Jazz Air Income Fund: High Yield, Low Valuation

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 |  Includes: ACDVF, JAARF
by: FP Trading Desk

Air Canada (AIDIF.PK) may be headed for bankruptcy courts, but Jazz Air Income Fund (OTC:JAARF) won't miss a beat and will continue to crank out steady distributions according to analysts at Genuity Capital. Uncertainty about AC has weighed on JAZ's [TSE:JAZ] unit price to the point that it looks cheap. Investors might just get jazzed by the current 30% distributable cash per unit yield based on its current unit price of C$3.32.

Jazz Air Income Fund provides 97% of Air Canada regional capacity using its fleet of 133 regional jets and turboprops. The income trust, a spinoff from ACE Aviations (OTC:ACEAF), provides fixed regional aircraft operations to Air Canada equal to 400,000 block hours per year. In return, JAZ gets a mark-up targeted at 13.2% over controllable costs.

The wedge between its current price of C$3.32 and long term value of C$6.25 per unit is the specter of Air Canada bankruptcy. Analysts at Genuity believe that bankruptcy would open the door for Air Canada to renegotiate its agreement with JAZ cutting both margins and possibly volumes.

Nevertheless, JAZ still looks cheap. Even in the worst case scenario of bankruptcy and severe margin compression under a new agreement with Air Canada, JAZ is worth C$4.00 per unit, 23% above its current unit value according to Genuity.

In the base case scenario JAZ reaches its target price of C$6.50 per unit assuming no bankruptcy and C$5.75 in the event of Air Canada bankruptcy. Either way the trust is cheap.