Air Canada ACDVF

Nat Bank: Attractive valuation

[Tempo1]

Note from Tempo1: There is the summary followed by some extracts from the full report.

Q1/24 preview - valuation continues to look attractive

Demand and fares still generally healthy

Based on CATSA passenger screening data at Canada’s largest airports, the
most recent 7-day rolling average of passenger traffic in Canada was up 1.9%
y/y and so far this year, has largely been higher than last year. Additionally,
based on CPI data from Statistics Canada, airfares in Canada in March were up
2.9% y/y, the first y/y increase since March of last year.

Domestic capacity fairly rational in Q2

Overall Canadian industry domestic capacity in Q2/24, as measured by
seats, is projected to be down 3.5% y/y and 11.9% below Q2/19. The U.S.
transborder market will see industry capacity up 12.6% y/y in Q2 while
international capacity to and from Canada in Q2 is set to increase 13.9% y/y as
trans-Atlantic seat capacity this summer is projected to be up significantly y/y.

Estimates trimmed due to fuel and f/x

We have trimmed our 2024 and 2025 estimates due to higher fuel and less
favorable f/x. In Q1/24, the average spot price of jet fuel was C$1.04/liter,
which was below our assumption of C$1.10/liter. However, the current spot
price is C$1.09/liter, which is above our prior Q2 forecast of C$1.05/liter.
Air Canada’s 2024 guidance is based on an f/x rate of $1.33, but the current
spot is $1.38, so we have adjusted certain cost items and interest expense to
reflect the less favorable rate.

Maintain Outperform and $31.00 target

Although the market seemingly remains concerned about the sustainability
of air travel demand in Canada, the data continues to point to a still positive
end market. The current valuation for Air Canada shares also continues to
reflect what we believe is an overly pessimistic outlook. On our updated
2024 forecast, which assumes a 2.3% decline in passenger unit revenues and
non-fuel unit costs towards the high end of Air Canada’s guidance range, Air
Canada shares are trading at just 3.2x EV/EBITDA and 7.0x P/E. This is below
the historical average forward multiples of 4.3x EV/EBITDA and 9.0x P/E

Some extracts from the full report:

• From a valuation perspective, Air Canada is also trading below the U.S. legacy carriers, currently trading at 3.2x 2024 consensus EV/EBITDA versus the U.S. peer average of 5.1x

• Our own fare surveys for Air Canada also suggest that domestic pricing was generally higher y/y in Q1/24 on the key routes we track, and we suspect that Lynx Air’s market exit in late February likely had some modest positive impact on AC in Q1.

• In Q1/24, the average spot price of jet fuel was C$1.04/liter, which was below our assumption of C$1.10/liter. However, the current spot price is C$1.09/liter, which is above our prior Q2 forecast of C$1.05/liter, so we have adjusted our Q2 assumption to C$1.10/liter with an assumed lower price later in the year and into 2025 (AC’s 2024 guidance is based on a C$1.00/liter assumption).