invests in and manages a portfolio of airplanes.

Year-over-year, revenues grew by 21.3% to $415.25 million CAD. This was composed of 11% growth in regional aviation services and RAL revenue more than doubling. What I find somewhat unfortunate is that everything is lumped into two segment reporting lines. I would rather have the company report in a way that is more understandable and gives more insights into what moves the revenues and results. For instance, in RAS there was growth in flight activity and MRO but we don’t have an exact breakdown while this would be very helpful in assessing the strength of the business. Additionally, Chorus finalized the acquisition of Falko last year meaning that the RAL results are heavily impacted by the Falko acquisition. So, for RAL there is no comparable basis and on RAS the adjusted earnings were 22% higher on higher MRO revenues and flight activity and cost pass through but with no break-down of the bottom-line results.

The best breakdown I could find is that controllable cost and pass-through revenues increased by 11% while fixed margin and performance-based revenues decreased by 5% and 14% respectively while revenue from aircraft leasing under CPAs increased by 6.5 and Other revenue which is mostly MRO increased by 29%. Overall, profits improved by 80% which includes the Falko contribution in 2023.

Chorus Aviation maintained its guidance for 2023 and that guidance suggests that the company had a strong start to the year with Q1 results being a bit ahead on an equal weighted quarter derived from the guidance.

Is Chorus Aviation A Buy?

It’s difficult to assess a business that is involved in as many lines of aviation business as Chorus Aviation. While that is what makes assessing the stock rather difficult in combination with Falk being new to the portfolio, it significantly complicates analyzing and valuing the company. However, I made an attempt and based on the guided mid-point for Adjusted EBITDA the forward EV/EBITDA is 6.5x. With its median in mind, there is little upside but valuing the business in line with the industry gives a price target of $3.80 CAD representing 28% upside. That is when we value the business as an airline, when we value it as an aircraft trading company the price target is $4.81 CAD with 61% upside. On an adjusted basis, both businesses currently generate half of the EBITDA. Blending this in gives a $4.30 CAD price target with roughly 45% upside.

Conclusion: Chorus Aviation Could Be An Attractive Stock To Buy

Chorus Aviation is a complex company to analyze. I can see how the various lines of businesses are related and it is something I am really liking. I see a lot of upside in pilot training, while MRO demand is high at the moment with little upside to revenues as the MRO slots are fully booked and leasing airplanes or better said managing as Falko wants to do going forward can be very lucrative. Perhaps their CPA business with Jazz for Air Canada is the lease desired line of business. In some way, this looks like a vertically integrated business, but looking at the entire business and management presentations, I am not given the impression that the various focus areas are vertically integrated to cut costs. Does it make me like the business less? No, to my own surprise not. I think they have a nicely diversified business that they can use and perhaps already use to circulate efficiency drivers. While regional airplanes and airlines are not “hot”, I think Chorus Aviation is attractive because regional airplanes are active worldwide not just in the US.

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