In response to a question from a Member of his Inner Circle, Pat McKeough looks at Canada’s leading regional airline. Chorus Aviation is an affiliate of Air Canada and was previously known as Jazz Air Income Fund. Owned by Chorus, Jazz Air is Canada’s second-biggest airline overall. A capacity purchase agreement (CPA) with Air Canada provides stable cash flow for the airline and supports Chorus’ dividend. Earlier this year, Chorus also bought Voyageur Airways, which operates out of North Bay, Ontario and flies to destinations in Canada, Africa and Asia. The CPA with Air Canada ends in 2020 and Pat assesses the long-term implications of this development, including the possibility of further acquisitions. He notes that this and other potential risks are reflected in Chorus’ low earnings multiple and very high dividend yield.
Q: Pat: Is Chorus Aviation a good stock to buy? Thanks.
A: Chorus Aviation (symbol CHR.B on Toronto; www.flyjazz.ca) formerly known as Jazz Air Income Fund, is Air Canada’s main regional affiliate.
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Chorus owns Jazz Air, Canada’s largest regional airline and second-biggest airline overall, based on the number of planes it operates and routes it flies. Jazz Air and Air Canada have a capacity purchase agreement (CPA) under which Air Canada buys almost all of Jazz’s seats based on predetermined rates.
The company’s current CPA with Air Canada provides the stable long-term cash flow it needs to maintain its monthly dividend and buy new aircraft.
However, the CPA ends in 2020 and will likely result in lower cash flow—although Chorus should still be able to keep paying the current dividend. Acquisitions could also add diversification and reduce Chorus’ exposure to Air Canada. That, combined with additional cost savings, will also support the dividend.
Growth stocks: Competition much stiffer since 2013 launch of WestJet’s regional airline
In May 2015, Chorus bought Voyageur Airways for $80 million. This privately held firm was founded in 1968 and operates in Canada, Africa and Asia. It’s based at its 200,000-square-foot facility in North Bay, Ontario, and has 18 planes, of which 13 are owned and five are leased. Most are Bombardier Dash 8-300s or CRJ-200s.
The company also has storage and parking for up to 65 regional aircraft at its North Bay facility and provides services such as fuelling and ground handling.
Chorus trades at just 6.6 times this year’s forecast earnings of $0.85 a share and yields 8.7% on its $0.04 monthly dividend. This low multiple of earnings and high dividend yield reflect its risk: the company operates in a competitive business, especially after WestJet launched its own regional airline in 2013. Chorus’s dependence on Air Canada, with its potentially volatile labour relations, is also a negative.
The stock is okay to hold, but only for highly aggressive investors.
Inner Circle recommendation: HOLD for aggressive investors.
For our view on what makes a strong growth stock, as opposed to a riskier momentum stock, read What are growth stocks?
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