CIBC comments - "On the Road with CHR"I'm taking this from CIBC's update as they were on the road w/ management. Sorry for formatting, Stockhouse formatting is not my strong suit. GLTA - this has been a tough few weeks for CHR.
Our Conclusion We had an opportunity to host CHR for a number of investor meetings. With us from the company were Gary Osborne (CFO) and Tyrone Cotie (VP Treasury & Investor Relations). We provide our key takeaways from our time with management in this report. Price target is $4.50.
Key Points Outlook For Regional Aviation Leasing Remains Positive: - CHR’s Regional Aviation Leasing (RAL) segment remains a long-term growth lever for the company. - CHR plans to provide an update on the status of Fund 3 shortly with a target raise of ~US$500MM, of which CHR will contribute up to 15% of the equity capital. The fund is targeting mid-teens IRR, and Falko estimates that investors would generate a fund net IRR range of 8%- 12%. CHR also earns 1%-1.5% in management fees in running the fund as well as upside from carried interest. CHR noted that Fund 2’s returns are tracking towards its targeted levels, while Fund 1 will likely see a more modest return. That said, given Fund 1 experienced the full brunt of the pandemic, a positive ROE is viewed positively.
- The competitive dynamics in the regional aviation leasing world have become more favourable. The global lessors continue to prefer to focus on the larger aircraft types (narrowbodies and widebodies). Nordic Aviation Capital (NAC), a leader in regional aviation leasing prior to the pandemic, went through a major financial restructuring in 2021 while GECAS was acquired by AerCap. Conversely, CHR strengthened its market position through its acquisition of Falko.
- CHR sees a path to ~US$3B in Committed Capital within Falko. Currently, Fund 1 has ~US$200MM of its original US$450MM, but was started in 2015 and will likely be wound down in the coming years. Fund 2 is US$650MM and Fund 3 will raise US$500MM. Based on the management fee structure, CHR’s fee income would increase to US$30MM-US$45MM.
- Clear Path To Deleveraging: CHR exited 2022 with a leverage ratio of 4.4x and is targeting to bring this down to 3.6x-4.0x this year and further reducing this to 2.5x-3.0x in 2024. In addition to prioritizing is operating cash flow towards this goal, CHR is also looking at asset sales given its transition to an asset-light leasing model. From this perspective, CHR intends to opportunistically trade RAL's wholly-owned or majority-owned aircraft, including in connection with the wind-up of its 67.45% ownership in Ravelin Holdings LP by its 10th anniversary in 2025. As of March 31, 2023, Ravelin Holdings LP held an interest in 39 aircraft with a net book value of US$402.5MM and secured debt of US$212.9MM. As asset sales occur, the related leasing revenues in RAL will decrease, which will be partially offset by lower depreciation and debt servicing costs and earnings from Falko managed funds. So while we do expect CHR’s earnings to take a modest step backward as it sells aircraft while the deployment of Fund 3’s capital is in the early innings, it does position the company to have a stronger balance sheet. For this year, CHR is targeting $50MM-$100MM in asset sales that are H2 weighted.
- Shareholder Capital Returns Ramping Up: CHR views its share price as significantly undervalued, trading at 0.5x PBV versus other aircraft leasing companies trading at an average of ~0.8x PBV. We have seen CHR step in to defend its share price. CHR was active towards its normal course issuer bid (NCIB) in Q1, repurchasing 6,544,937 shares for $22MM. This is on the back of CHR repurchasing 1,718,972 shares in Q4 for $5.5MM. Including its activity in Q2, the total amount purchased is now ~9MM shares. CHR’s NCIB runs from November 14, 2022 to November 13, 2023, allowing it to repurchase 15,928,236 shares. We would also expect CHR to reinstate a dividend once its leverage ratio reaches its targeted levels, which should also help defend the share price.
- Voyageur – Growth Lever Within RAS: While the capacity purchase agreement (CPA) with AC provides CHR with a significant amount of cash flow stability within its Regional Aviation Services (RAS) segment, Voyageur provides a growth lever. Within Voyageur, the company expects to grow revenue by 50% by 2025, driven by increasing parts sales and the growing defence market. The company estimates the parts sales addressable market is US$474MM as of 2023 with a CAGR of 2% driven by the lack of OEM support, aircraft being in service for longer, and airlines and MROs spending more on used serviceable parts. The airborne ISR defence addressable market is estimated at US$6.5B with a CAGR of 6%, and this is driven by an increase of need to monitor coastal activities, heightened military budgets, and the growing acceptance of contractors providing core services. The other opportunity for CHR is that Voyageur can provide services to Jazz and Falko, which helps internalize additional revenue opportunities and improves the lifecycle economics of the aircraft owned/controlled by CHR.
Price Target Calculation We arrive at our $4.50 price target by using a blended valuation approach of 7x P/E multiple on our 2024 estimated EPS contributed to common shareholders, which is in line with where aircraft leasing companies are trading, and a 0.75x multiple to our 2024 estimated BVPS.