Debt Reduction Will Reduce Leverage And Improve Financial Flexibility

Key Takeaways

• Sale of leasing segment and debt reduction have strengthened financials, enabling lower interest expenses and strategic growth investments.
  
• Diversified revenues from Voyageur and a long-term Jazz contract ensure stable cash flows, with potential margin expansion through operational efficiencies.
  
• The sale of Chorus's leasing segment and fleet reduction under Air Canada's agreement could impact revenue growth, with asset impairment adding financial uncertainty.

Catalysts

Through its subsidiaries, provides aviation services.

• The sale of the Regional Aircraft Leasing segment and subsequent debt reduction have significantly strengthened Chorus Aviation's balance sheet, reducing leverage from 3.3 to 1.4. This financial flexibility is expected to enhance earnings by lowering interest expenses and facilitating capital returns and targeted investments in growth.
  
• The ongoing growth and diversified revenue streams from Voyageur, specifically in the parts sales and defense sectors, are projected to contribute substantially to revenue, with expectations of reaching $150 million in revenue over the next year and sustained growth beyond 2025.
  
• Chorus Aviation's share consolidation is anticipated to increase the attractiveness of its stock to a wider range of investors, potentially improving the share price and consequently enhancing earnings per share (EPS) through market perception and trading volumes.
  
• The Jazz business, anchored by a long-term contract with Air Canada until 2035, provides strong, consistent cash flows, contributing to stable revenue and earnings expectations, with future margin expansion potential if operational efficiencies are realized.
  
• The NCIB program and active share buybacks aim to enhance shareholder value and EPS by reducing the number of outstanding shares, utilizing strong free cash flow post the Regional Aircraft Leasing segment sale.

Chorus Aviation Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chorus Aviation's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -8.9% today to 6.7% in 3 years time.
• Analysts expect earnings to reach CA$98.1 million (and earnings per share of CA$4.04) by about March 2028, up from CA$-125.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.1x on those 2028 earnings, up from -4.5x today. This future PE is lower than the current PE for the CA Airlines industry at 11.7x.
• Analysts expect the number of shares outstanding to decline by 2.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.02%, as per the Simply Wall St company report.

Chorus Aviation Future Earnings Per Share Growth

Risks

• The sale of Chorus's Regional Aircraft Leasing segment—though it reduces debt and improves financial flexibility—also results in a loss of revenue from this segment, which could impact overall revenue growth.
  
• The consolidation of shares may not result in the expected increase in share price attractiveness, potentially limiting the anticipated widening of the investor base and affecting the future stock price appreciation.
  
• The reduction in the covered aircraft fleet under the Capacity Purchase Agreement (CPA) with Air Canada could lead to diminished revenue from this contract as the number of aircraft decreases from 114 to 80, negatively impacting net margins.
  
• The impairment provisions recorded on non-operational Dash 8-300s and the potential difficulty in remarketing the Dash 8-400s come at a financial cost and add uncertainty to asset recovery values, affecting earnings and balance sheet metrics.
  
• Despite anticipated growth in the Voyageur segment, there remains uncertainty in successfully executing new contracts and capturing additional market opportunities, which could impact future revenue projections and margin expectations.

Valuation

• The analysts have a consensus price target of CA$27.25 for Chorus Aviation based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$30.0, and the most bearish reporting a price target of just CA$23.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.5 billion, earnings will come to CA$98.1 million, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 8.0%.
• Given the current share price of CA$20.04, the analyst price target of CA$27.25 is 26.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.