Air Canada is a Buy, says Paradigm Capital

Corey Hammill of Paradigm Capital believes Air Canada (Air Canada Stock Quote, Charts, News, Analysts, Financials TSX:AC) is ready to take off once more, maintaining a “Buy” rating and target price of $30.00/share for a projected return of 20 per cent in an update to clients on Wednesday.

Canada’s largest airline, Air Canada flies 364 aircraft to approximately 175 direct destinations worldwide. It is the only airline to offer a premium cabin on domestic routes and holds approximately 55 per cent domestic market share, 35 per cent trans-border market share and 37 per cent international market share in Canada.

Hammill’s latest analysis comes after Air Canada released its third quarter financial results, which Hammill noted had exceeded expectations.

Air Canada’s quarter was headlined by revenue of $2.1 billion for a 177 per cent year-over-year increase to beat the Paradigm estimate of $1.7 billion while being nearly in line with the consensus projection of $2.2 billion, though still a long way off the $5.5 billion in revenue from the same quarter in 2019 as the skies begin to open up again amidst the COVID-19 pandemic.

Meanwhile, on account of positive months in August and September, the company limited its EBITDA loss of $67 million, coming in well ahead of the consensus estimate of a $119 million loss and the Paradigm projection of a $190 million loss, and coming in well ahead of the reported $554 million loss year-over-year, though it’s still well short of the $1.5 billion in positive EBITDA in the same quarter of 2019.

However, an encouraging sign for Air Canada is that its previous cash burns have turned into $153 million in cash generation for the most recent quarter, or $1.6 million per day compared to Air Canada’s initial guidance of cash burn ranging from $3 million to $5 million daily. All told, the company wound up with $14.4 billion in unrestricted liquidity ($9.5 billion cash and equivalents), aided by a series of financing transactions for gross proceeds of $7.1 billion.

“I want to express my continuing gratitude to all our employees for their incredible efforts, resilience, and teamwork throughout the challenging past 20 months, most recently as we have worked hard to restart a very complex ecosystem with our many partners,” said Michael Rousseau, President and Chief Executive Officer of Air Canada in the company’s November 2 press release. “Their unstoppable energy, purpose and steadfast optimism have lifted and inspired us all as we navigate towards brighter skies ahead.”

The country’s health statistics have also boosted the company’s fortunes; Hammill noted, saying as of Tuesday, 89.2 per cent of Canadians 12 years of age and older have received at least one vaccine dose, while 84.5 per cent of those people are fully vaccinated, which should lead to further easing of global travel restrictions.

Air Canada stock predictions 2022, 2023

Hammill said bookings were about two-thirds of 2019 levels in August and September, with the company expecting increased demand to continue well into 2022.

The recent quarterly results have prompted changes to Hammill’s financial projections for Air Canada in the next year or two as it begins its recovery, as he now projects revenue to reach $5.99 billion in 2021 instead of his initial $5.29 billion estimate to beat the consensus projection of $5.62 billion.

He then forecasts revenue to rocket to a projected $15.7 billion in 2022 (previously $11.9 billion) for a potential year-over-year increase of 162 per cent as it gets closer to its 2020 revenue report of $19.1 billion, again staying ahead of the consensus estimate of $14.1 billion.

Hammill sees the company’s EBITDA taking a similar flight path, as he projects a loss of $1.48 billion in EBITDA in 2021 compared to his initial estimate of a $1.75 billion loss and the consensus estimate of a $1.52 billion loss. He then sees EBITDA returning to positive territory in 2022 at $2.07 billion (previously projected at $1.17 billion) for a potential margin of 13.2 per cent, while coming out slightly below the consensus estimate of $2.23 billion in EBITDA.

“We remain cautiously optimistic in our long-term outlook for Air Canada. The airline has been rebuilt to withstand the shocks that it has faced over the past year and a half, and will likely have to continue to navigate near-term bumps in the recovery. Given the duration of the expected recovery, we are using 2023 estimates to set our target price, giving us a long-term beacon,” Hammill wrote.

“We would like to stress that while the pandemic recovery is ongoing, revenue and earnings projections are extremely uncertain, hence our view that setting a short-term target price is not useful. We believe it will take 12–24 months for the business to normalize. Using a 5.0x target EV/EBITDA multiple, applied to our 2023e EBITDA, results in our $30.00 target price. Long term, we remain confident in Air Canada’s standing as a leading global airline,” he said.

Overall, Air Canada’s stock price has been trending upward for the balance of 2021, yielding a return of 12.8 per cent for the year to date with a high point of $29.80/share coming on March 15.