Better than expected cost cutting results are a good sign for Air Canada (Air Canada Stock Quote, Chart, News TSX:AC), according to Paradigm Capital analyst Corey Hammill, who reviewed the company’s latest quarterly numbers in an update to clients on Tuesday. Hammill kept both his “Buy” rating and $30.00 target for Air Canada, saying in spite of ongoing headwinds the airline is transforming itself into a long-term sustainably profitable business.
Air Canada reported third quarter earnings on Monday with total revenue of $757 million, down from $4.8 billion a year earlier. The company had an EBITDA loss of $554 million compared to a gain of $1.472 billion for Q3 2019. (All figures in Canadian dollars except where noted otherwise.)
Calling the impact of COVID-19 on the business unprecedented, Air Canada saw third quarter passenger numbers drop by 88 per cent year-over-year. Management emphasized in the press release the company’s efforts to make flying safer for travellers during the pandemic while at the same time putting in place a mitigation and recovery plan, including raising almost $6 billion in additional liquidity to tide AC over during the pandemic.
President and CEO Calin Rovinescu said, “We took the painful steps of eliminating 20,000 jobs, after having created 10,000 over the previous five years, and of reversing ten years of profitable network expansion by reducing capacity by more than 80 per cent in the third quarter.”
Rovincescu pressed on the need for financial support from the federal government, saying that the IATA has determined that globally, governments have provided more than US$160 billion in aid to airlines.
“Beyond sustaining tens of thousands of direct and indirect jobs, a healthy Canadian airline industry is essential for Canada’s infrastructure on which its economic recovery from COVID-19 depends and vital to securing the country’s place in a reordered, post-pandemic world. The impact on the industry and on the economy of how we as a country handle this crisis in air transportation will be felt for years to come,” Rovinescu said.
On the quarterly results, Hammill said the $757-million in revenue was above his $537-million estimate but below the consensus $1.1 billion, while the $554-million EBITDA loss was heavier than Hammill’s $384-million estimated loss and the Street’s $400-million.
Hammill said Air Canada’s daily cash burn for the quarter of $9 million was below management’s guidance of $16 million, showing the company’s commitment to fixed cost-cutting and capital reductions and deferrals. The analyst figures AC has reduced costs by $1.5 billion in 2020, triple the company’s original target of $500 million. Looking ahead, management has guided for Q4 cash burn of $12 to $14 million per day, which would include about $9 million per day of capex and debt repayments.
“Despite the severe current headwinds, we remain cautiously optimistic in our long-term outlook for Air Canada,” Hammill wrote. “The business has been re-built 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.”
“Given the severe impact that COVID-19 is having on the airline sector, we previously pushed out our valuation year, to 2023. This target serves as a longer-term beacon. In the very near term, given the increasing levels of debt and uncertain revenue environment, setting a short-term target price seems pointless. We stress that revenue and earnings projects in the short term are much more of an art than a science. We expect over the next 12–24 months, business will likely begin to normalize,” Hammill wrote.
Air Canada’s share price is currently down 58 per cent for 2020, with Hammill saying it’s likely to remain volatile over the next few quarters.
The analyst has adjusted his estimates and is now calling for full 2020 revenue of $5.962 billion (previously $7.568 billion) and an EBITDA loss of $1.777 billion (previously a loss of $1.202 billion). For 2021, he is estimating revenue of $8.289 billion (previously $14.064 billion) and positive EBITDA of $1.272 billion (previously positive $1.441 billion).
“Once we move past the recent series of hurdles, starting with the 737 Max grounding and now the ongoing coronavirus pandemic, the next catalyst for Air Canada could be a long-awaited multiple expansion, narrowing the gap between AC and U.S. peers. Airlines have been hit particularly hard year-to-date, with Air Canada down 58 per cent and our tracking basket down ~44 per cent,” Hammill wrote.
“We arrive at our $30.00 target price based on a 4.5x EBITDA multiple on our 2023 estimate. We maintain our Buy rating but remain cautious in the near term,” he said.
At press time, Hammill’s $30.00 target represented a projected one-year return of 48.7 per cent.