CIBC: 5,25$ and outperformer rating Capital Raise Positions CHR For Growth Coming Out Of The Pandemic
Our Conclusion
We are resuming coverage of CHR with a $5.25 price target and Outperformer rating post its capital raise. While we saw CHR with sufficient liquidity to manage through the pandemic, this additional capital puts the company in a better position to be opportunistic as it looks to grow its regional aircraft leasing fleet or expand into additional contracted flying operations.
Key Points
Re-focusing On Growth: Prior to the pandemic, CHR was focused on growing its aircraft leasing operations. Back in 2019, there were ~300 RJs (regional jets) that were manufactured annually and CHR saw ~100 being lease-financed. In addition, there were portfolio and mid-life aircraft acquisition opportunities. But since the onset of COVID-19, CHR has been in liquidity-preservation mode. While its cash flow has been hit by the pandemic, it has proven to be more resilient than a traditional airline given the contractual nature of its revenue stream. With growing optimism around the recovery in air traffic, we expect airlines to begin rebuilding their fleets with a trend towards leasing versus buying. This is a favourable backdrop for aircraft leasing companies such as CHR. As well, we expect larger aircraft leasing companies to assess their portfolios, which may present an opportunity for CHR to acquire aircraft. Recall that earlier this year, GE combined its aircraft leasing unit with AerCap. CHR’s capital raise will allow it to be opportunistic in executing against its growth pipeline, while ensuring it has sufficient liquidity in the near term. Pre-pandemic, CHR looked to add ~20 aircraft organically to its portfolio, with a target ROE in the mid-teen % range. We suspect the company will look to eventually return to this growth trajectory.
Model Adjustments: We have adjusted our model to reflect the capital raise. Our EBITDA estimates do not change, but EPS estimates come down to reflect the additional interest costs incurred from the debt raise and dilutive impact from the equity raise. Our EPS estimates decline from $0.41 to $0.36 in 2021E and from $0.59 to $0.54 in 2022E