After attending the company’s annual investor day, Paradigm Capital analyst Corey Hammill remains bullish on Air Canada (TSX:AC) despite a share price that has soared in recent years.
On September 19 in Toronto, Air Canada hosted its annual investor day in which the airline revealed newly updated financial targets and extended its guidance through to 2020. Hammill thinks improvement on the bottom line may be more sustainable than some might believe.
“Our overall takeaway from AC’s Investor Day is that it is a continuation of the impressive financial turnaround delivered by this management team over the past five years,” the analyst says. “We encourage investors to focus on the new EBITDAR margin targets, which imply that management views recent margin expansion (up 800 bp since 2013) as a long-term, sustainable change in the business cost structure. As the bulk of AC’s capacity additions (measured by ASMs) are behind it, the airline is transitioning its focus on growing cash flow through high-quality revenue and improved operational efficiencies. Despite its share price appreciation to ~$23.00 from $2.27 on its first Investor Day on July 7, 2013, AC is the least expensive North American airline with shares trading at ~4.0x 2018e EV/EBITDAR while U.S. legacy peers are trading at ~5.0x. We see significant continued upside for the share price as AC: 1) boosts profits through revenue growth and margin expansion; and 2) experiences a well-deserved multiple expansion.”
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In a research update to clients Wednesday, Hammill reiterated his “Buy” recommendation and one-year price target of $27.00, implying a return of 11 per cent at the time of publication, including dividend.
Hammill thinks Air Canada will post EBITDAR of $2.95-billion on revenue of $16.1-billion in fiscal 2017. He expects those numbers will improve to EBITDAR of $3.56-billion on a topline of $17.31-billion the following year.