Air Canada stock is a buy, says Paradigm Capital

Even with increasing fuel costs, Air Canada (Air Canada Stock Quote, Chart, News: TSX:AC) beat its Q1/18 estimates, showing that Canada’s largest airline is now becoming a long-term sustainably profitable company. That’s according to analyst Corey Hammill of Paradigm Capital who on Tuesday reiterated his “Buy” rating and $32.00 target price for AC.

On Monday, Air Canada announced its first quarter 2018 financial results, reporting that traffic rose 11.4 per cent compared to Q1/17, while passenger revenue per seat mile grew by three per cent. The airline also posted an operating loss of $14 million compared to $30 million in the first quarter of 2017.

“We are pleased with our strong results in the first quarter, historically the most challenging of the year for airlines in Canada,” said Calin Rovinescu, President and Chief Executive Officer, in a press release. “Alongside the record quarterly and annual results we have previously reported, our performance in this more challenging quarter affirms Air Canada’s progress towards consistent earnings and long-term, sustained profitability.”

Hammill focused on AC’s strong Q1 EBITDAR (earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent) of $397 million, which beat both his estimate of $348 million and the consensus $291 million and was up 16 per cent year-over-year.

“Air Canada was able to reduce costs in the quarter, which helped drive the strong results,” said the analyst in a client update. “We estimated that costs would increase 2 per cent in the quarter, while the carrier was able to reduce CASM by 0.9 per cent in Q1. Management is committed to transforming Air Canada into a sustainably profitable airline, and a relentless focus on cost control/reduction is key to withstanding less controllable macro forces.”

Hammill has revised his estimates, projecting FY18 revenue of US$18,072 million (up from US$17,829 million) and EBITDAR of US$3,071 million (down from US$3,256 million).

The analyst prices AC using a 4.5x EV/EBITDAR valuation multiple, resulting in a $32.00 target, which represents a projected return on investment of 20 per cent at the time of publication.

“As Air Canada continues to improve its balance sheet, lowering its leverage ratio from 2.0x toward 1.2x (adjusted net debt/adjusted EBITDAR), we believe its valuation multiple will expand,” Hammill says.