Air Canada is built to last, says this analyst

Paradigm Capital senior analyst Corey Hammill is staying cautiously optimistic on Air Canada (Air Canada Stock Quote, Chart, News TSX:AC) after the airline’s latest quarterly results arrived with a huge quarterly loss.

In an update to clients on Tuesday, Hammill said while the business is certainly being tested, AC has been built to withstand shocks.

Air Canada reported its first quarter ended March 31 financials on Monday, showing revenue down to $3.72 billion from $4.43 billion a year earlier and an operating loss of $433 million compared to operating income of $127 million a year ago.

President and CEO Calin Rovinescu said the numbers tell the tale of the “severity and abruptness” of COVID-19’s impact on the airline, whose business began to take a hit as early as January with the cancellation of flights to China. The story turned more grim from there as Air Canada dropped service worldwide, now flying at ten to 15 per cent of its former capacity.

“The impact was exacerbated during the month of March with mandated social distancing, unprecedented government-imposed travel restrictions in Canada and around the world and the shutting down of economies,” Rovinescu said in a press release. “As significant as the financial damage has been, our prime concern remains the health and safety of our customers and our employees, whom I thank for their unwavering dedication under impossible conditions.”

“I also want to acknowledge the pandemic’s effects upon all of our other stakeholders, particularly those in the travel trade community. Be assured that we are resolutely committed to bringing our airline successfully through this crisis,” added Rovinescu.

The quarter marked AC’s first of declining operating revenue after 27 consecutive quarters of growth, while the company ended the quarter with $6.5 billion in unrestricted liquidity and negative free cash flow of $393 million. Management said that while it is predicting its capacity to be reduced by 85 to 90 per cent in the second quarter and by 75 per cent for the Q3, it is withdrawing all guidance including previously announced full year 2020 and 2021 guidance.

On the Q1 numbers, Hammill said the top line of $3.7 billion was above his $3.2 billion estimate and the consensus $3.6 billion, while EBITDA of $71 million was better than Hammill’s negative $154 million but below the Street’s $126 million.

Hammill said to brace for a bigger impact on AC’s Q2, where a full quarter of the pandemic will make its mark. Yet, the analyst has faith in Air Canada’s long-term prospects.

“Once we move past the recent series of hurdles, starting with the 737 Max grounding and now the coronavirus pandemic, the next catalyst for Air Canada could be a long- awaited multiple expansion, narrowing the gap between AC and US peers,” Hammill wrote.

“Airlines have been hit particularly hard YTD, with Air Canada down 63 per cent and our tracking basket down ~60 per cent. With the market sell-off, shares are trading at deep discounts, AC at ~2.6x 2021e versus peers at 5.7x. We are maintaining our 4.5x 2022e EV/EBITDA target multiple; however, given the current environment is considered a black swan event, we are pushing forward to 2022e EBITDA,” Hammill wrote.

Hammill has lowered his 2020 forecast and is now calling for revenue of $7.953 billion (was $13.555 billion) and EBITDA of negative $2.346 billion (was $1.413 billion). The analyst is keeping both his “Buy” rating and $30.00 target unchanged, with the target at press time representing a projected return of 41 per cent.