The outlook may look disastrous for Air Canada (Air Canada Stock Quote, Chart, News TSX:AC) but the company’s long term prospects are still top notch, according to Paradigm Capital analyst Corey Hammill, who delivered an update on the stock and company to clients on Tuesday.
Hammill maintained his “Buy” rating but reduced his 12-month target price from $54.00 to $30.00, saying that at current levels, investors have a great entry point for AC.
Air Canada’s share price continued its free fall this week as the market reacts to the ongoing COVID-19 crisis which has crippled airlines worldwide.
Air Canada, whose share price hit above $50 earlier this year but is now well below $20 per share, released an update on Monday on the measures the company was taking to mitigate the impact of the COVID-19 pandemic on its operations.
The company said it has pulled its 2020 and 2021 guidance provided only a month ago and has reduced its capacity by 50 per cent for the second quarter 2020. AC said it will look to save $500 million by cutting costs and deferring capital spending and a suspension of its share buyback program. At the same time, the company expects a sharp decline in fuel costs which coupled with the cost-cutting measures will offset between 50 and 60 per cent of lost revenue for the second quarter.
“COVID-19 presents the global airline industry with unprecedented challenges, compounded by uncertainty as to the extent of its effects. However, we are confident that after a decade of transformation and record results, Air Canada today has the agility, the team and the route network to successfully navigate through this crisis. Most importantly for business continuity, it also has the necessary financial resources, including a solid balance sheet, record liquidity levels, higher debt ratings based on a low leverage ratio, and a significant pension plan surplus,” said Calin Rovinescu, president and CEO, in a press release.
As to the company’s financial position, Hammill noted in his update that Air Canada, as of March 13, is sitting on a record $7.1 billion in cash, cash equivalents and short-term investments, that the company will draw down $200 million from its revolving credit facility in the coming weeks and that AC has no debt maturities in 2020.
Hammill argued that as with past pandemics, the states of affairs for airlines will eventually improve as global demand returns and fuel prices remain low — and thus, so will better days return for AC.
“Despite the severe current headwinds, we remain positive in our long-term outlook for Air Canada. Its business is built to withstand shocks and still deliver strong profits, as clearly evidenced in 2019.
Shares have reflected past performance, ranking among the top TSX performers over the past decade and one of the top airline stocks in 2019, up +80 per cent,” said Hammill.
“Given the severe impact that COVID-19 is having on the airline sector, we have reduced our estimates based on AC’s latest statement. Using a 4.5x 2020e EV/EBITDA implies a $30.00 target price; however, going into 2021 we expect business to resume as normal, which would support a return to a $50+ target price. Timing is hard to predict, but we expect investors will look back at AC shares in the mid-teens as a great long-term entry point,” he wrote.
As of press time, Hammill’s $30.00 target represented a projected 12-month return of 69 per cent.
File Under: Air Canada stock predictions 2020