Sale Of RAL Segment Will Reduce Debt By $17 Billion And Improve Financial Flexibility

Key Takeaways

• Sale of Regional Aircraft Leasing improves financial flexibility and profitability by reducing debt levels and servicing costs.
  
• Strong ties with Air Canada and growth in Voyageur and Cygnet businesses promote revenue stability, expansion, and future earnings growth.
  
• The sale of the leasing segment and reliance on Air Canada heighten financial risk and challenge Chorus' revenue diversification and long-term stability.

Catalysts

Through its subsidiaries, provides aviation solutions.

• The sale of the Regional Aircraft Leasing segment is set to significantly improve Chorus' financial flexibility by eliminating $1.7 billion in financings, thus reducing debt levels and servicing costs, which should improve net margins and profitability.
  
• The renewal of Chorus' normal course issuer bid reflects management's belief that the company's shares are undervalued and that share buybacks will enhance shareholder returns and earnings per share (EPS).
  
• Strong relationship with key customer Air Canada, demonstrated by the extension of aircraft leases, ensures continued revenue stability and growth from the Jazz CPA operations.
  
• Expansion of the Voyageur business, with revenue growing notably, underpinned by increased parts sales and new contracts with defense and specialty clients, is expected to drive revenue growth and maintain healthy EBITDA margins.
  
• Cygnet Aviation's initiatives, including pilot training and new partnership programs, are expected to address pilot shortages and support long-term operational expansion, positively impacting future earnings.

Chorus Aviation Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chorus Aviation's revenue will decrease by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 6.1% in 3 years time.
• Analysts expect earnings to reach CA$80.2 million (and earnings per share of CA$2.37) by about February 2028, up from CA$36.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, down from 15.6x today. This future PE is lower than the current PE for the CA Airlines industry at 15.6x.
• Analysts expect the number of shares outstanding to decline by 1.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.59%, as per the Simply Wall St company report.

Chorus Aviation Future Earnings Per Share Growth

Risks

• The sale of Chorus' Regional Aircraft Leasing (RAL) segment, reclassified as discontinued operations, may result in a loss of future revenue streams and earnings potential associated with this segment. This decision could impact long-term revenue stability if replacements for these income streams are not adequately secured.
  
• Maintaining only one reportable operating segment after the RAL sale could limit Chorus' revenue diversification, increasing susceptibility to volatility within the Regional Aviation Services business and potentially impacting net margins if this segment encounters challenges.
  
• The reduced capital structure after the RAL sale, while decreasing debt, removes $1.7 billion in financing opportunities; the company must manage capital efficiently to avoid hindering future growth prospects and free cash flow generation.
  
• The relationship with Air Canada, crucial for Chorus' revenue via aircraft leases, might face risks if future lease renewals are less favorable or if Air Canada opts for alternative options, potentially reducing consistent revenue streams and negatively affecting earnings.
  
• The contract nature and duration in the Voyageur Aviation segment, including parts sales and defense contracts, might lead to unpredictable future revenue streams if some contracts are short-term or not renewed, impacting long-term revenue growth and financial stability.

Valuation

• The analysts have a consensus price target of CA$26.514 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$32.2, and the most bearish reporting a price target of just CA$23.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.3 billion, earnings will come to CA$80.2 million, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of CA$19.69, the analyst price target of CA$26.51 is 25.7% 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.