cibc analyst Outperformer Price Target (12-18 mos.): C$4.25Q1 First Pass: Working Through A Challenging Environment
Key Takeaway: CHR reported Q1 adj. EBITDA that was 4% below consensus and 8% below our expectations but the focus remains on the steps taken to shore up the liquidity (currently sits at $265MM+), and the company is working with its lessees requesting rent relief. The bright spot remains CHR’s CPA with AC, which provides CHR a fixed margin. Net-net, there was nothing surprising in CHR’s results and the extensive update. The company emphasized that the current conditions within the airline industry remain challenging. Call is at 9 a.m. ET on May 15.
Q1 Recap: CHR reported adj. EBITDA of $89MM, up from $75MM last year and versus our estimate of $96MM (consensus $92MM). The main variance was in the Regional Aviation Services division. Regional Aircraft Leasing EBITDA came in at $39MM, up from $22MM last year, and versus our estimate of $37MM. Regional Aviation Services EBITDA was $50MM, down from $53MM last year and versus our estimate of $59MM. The company saw a reduction in other revenue due to a decrease in MRO and contract flying activity, and also incurred higher G&A costs. Adjusted EPS in the quarter was $0.16, up from $0.13 last year and in line with our estimate and consensus.
Liquidity Update:
At quarter-end, CHR had cash of $91MM, inclusive of a $30MM drawn from its $75MM committed facility with the opportunity to borrow up to a further $25MM on a demand basis. CHR also provided letters of credit totaling $10MM that reduced the amount available under this facility. On April 28, CHR obtained a US$100MM unsecured revolving credit facility repayable in two years. When combined with its cash and other committed facilities, CHR’s liquidity totals ~$265MM. The company also noted it is in the process of raising ~US$30MM-US$50MM in financing to be secured by up to four unencumbered aircraft in H1/20. We estimate CHR’s monthly cash burn is ~$23MM. Capex Update: CHR has reduced its capex for 2020 and now expects expenditures excluding the acquisition of aircraft and ESP to be $23MM- $29MM. Aircraft-related acquisitions and ESP capex are expected to be $349MM-$355MM. Previously, CHR was guiding to expenditures excluding the acquisition of aircraft and the ESP of $38MM-$44MM. Aircraft-related acquisitions and ESP capex were initially expected to be $442MM-$452MM
Regional Aviation Services – Working With AC On Capacity Reduction: CHR is working with AC given the 90% reduction in network capacity in Q2. Note, under the CPA, the fixed margin does not vary based on the number of aircraft, while the variability between its Controllable Revenue and Controllable Costs under the CPA are limited to $2MM annually. CHR does estimate the Controllable Cost Guardrail receivable from AC could increase between $20MM and $40MM by the end of 2020 due to the uncertainty around its flying schedule. As well, CHR expects a delay in the CRJ900s that were scheduled to be added to the AC covered fleet given BBD had to idle production due to the impact of Covid-19. We have modeled in the introduction of the CRJ900s starting in 2021.
Regional Aircraft Leasing – 25% Of Contractual Lease Payments Received In April: CHR has received requests from substantially all of its CAC customers for some form of rent relief. CHR notes the period of relief span 3-6 months with repayment terms between 6-24 months. CHR expects these deferrals to increase its trade receivables to $40MM-$60MM at its peak over the next 2 quarters. CHR also provided an update on 3 lessors – Flybe, CityJet, and Virgin Australia. Lease revenue from these 3 carriers is ~US$5.6MM a quarter (~$7.8MM at a 1.40 C$/US$ FX rate). For context, CHR’s Regional Aircraft Leasing revenue in Q1 was $42.2MM. Note, we are currently modelling zero revenue out of the Regional Aircraft Segment for the remainder of the year.
1. On March 5, Flybe ceased operating and was placed in administration. CHR had 3 ATR72-600s and 5 Dash 8-400s on lease to Flybe with remaining lease terms of 2-4 years. CHR recorded an impairment on the ATRs of $5.9MM to operating revenue. This impairment was offset by CHR’s recovery of its security package which was also recorded to operating revenue resulting in a net gain of $0.1MM. There was no impairment recorded on the Dash 8s. At the end of Q1, CHR’s long-term debt was US$35.7MM for the 3 ATRs and US$26.8MM for the 5 Dash 8s. CHR has until March 2022 to remarket the ATRs and until September 2020 to remarket the Dash 8s. If it fails to remarket the aircraft, CHR may be required to repay the outstanding debt. 2. On April 17, CityJet entered an examinership process in Ireland. CHR leases 2 CRJ900s to CityJet and holds security deposits in respect of these aircraft. The average remaining lease terms for these aircraft is 8 years. At the end of Q1, CHR’s long-term debt related to these aircraft was US$29.6MM. The aircraft remain under lease with CityJet. CHR will have 24 months to remarket the aircraft in the event the aircraft leases are terminated. 3. On April 20, Virgin Australia entered into voluntary administration. CHR leases 3 ATR72- 600s to Virgin Australia and holds security deposits in respect of these aircraft. The average remaining lease terms for these aircraft is 4 years. At the end of Q1, CHR’s longterm debt related to these aircraft was US$28.5MM. The aircraft currently remain under lease with Virgin Australia. CHR will have 24 months to remarket the aircraft in the event the aircraft leases are terminated
Price Target Calculation We calculate our $4.25 price target by applying an adjusted EV/EBITDA multiple of ~6.5x and a P/E multiple of ~10x to our 2021 estimates. These multiples are in line with where CHR’s comps have traded historically. We use pro forma adjusted net debt of ~$1.7B.