cibc analyst: Price Target (12-18 mos.): C$3.25 was $3.75Regional Aviation Fundamentals Remain Healthy
Our Conclusion
CHR’s Q1 results continue to point to a healthy regional jet leasing market while the company’s transition to an asset-light model is driving strong FCF generation. We have adjusted our estimates to reflect CHR’s updated outlook. We maintain our Outperformer rating, but our price target moves to $3.25 from $3.75. Our 2025 estimates move lower to reflect the impact of higher asset sales this year and a lag in fully deploying capital once Fund III closes. That said, the closing of Fund III is key potential catalyst to drive earnings growth at CHR.
Key Points
Regional Jet Fundamentals Remain Healthy: CHR’s Q1/24 results highlight the health of the regional jet space as the company saw heightened levels of activity. In the quarter, CHR saw gross proceeds on asset sales of $96MM. This included the sale of two A220-300s, one ATR72-500, and two engines. We also saw robust activity on Fund II – Falko executed a sale and purchase agreement with Nordic Aviation Capital to acquire a portfolio of 24 Embraer aircraft on behalf of Fund II. The company pointed to signs of a healthy demand environment in the regional jet space. Supply chain issues over parts and engines are impacting aircraft deliveries, especially narrowbodies, and this acts as a tailwind for the regional jet leasing market. The company also noted that lease rates are also coming in better than expectations – trending up Y/Y and up double digits compared to 2020/2021. Looking at ISHKA data, it notes CRJ900 lease rates are up 23% from January 2023 levels. E175LR lease rates are up 17% over this same time period. Given the positive backdrop, CHR increased its full-year guidance of adj . EBITDA and adj. FCF which reflects both a stronger US$ but also an anticipated increase in aircraft sale activity.
Update On Fund III: CHR continues to expect that Fund III will be closed by the end of 2024, with the expectation that it will have: 1) a minimum of US$500MM in capital commitments and 2) management fees and economic terms commensurate with those in Falko’s prior funds. The improving demand environment for the regional jet market bodes well for the closing of Fund III sometime this year. We continue to view the asset-light strategy positively as this improves cashflow generation and reduces the company’s capital intensity. The closing of Fund III is key potential catalyst to drive earnings growth at CHR.
De-risking The Balance Sheet: CHR’s leverage ratio improved to 3.4x exiting Q1/24 (from 3.6x exiting 2023) as the company paid down $135MM in the quarter. The company anticipates further deleveraging and is targeting leverage ratio range of 3.1x-3.5x for the year. We continue to see the benefit of the asset-light strategy as CHR is guiding to 2024 adj. FCF to come in at $300MM-$350MM. The company expects to be active on returning to shareholders (CHR purchased and cancelled 938,216 common shares in the quarter), and we see the potential for CHR to reinstate its dividend after leverage drops to below 3x. EQUITY RESEARCH May 7, 2024 Earnings Update CHORUS AVIATION R