Chorus Aviation (OTC:CHRRF) recently reported its Q2 results including $184 million in operating revenue – down 45% from a year earlier due to obvious drops in demand amid travel restrictions. Based on available financial market data, Chorus was able to beat the consensus EPS of $0.11 – on an adjusted basis (Source: Timescolonist) – which lifted shares by around 10% (TSX:CHR) before dropping back in recent days on macroeconomic sentiment. The stock still trades around 40% higher than the 52-week low but far from the 52-week high (2.2x lower). In my view, the outlook is not too rosy if we consider payment delays, risk of aircraft being returned, and lower lease volume. The contrarian argument is that the valuation is interesting, the liquidity adequate, and Air Canada (OTCQX:ACDVF) is still a strong partner.
CHR:TSX – Stock Price – Bloomberg
Q2 2020 – Some positives but concerns won’t fade
Starting with positive signs, Chorus’ portfolio of leased aircraft is holding up fairly well with around 38% of lease revenue being collected in July against only 28% in Q2 (Source: Q2 Releases). In addition, around half of the third-party leased fleet is flying which reveals the pick up in aviation activity has somewhat bear its fruits. As per the firm’s capacity purchase agreement (CPA), Chorus’ revenues won’t vary with the number of aircraft this year as margins are pre-agreed annual amounts. Yet, flying activity can, ultimately, alter revenue stability which means if the number of block hours operated under the Air Canada contract increases, Chorus should see better figures in Q3 & Q4. According to the press release, Chorus flew only 9% of the block hours.
Financial information – Q2 Releases
On the negative side, it looks like Q2 confirmed the existing impact of the aviation industry on Chorus’ business. As illustrated with pending/delayed transactions (ref. table below), Chorus has 13 aircraft to re-market, and we could expect more returns going forward. The new CPA negotiations will be worth following, but the reduced presence of Air Canada implies Chorus needs to diversify away from one main partner.
Closed and pending/delayed transactions announced – Q2 Releases
Thanks to the following factors, there is still some uplift potential to the stock
In my opinion, the main factor that brings comfort lies in the liquidity Chorus is holding. It ended the quarter with cash and available credit of $189 million, 80% of that being mostly cash. If I apply a conservative haircut (based on aviation activity level) to the more than $350 million cash flow burnt over the last year, I think Chorus has enough cash to withstand a few quarters of difficulty. The quarterly releases indicate that the company also extended the loan deferral program with its largest lender until the end of the year. The total balance that could be deferred is estimated at $30 million. The latter highlights the flexible nature of its funding needs and degree of credibility.
Another element that could turn positive stems from the federal and inter-provincial restrictions set by governments. Air Canada is putting considerable pressure to alleviate these bans, considered as among the most severe worldwide. An alteration there could improve the CPA economics of Chorus Aviation once renegotiated. Finally, as discussed earlier, the lease portfolio still exhibits positive momentum and should continue to act as a more stable source vis-à-vis typical airlines.
Are these factors enough to offset doubts?
While I think Chorus still exhibits some interesting characteristics for a long-term play, concerns are too important to ignore in my view. The failure of many airlines and the overall conditions for the industry will force Chorus to quickly re-lease aircraft. Flybe ceased operations in March and Chorus is still fighting for claims with Virgin Australia and CityJet which filed for bankruptcy. More so, the deferrals keep on worrying investors, and thus the stock price. Again, the economics of the CPA program remains a question mark but the survival is still highly linked to Air Canada’s future – a positive in a sense given how systemically important Air Canada is for the economy.
With Chorus already receiving requests from its leasing customers for temporary rent relief. That doesn’t bode really well for the rest of the year although lease deferrals of $38.4 million don’t look astonishing.
Overall, I think the upside is limited to what macroeconomic news has brought around June which led the stock price to maintain momentum above C$3, but I see too many constraints to initiate a strong position at this stage. The 50-day moving average of C$2.6 looks like a strong support point to me and I acknowledge the interesting valuation. As evidenced with a P/B of 0.68 and forward P/E of 4.5 (Source: Yahoo), I like the fact that Chorus displays attractive valuation measures with more resilience than most airlines as per its business model. I maintain a neutral recommendation on too many uncertainties for the rest of the year.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.