cibc - Offsetting The Majority Of Cash Burnoutperformer target $4.25 CA
CHR continues to offset the majority of its cash burn despite the challenges facing the broader airline industry. We calculate CHR’s current monthly cash burn rate at ~$5MM assuming current cash flow trends. This compares to CHR’s pro-forma liquidity at ~$350MM, which reflects a significant buffer. And as air traffic begins to recover, CHR should be an earlier beneficiary with expectations that domestic travel (and thus regional jets) will lead the pack. While we would expect CHR’s share price to remain volatile until travel restrictions are lifted and air travel begins to return, its modest cash burn today is a positive differentiating factor versus other airline/aerospace companies. We maintain our Outperformer and $4.25 price target.
Key Points
AC Remains Current On All Its Payments: Given the challenges in the broader airline industry, there is a concern that AC may look to reduce the fixed fee it pays CHR, which is an overhang on its share price. That said, CHR provided a positive update on this front noting: 1) AC is current on all its payments (both fixed fee and lease payments); 2) CHR is working with AC on reducing its controllable costs to reflect the significant decline in capacity. Reducing the controllable cost remains a bigger cost savings opportunity for AC (~$900MM in controllable costs in 2019) when working with its regional partners versus trying to reduce the fixed fee it pays CHR (~$70MM annually); and 3) the fixed fee that AC is currently paying CHR is at market rates, which we believe limits how much this can be reduced.
CAC - Better Than Zero: CHR provided a better-than-expected update on its CAC operations. We believe the market (including us) was expecting 100% deferral of all lease payments and 0% collection from CAC. However, CHR noted that it collected 25% of contractual lease payments in April and expects these deferrals to increase its trade receivables to an aggregate amount of $40MM-$60MM at its peak over the next two quarters. While this is well below the earning potential of CAC, we view this as a relatively positive data point given it is better than feared. Also, the guidance CHR provided on its trade receivables infers that it sees the 25% collection rate as the low point given CAC generates ~$40MM of revenue quarterly.
Model Summary: We have adjusted our model to reflect the following changes: 1) we have reduced our earnings from Regional Aviation Services to reflect weakness in Voyageur and its MRO business; and 2) we have reinstated revenue at CAC for the remainder of the year given it will continue to recognize revenue through its deferral agreements. Our 2020E and 2021E EBITDA move to $376MM (from $333MM) and $414MM (from $381MM), respectively.
Offsetting The Majority Of Cash Burn Liquidity is the primary focus for investors looking at the airline industry and CHR finds itself in an enviable position given its revenue offsets. In the exhibit below we highlight CHR’s main cash outflows looking out the next 12 months are its debt repayment, cash lease payment, and capex funded from operating cash flow assuming the CRJ900s are all delivered this year (our model assumes a 6-9 month delay). The sum of these outflows is ~$257MM. But unlike other airlines that are facing 80%-90% decline in revenue and earnings, as we noted above, CHR is benefiting from revenue coming in the door. If we look at its Regional Aviation Services, the AC contract continues to function as expected and if we annualize Q1 adj. EBT this infers an operating cash flow out of this segment of ~$140MM looking out the next 12 months. Within CAC, with the company holding off on any growth capex, we see this segment generating ~$50MM-$60MM in operating cash assuming a 25% collection rate on rents. Netting this all out gets you annual cash burn at current revenue trends of ~$58MM or ~$5MM a month. This compares to CHR’s liquidity position today at $265MM, but this excludes the US$30MM-US$50MM of additional funding available from its unencumbered assets and $49MM of restricted cash that will become unrestricted as lease deferral agreements are finalized. This puts total pro-forma at ~$350MM. In our view, that is ample liquidity given CHR’s current cash burn levels. And as air traffic begins to recover, CHR should be an earlier beneficiary with expectations that domestic travel (and thus regional jets) will lead the pack. While we would expect CHR shares to remain volatile until travel restrictions are lifted and air travel begins to return, its modest cash burn today is a positive differentiating factor versus other airline/aerospace companies.
Price Target Calculation We calculate our $4.25 price target by applying an adjusted EV/EBITDA multiple of ~5.5x and a P/E multiple of ~8x to our 2021 estimates. We have reduced both multiples as we have reintroduced the CAC earnings stream, but recognizing there will be a deferral of cash receipts over our forecast period. These multiples are in line with where CHR’s comps have traded historically. We use pro forma adjusted net debt of ~$1.7B.