After picking up some tailwinds in the latter half of 2017, WestJet’s (TSX:WJA) future is decidedly cloudier, says Ahmad Shaath, analyst with Beacon Securities, who today maintained his “Hold” rating on the stock with a lowered target price, down to $27.00 from $29.00.
WestJet’s Q4 2017 results are in, with a revenue of $1.1 billion ($4.5 billion on the year) and an adjusted EBITDAR of $225 million, putting WestJet in its best position in the past five years, Shaath notes.
“The quarter was highlighted by continued strength in demand/revenue side, where WJA recorded its 4th consecutive quarter of y/y increase in yield,” says the analyst in a February 6 report to clients. “WJA closed off FY17 with 4 quarters of accretive capacity increase, where its capacity additions were met with +y/y increase in traffic and yield/RASM.”
With over 12,000 employees and more than 160 planes, Canada’s second-largest carrier is about to face stiffer competition from a fleet of new ultra-low-cost carriers (ULCCs). Names like Canada Jetlines, FlyToo, NewLeaf and Flair Airlines are all promising to be up and running in 2018, offering heavily discounted domestic flights.
Not to be outdone, WestJet has announced it will start flying its own ULCC, Swoop, starting in June between select cities. In one sense, the move can be seen as WestJet’s returning to its roots as an upstart challenger to the established airlines, but so far, Canada has proved a tough frontier for discount carriers, leaving WestJet’s foray a notable question mark going forward.
That along with the prospect of higher fuel costs over 2018 are reasons to be cautious, says Shaath. “Despite the continued positive revenue/demand trend, we view current fuel volatility and uncertainty regarding WJA’s ULCC offering (Swoop) traction in the market place as catalysts for our ‘wait and see’ approach,” says the analyst. “Consequently, we maintain our HOLD rating.”
Beacon’s revised price target of $27.00 is based on 10x its revised FY18E EPS estimate and represented an 18 per cent return at the time of publication.