TD on CHR; BUY, 1 Year Target $5.50Chorus Aviation Inc. (CHR-T) C$4.27 Falko Transaction Provides Good Opportunity
Recommendation: BUY Risk: MEDIUM 12-Month Target Price: C$5.50 12-Month Dividend (Est.): C$0.00 12-Month Total Return: 28.8%
Event On February 28, Chorus announced that it has entered an agreement to acquire Falko Regional Aircraft for US$855 million. The acquisition is expected to close in Q2/22, subject to regulatory approval. Impact: SLIGHTLY POSITIVE We believe that the larger value of AUM (80% increase), greater diversification (68% increase in airline customers), and support from a private equity firm (BAM) should be viewed positively. We do not believe that there is sufficient information available at this time regarding the profitability of the combined entity to make an estimate of the accretion opportunity with reasonable confidence. As a result, our positive preliminary view of the transaction relies on management's indications for an undisclosed amount of EPS accretion beginning in year one. Even if accretion proves negligible in the early years after closing, we believe that Chorus shareholders will benefit from: 1) the larger fleet size and fund structure for financing aircraft that should bias its cost of capital lower and 2) minority investments in funds, the accompanying asset management revenue from the aircraft, and the positive implications for returns on capital. Acquiring a regional aircraft leasing and asset management company as the industry emerges from the pandemic could prove to be an opportune time to be acquiring such a business, assuming that it is completed at an appropriate valuation, while maintaining prudent financial leverage. Although we view the price of capital raised to support the acquisition as relatively high, we are comforted by the fact that this cost was factored into management's indications for an accretive transaction in year one. We believe that the combined entities' five-year target for increasing leasing AUM by US$2 billion is achievable, given our expectation of deliveries of regional and crossover aircraft over the next five years. TD Investment Conclusion We believe that the CPA with Air Canada provides the stability and long-term cash flow for Chorus to continue to meet its financial obligations and provide a source of equity to finance growth in its leasing portfolio. We believe that the company's earnings and cash flow upside is significant and not reflected in the current valuation.