CHRRF - Chorus Aviation Stock: Not Understood And Undervalued

2023-08-20 08:30:34 ET

Summary

• Chorus Aviation is a regional airline, aircraft lessor, MRO provider, and pilot training academy in one.
• Revenues were flat year-over-year.
• Chorus Aviation has shown little year-over-year growth in results, but its stock is undervalued.

We're always looking for value. 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. I previously covered Chorus Aviation ( CHRRF ) and issued a buy rating for the stock driven by the company's position as the biggest regional operator in Canada providing exclusive air services to Canada Express and its asset light leasing model.

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 leasing 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 1.1% to $396.8 million CAD. This was composed of 1.1% lower sales in regional aviation services and RAL revenues growing by 13.5% mainly due to Falko adding revenues for the full quarter followings its acquisition last year. Total expenses dropped by 11.4%, but this was driven by lower charges to account for the acquisition of Falco and its portfolio of airplanes. The adjusted EBITDA grew by $5.9 million to $110.7 million, with the Regional Aircraft Leasing posting $6.8 million higher adjusted EBITDA due to timing of the Falco acquisition within the second quarter and Regional Aviation Services results were more or less flat year-over-year.

While I do like the business model, the one thing that I am looking for investments, namely growth, was missing. Revenues were mostly flat while the adjusted EBITDA grew by 5.6%, both of which were driven by timing.

Chorus Aviation maintained its guidance for 2023, and that guidance suggests that the company is more or less on track to meet its targets with free cash flow being used to reduce debt, but its Fund III to acquire a new airplane portfolio is now expected to close outside of 2023. This has not materially altered the guidance, but it's something to keep in mind.

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. Valuing the business as an airline, we get to 43% upside, representing a $2.90 USD price target. For Chorus Aviation, you can make a point and value the business as a lessor as well, which would put the price target on $3.58 USD. Both the leasing and aviation services segments generate roughly half of the EBITDA, bringing our implied stock price target to $3.24. USD, representing 60% 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 upsides 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 least 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 airlines are not "hot", I think Chorus Aviation is attractive because regional airplanes are active worldwide, not just in the US. Perhaps my only concern is that there hasn't been much growth this quarter when we look at the one-off items and timing issues driving the year-over-year changes in results. But overall there is a deleveraging path that the company is following, firmly supported by a positive free cash flow, while I do believe the aircraft asset management approach will become more and more lucrative.

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