CIBC: Target at 25$ from 21$Path To Cash-flow Neutral
Our Conclusion
AC’s Q3 results were overshadowed by news around the COVID-19 vaccine and Transport Canada indicating it is working on an airline financial assistance program. But the developments over the past 24 hours also reinforce our long-term positive view on AC. Its liquidity position ($8.2B currently), low leverage ratio entering 2020, current market positioning, and strong operating culture gave us the high level of confidence that the airline would successfully weather the storm. So while demand trends remain challenged over the near term, AC looks positioned well for this marathon. We maintain our Outperformer rating and our price target goes to $25 from $21.
Key Points
The Pfizer news this morning has lit a fire under airline equities and sent a signal that there is light at the end of this dark tunnel. While the drug still needs to be approved and it will take time for a vaccine to become readily available to the general public, we believe these recent developments help improve consumer confidence. We look at AC’s Q3 results and Q4 guidance to get a sense of what it will take to get to cash-burn breakeven. Based on current demand trends, we estimate daily cash burn in 2021 starts at ~$14MM-$15MM excluding any government support programs. Under this scenario, we estimate that revenue needs to get back to ~50% of prepandemic levels to get to breakeven cash burn. Please refer to Exhibit 1.
We see the ability to get there in 2021 as doable reflecting: 1) developments around rapid testing in Canada, which continues to progress well and should help reduce travel restrictions; and 2) developments around a therapeutic or vaccine. On the former, AC noted that given Canada’s more restrictive travel policies relative to the U.S., the U.S. mainline carriers saw demand down ~80% Y/Y in Q3 versus AC down ~91% Y/Y. This equated to ~$600MM in revenue. So we believe as restrictions are loosened, the Canadian airlines will benefit from a step function increase in demand similar to what we have seen in other parts of the world. On the latter point, a therapeutic or vaccine will drive a continued reopening of economies including air travel. Looking at China as an example, with COVID cases now at very low levels, domestic air traffic has already returned to pre-pandemic levels.
We are currently modeling that AC gets to breakeven cash burn in H2/21 given our view that demand will exhibit a more stable recovery next year. This is key as getting to cash-burn neutral provides improved valuation support for AC as it stabilizes the company’s debt levels and eliminates the current enterprise value leakage.