Scotia reasoning for upgrade . We are upgrading AC shares to SO and raising our TP to $7.25.
. AC's Q1 traffic results were in line with our expectations. Consolidated traffic
grew by 3% on ASM growth of 4% which led to 80.3% LF (down 70 bps YOY). Loads
were weak in Canada, Atlantic, and Pacific, while the US Transborder market was
the strongest.
. AC also adjusted its Q1 EBITDAR guidance positively, which led to a 21% and 2%
increase in our Q1 and 2014 estimates. This was driven by better-than-expected
RASM and CASM performance. While FY CASM guidance was not adjusted, we believe
that there is room for this to move lower over the year as AC is looking for
further areas to cut costs. The C$ remains a major risk factor in this regard.
AC also reduced Q1 and FY ASM guidance.
. There are three major reasons behind our upgrade. First, this is the second time
in three months that AC has trimmed its ASM increase, which suggests a
willingness to adjust capacity if traffic doesn't hold up. This allays one of
our major concerns with regard to potential RASM decline in 2014. While still a
risk, we feel that it is discounted in estimates. Second, CASM declines are
coming in better than earlier guidance, which is also positive. Third, valuation
is attractive as AC shares are down 42% from recent highs and are trading at
levels seen last fall. This puts the shares at 4.2x EV/2015 EBITDAR, which is a
1x discount to the US comp group. As such, we see room for the shares to
outperform from current levels.