Following the company’s second quarter results, Paradigm Capital analyst Corey Hammill remains bullish on Air Canada (TSX:AC).
On Friday, Air Canada reported its Q2 results. The company posted EBITDAR (earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent) of $646-million on revenue of $4.33-billion, a topline that was up 10.7 per cent over the same period last year.
“I am pleased to report another solid quarter of revenue growth, cost containment and unrestricted liquidity, in the face of significantly higher fuel prices,” CEO Calin Rovinescu said. “Our record revenues this quarter demonstrate the appeal of Air Canada’s brand and underscore the continuing strong demand for air travel in all of our main markets. I thank our 30,000 employees for their hard work and dedication in taking care of our customers, which was recognized this month when Air Canada was named the best airline in North America for the second consecutive year at the Skytrax World Airline Awards celebrated in the U.K. Winning the award for the seventh time in nine years is a testament to the sustained progress we have made, something which all our employees should be very proud of, as I am.”
Hammill says Air Canada is poised to do well regardless, but showed how a drop of the price of oil could be a serious boon.
“We remain upbeat in our outlook for AC and believe that a multiple expansion is long overdue,” the analyst said. “The current spread between AC and U.S. legacy carriers based on 2018 consensus EBITDAR estimates is 2 multiple points, with AC trading near 4x and U.S. peers ~6x. We estimate each 1 multiple point is worth ~$11 per AC share. Investors should watch the oil price closely, as this will have a material impact on estimates. We estimate that each $1.00 move in WTI (West Texas Intermediate) has an ~$50M impact on EBITDAR. The change in our estimates is a direct result of the increased cost of jet fuel. Management is optimistic that it can recover ~75% of the expected increase in fuel costs through fare increases. Despite the short-term volatility because of the oil price, we expect an ongoing focus on cost cutting and an overall strong operating environment to keep the financial performance on track.”
In a research update to clients today, Hammill maintained his “Buy” rating and one-year price target of $32.00 on Air Canada, implying a return of 26 per cent at the time of publication, including dividend.
Hammill thinks Air Canada will generate EBITDAR of $2.9-billion on revenue of $18.1-billion in fiscal 2018. He expects those numbers will improve to EBITDAR of $3.45-billion on a topline of $19.4-billion the following year.