Ahead of the company’s third quarter results Wednesday, Paradigm Capital analyst Corey Hammill is feeling bullish about Canada’s largest airline.
In a research update to clients today, Hammill maintained his “Buy” rating, but raised his one-year price target on Air Canada (TSE:AC) from $27.00 to $37.00, implying a return of 29 per cent at the time of publication, including dividend.
Hammill says that despite the fact that shares of Air Canada have more than doubled this year it is still the least expensive carrier in North America. He points out that the stock is trading at 4.2x EV/EBITDAR, much lower than the 5.6x EV/EBITDAR of 2018 estimates that U.S. legacy carriers are trading at. The analyst says if you applied the same multiple to Air Canada the stock would trade at at least $42.00. Hammill says there appear to be tailwinds in the sector.
“The early Q3 U.S legacy airline results are showing solid customer demand and, more importantly, improving pricing trends,” the analyst says. “This gives us incremental confidence in our outlook for Air Canada’s Q3 results. Airline investors in both the U.S. and Canada have been waiting to see unit revenue reverse its multi-year slide. We remind investors that small changes in RASM (Revenue Per Available Seat Mile) and load factor can have a big effect on Air Canada’s results. For Q3, each 1% of additional RASM equates to $50M in additional EBITDAR, while a 1% increase in load factor equates to $40M in additional EBITDAR. Our investment thesis is anchored by positive industry trends, new long-term financial targets and an expectation of continued share price growth. Maintaining our 4.5x EV/EBITDAR valuation multiple, and rolling forward our valuation to 2018, we arrive at our new target price of $37.00.
Hammill thinks Air Canada will generate 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 $17.3-billion the following year.