Second quarter results coming in better than expected for Air Canada (Air Canada Stock Quote, Chart, News TSX:AC) but it’s the company’s new plan of action that’s impressing Paradigm Capital analyst Corey Hammill.
The analyst reviewed Air Canada’s quarter in an update to clients on Tuesday and kept his “Buy” rating and $30.00 target, saying the airline is transforming into a long-term sustainably profitable business.
Montreal-headquartered Air Canada delivered its Q2 financials on July 31, with the overall quarterly revenue down a massive 89 per cent year-over-year and total passengers carried dropping by 96 per cent compared to Q2 2019.
Air Canada CEO Calin Rovinescu said the COVID-19 pandemic has been devastating and that Canada’s federal and inter-provincial regulations in response to the health crisis have further hobbled the airline. Rovinescu pointed to a number of steps taken by management, including the raising of $5.5 billion in new equity, debt and aircraft financings since mid-March (putting the company at over $9 billion in liquidity as of June 30), a major management and front-line workforce reduction, a $1.3-billion reduction in fixed costs and capital investments, the permanent retirement of 79 aircraft and the indefinite suspension of some domestic routes and station closures.
“These were some of the painful but necessary steps we have taken to stabilize our airline and preserve cash in these uncertain times. We will now look to the future using this unprecedented challenge as an equally unprecedented opportunity to rebuild a smaller but even more nimble airline, with a simplified and younger fleet and a lower cost structure coming out of the crisis,” Rovinescu said in a press release.
On the Q2, Air Canada managed revenue and EBITDA of $567 million (down from $4.7 billion for Q2 2019) and negative $832 million (down from $916 million a year ago), whereas Hammill was calling for revenue of $537 million and EBITDA of negative $1.6 billion.
Hammill reported the news that the IATA recently revised its forecast on air travel recovery, which it now says will occur in 2024, while Air Canada’s management has said it’s expecting the recovery to take three years.
Despite these headwinds, Hammill says he’s “cautiously optimistic” in his long-term outlook for AC.
“The business has been rebuilt to withstand shocks, which is being tested today. Shares have reflected past record performance, ranking among the top TSX performers over the past decade and one of the top airline stocks in 2019, up +80 per cent,” Hammill wrote.
“Given the severe impact that COVID-19 is having on the airline sector, we have reduced our estimates based on Air Canada’s latest statements. We are pushing our valuation out additional year, to 2023. This target serves as longer-term beacon. In the very near term, given the increasing levels of debt and uncertain revenue environment, setting a short-term target price is difficult. We stress that revenue and earnings projections in the short term are more art than science. We expect over the next 12–24 months business will likely begin to normalize. Maintaining a 4.5x target EV/EBITDA multiple, applied to 2023e EBITDA, results in our $30.00 target price. We expect shares to remain volatile over the next few quarters,” Hammill said.
Hammill is calling for fiscal 2020 revenue of $7.568 billion (down from $7.953 billion) and EBITDA of negative $1.202 billion (up from negative $2.346 billion). His $30.00 target represented at press time a projected one-year return of 50 per cent.