(By Balaseshan) CIBC World Markets Inc. analyst Kevin Chiang downgraded rating of Chorus Aviation Inc. (TSE: CHR.B) to "Sector Performer" from "Sector Outperformer" due to valuation with its share price up 37% since mid-November.
The brokerage, which lifted price target to $4.25 from $4, maintained its 2013 EBITDA estimate of $175.80 million and its 2014 estimate of $170.10 million.
While risk related to a dividend cut has been diminished, and a resolution to the Air Canada(TSE: AC.B) arbitration will be a positive catalyst, Chiang believes much of this is reflected already.
Even if AC.B "wins" on the outstanding issues remaining with regards to the arbitration resulting in the Controllable Markup falling to 11.41% (from 12.5% currently), the analyst could see CHR.B maintain its dividend as he is forecasting a 2013 payout ratio below 70%.
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Once the arbitration is concluded, Chiang expects CHR.B will refocus on its diversification initiative. Areas that CHR.B can build on include partnering with another airline and leveraging its experience flying the 757 as well as more charter flying.
The analyst raised price target as he rolls out his 2014 EBITDA estimate and take his multiple up to 4.5 times (up 0.5 points to account for the reduced risk of a dividend cut). He assumes CHR.B's controllable mark-up is unchanged at 12.5% and with 2014 block hours flat year-over-year.
CHR.B remains unchanged from previous close of $4.11.