Air Canada is still a buy, Paradigm Capital says

Air Canada’s (Air Canada Stock Quote, Chart, News: TSX:AC) strong Q4 results speak to the success of the company’s turnaround plan, says analyst Corey Hammill with Paradigm Capital, who Monday maintained a “Buy” rating, albeit with a target price reduction.

The airline released its fourth quarter results last Friday, showing a profit of $8-million or two cents a share over the last three months of 2017. That compares handsomely with last year’s Q4 which generated a net loss of $179-million or $0.66 a share.

Air Canada’s total passenger numbers for the quarter were up 9.9 per cent, as the company continued to take on more routes, while operating revenue increased 11.5 per cent to $3.82 billion.

“Air Canada’s string of strong EBITDAR results continued in Q4 at $521M, beating our estimate of $511M and the Street’s $493M, and up 15% y/y,” says the analyst in a note to clients. “The margin was 13.6%, up 30 bp y/y. For the full year, EBITDAR was $2,921M, up 5% y/y, and also a record; the margin was 17.8%, in the middle of AC’s range of 17–19%. Management continues to target an EBITDAR margin of 17–20% from 2018 to 2020.”

The company has put in place significant reforms in recent years aimed at reducing costs and becoming profitable, says Hammill, and the results are showing. “Air Canada management has put in place major changes which are transforming the airline into a long-term sustainably profitable business,” he says.

“Looking ahead, AC expects to shift attention from its multi-year focus on international expansion (total ASMs up 50% over the past four years) into re-fleeting its North American aircraft,” says the analyst. “This is expected to slow both capacity growth and stage length increases. Both are likely to be a net benefit to reported unit revenue,” he says.

Air Canada’s management predicts jet fuel costs will rise by seven per cent in 2018, leading to a full-year average of $0.70/litre in comparison to $0.63/litre over 2017. That figures into a target price reduction, says Hammill, who maintains his “Buy” recommendation and a 12-month target price of $32.00 (down from $37.00), for a potential return of 23 per cent including dividend.