Buy Air Canada stock ahead of full recovery, says Paradigm Capital

Corey Hammill of Paradigm Capital has a better perception of where Air Canada (Air Canada Stock Quote, Charts, News, Analysts, Financials TSX:AC) is capable of going, maintaining a “Buy” rating and target price of $33.50/share for a projected return of 32 per cent in an update to clients on April 27.

Canada’s largest airline, Air Canada currently flies 364 aircraft to about 175 direct destinations worldwide 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 analysis arrived after Air Canada reported its first quarter financial results for the 2022 fiscal year.

“Following a comprehensive review, Air Canada management has proven its capabilities and agility to weathering unprecedented industry shocks,” Hammill said. “With its first quarter of profitability in seven quarters now reported and consistent signs of recovery in air travel, our focus is shifting back to Air Canada’s management team building a sustainably profitable business.”

Air Canada’s financial quarter was headlined by $2.6 billion in revenue to nestle itself comfortably in between the Paradigm Capital projection of $2.5 billion and the consensus estimate of $2.7 billion. The quarter marked a sharp spike for Air Canada in the name of a 257 per cent year-over-year increase, in spite of being impacted by restrictions owing to the Omicron variant and sharply rising fuel prices.

Meanwhile, the company reported an EBITDA loss of $143 million to beat the Paradigm estimate of a $550 million loss while coming short of the Street estimate of a $73 million loss. The report was also an improvement from the $763 million loss reported in the opening quarter of 2021.

Air Canada also reported positive free cash flow for the third consecutive quarter at $59 million, with company management aiming to hit $3.5 million in cumulative free cash flow by 2024.

All told, Air Canada ended the quarter with $9.2 billion in cash available, along with over $10 billion in unrestricted liquidity, including available credit.  

“The substantial year-over-year improvement in Air Canada’s first quarter results is clear evidence that a recovery is underway. Our strong improvement is a testament to our employees, and I thank them for their hard work taking care of our customers throughout more than two years of a global pandemic. Now, our employees are demonstrating this same level of determination, commitment and passion in executing on our recovery strategy,” said Michael Rousseau, President and Chief Executive Officer of Air Canada in the company’s April 26 press release.

Despite management reiterating its previous guidance, Hammill has revised some of his financial estimates for Air Canada, lowering his 2022 revenue estimate from $15.8 billion to $14.9 billion while slotting in right behind the consensus projection of $15.5 billion, though the revised figure is still a potential year-over-year increase of 132.3 per cent as global air travel opens up again. 

Looking ahead to 2023, Hammill lowered his projection from $19.9 billion to $19 billion, marking a potential year-over-year increase of 28.1 per cent while being roughly in line with the consensus estimate of $18.9 billion.

Meanwhile, Hammill forecasts Air Canada to return to positive EBITDA of $1.46 billion in 2022, down slightly from the initial $1.48 billion estimate the consensus has retained, while producing an implied margin of 9.8 per cent. Looking ahead to 2023, Hammill forecasts the company’s EBITDA to rise to $3.26 billion for a wider margin of 17.1 per cent, coming in slightly ahead of the consensus estimate of $3.08 billion.

“We are confident the airline is on the cusp of returning to profitability and expect the share price will return to prior highs,” Hammill said. “Management has proven its ability to navigate through unprecedented pressures. We now continue to wait for the timing of full recovery.”

Air Canada’s stock has produced a 2.9 per cent return for investors since the start of 2022, making a bit of a recovery after a nosedive to $19.59/share on March 7, though it has been relatively flat since the release of the quarterly results.

Air Canada recently announced a second special humanitarian flight in conjunction with Airlink, Flexport.org and GlobalMedic to send humanitarian aid and medical supplies to Ukrainian refugees affected by the ongoing war.

In addition, the company’s Aeroplan platform was recently recognized with two honours at the Freddie Awards for loyalty programs, taking home Best Redemption Ability and as the top-trending program for the third time. Meanwhile, the company’s Cargo division also completed its first freight flight to Madrid as it works to expand its European operations.