Chorus Aviation Inc T.CHR

cibc analyst : target C$3.75 down from $4.25

[perplexed01]

Our Conclusion

CHR’s share price reacted negatively to its Q4 release as its 2024 EBITDA guidance was below expectations. We keep our Outperformer rating to reflect what we view as a significant disconnect between CHR’s intrinsic value and its share price. Price target moves to $3.75 (from $4.25) as we adjust our estimates to reflect CHR’s outlook.

Key Points

2024 Guidance Thoughts – Cash Flow Generation Looks Better Than EBITDA:
CHR’s share price reacted negatively to its 2024 EBITDA guidance which came in at $350MM-$400MM versus $459MM in 2023 and consensus expectation at the time of $420MM. The decline in EBITDA reflects a higher number of aircraft being sold from the leased portfolio and lower lease revenue under the CPA. That said, as CHR’s earnings mix shifts, EBITDA is becoming a less relevant metric. For example, within its CPA, the aircraft are fully amortized at the end of the first lease. As they move to the second lease, the lease rate is lower but cash flow is higher because they are debt free.

Despite the $59MM-$109MM hit to EBITDA on a Y/Y basis in 2024, CHR’s implied operating cash flow before changes in NWC is expected to come in at $356MM (taking midpoint of FCF and capex guidance) versus $362MM in 2023. Within Jazz, payments on long-term debt and interest falls from ~$149MM in 2023 to $128MM in 2024 and to $93MM in 2026. In other words, despite EBITDA declining, CHR continues to generate strong cash flow which it can use to deploy into future growth opportunities, return cash to shareholder through its NCIB, and deleverage its balance with the target of getting to 3.1x-3.5x exiting this year (ended 2023 at 3.6x).

Valuation Disconnect Keeps Us As Outperformer:
We continue to see a significant disconnect with CHR’s valuation. Things to note: 1) It is currently trading at 0.37x P/TBV versus other aircraft leasing companies trading at an average of 0.95x. We have CHR trading at 5.9x 2025 P/E on our estimates versus the comp group at 7.2x. 2) As CHR has embarked on an asset-light strategy, it has not seen a pick up in its equity value. For context, its total debt was $2.06B at the end of Q3/22 versus $1.76B currently. CHR’s leverage ratio was as high as 6.5x back in Q2/22. Pre-pandemic, CHR’s EV (enterprise value) was almost $3B versus $2.1B today despite higher operating cash flow before changes in NWC ($266MM in 2019 versus $362MM in 2023).

Maybe A Greater Sense Of Urgency Is Needed:

We do think a greater sense of urgency is needed at CHR to narrow this valuation disconnect. While we do see that the closing of Fund III and its shareholder return strategy are near- to medium-term catalysts, it may be necessary for CHR to accelerate its asset-light transition within RAL to drive a re-rate. The company’s current strategy has significantly reduced the capital intensity of the business, which CHR is not getting any credit for today. For instance, 2019 capex was $875MM, reflecting the strategy of funding its growth using balance sheet. For 2024, CHR is guiding to capex of ~$41MM.

[MDawg65]

so what is CHR mgmt doing to reduce the disconnect? why not start with a small dividend? even half of the old $.04/per month seems now to be affordable and woudl drive value. or double the share buyback but this company is doing well. maybe not meeting its targets but its profitable  with decent margins and is paying down debt.  why does the market seem ot dislikke it so much? why isn&

[perplexed01]

i think u identified the key question - "why does the market seem ot dislikke it so much?" assuming the cibc analysis is correct then "Maybe A Greater Sense Of Urgency Is Needed" translates to bad management + poor communication to SH's. no confidence = dislike. i remember buying in 2013 ~$2 same price as now!   

[bobsomething]

What does the analyst mean by "A greater sense of urgency"

[bobsomething]

I just understood what he meant. He wants Chorus to accerate its transition to Asset Light Model.