Buy and Hold - Catalysts For Upside Movement..... .....for starters, a lot of last weeks selling pressure came from me - dumped about 70K of shares over 5 days - volume was particularly weak and I wanted to hedge some potential downside (ie. buy on the dip) should the adjusted Feb 20th numbers come in below consensus - based on my calculations and analysis - on a year end basis - there is a chance they may take a FX hit that exceeds consensus estimates of $10M unrealized loss so trimmed a portion of my position just in case - I think probability is low at these levels - over 100K of buy orders at $3.50 and above so not likely to break this support level unless a VERY bad Q4 2013. Still, always good to hold some cash for dips......but still very long this stock for 2014
My analysis seems to back up the numbers coming from TD and RBC research....
a) The cost cutting has not been reflected into future EPS projections....although they will likely take a progressive hit in block hours down to the minimum 367K guaranteed in the CPA (from now through 2015)...even if we assume a decrease in revenue for 2014 and 2015....the cost cutting initiatives (voluntary separation, pay down debt, etc)....should drive EPS towards $0.68 to $0.75....TD has 2014 EPS pegged at $0.73...that would be 25% increase from current consensus estimates of $0.58 for 2013.....at $3.57 a share - is seems clear to me this has not yet been priced into the stock.....
b) According to TD research - Chorus should end the year with $113M in cash after paying down a portion of the debentures. According the them - ideal cash balance is $80M-$100M - leaving them with excess of $13M to $33M in cash for other "shareholder enhancing" activities (ie. buybacks, dividend increase, fleet upgrades, etc).....that in and of itself doesn't mean they will use the cash to increase the dividend...however
c) (Quote from Financial Post) - "But analyst Walter Spracklin of RBC Capital Markets said the arbitration ruling could put a dividend increase "on the table" if the company increases it payout rate from 25 per cent to management's target of 55 to 60 per cent."
d) Current payout ratio based on FCF (again according to TD and other research) is projected to be about 47% for 2013 and 47% for 2014.
e) Should management use the excess cash toward a payout ratio of 55% - that would translate to a dividend increase from $0.45 to $0.53 - a 17% increase...or roughly $9.8M annually.....that would translate to a shareprice of $4.41 generating a yield of 12%.....and still leave Chorus with potential surplus funds....
LONG TERM (Post 2015)....there are some issues that need to be worked out.
Cost per available seat mile (CASM) for Chorus is indeed almost double that of Westjet ($0.25 versus $0.13)....and $0.07 higher than that of Air Canada......so Chrous management needs to spell out clearly not how they plan to trim a few bucks here and there - but lay out a strategy how they plan to reduce their CASM by almost 50%.....to quote another analyst - salaries and wages are the only area that will make a dent in this regard over the long term - and Chorus does have time to negotiate with its union - but won't likely happen until we get close to the 2020 date.
Canaccord seems to suggest the road ahead (bringing CASM down by 50% is impossible)....I beg to differ.
An easy win is to increase Available Seat Miles (the denominator) to bring these numbers in line with the competition - and do so while holding current costs at bay. This provides incentive for Chorus to negotiate a decrease their markup for more block hours in 2015 - creating a win-win for AC and Chrous....and my bet is that deal will happen later this year prior to the 2015 benchmarking exercise. An alternative that has been a topic of speculation - a buyout by AC of Chorus to break the union and bring costs down by folding Chorus into Rouge - can also potentially be an avenue to pursue. Long and short - there are options to bring CASM down - just need to be negotiated which path to choose. If either of these materialize... then yes - we are talking $5+ a share at a minimum.....
Long and short - some low probability short term catalysts for more downward pressure on the SP at current price ($3.57) - but we are as close to a bottom - with plenty of upside. A price target of $4.50 for 2014 is certainly more than achievable....and getting a current yield of 12.61% to wait creates a compelling reason to buy at these levels.
Cheers