Price target upgrade - Scotia Bank $11 to $12 . We remain bullish on AC after a nice beat in Q3.
. The key here is that margins have expanded nicely in both Q3 (up 170 bps) and
YTD (up 70 bps YOY) despite the significant headwind from FX. We see this as
credible evidence of success in implementing AC's cost reduction strategy. We
also think that management has done well to improve the risk profile by lowering
costs, mitigating the pension issue, and getting increased employee engagement,
which is reflected in the 10-year pilot deal.
. There is no doubt that the 2015 ASM increase of 9%-10% is aggressive. However,
93% of the increase is at low incremental cost and the recent decline in fuel
price gives more room to manoeuvre on price. Management also highlighted that
they can pull back on the ASM increase if demand doesn't cooperate. We also
think that a significant reversal in fuel prices could necessitate such a move
to protect margins. The important thing is that AC is willing and able to do
this.
. We remain SO rated with an increased TP of $12. The higher TP was mainly driven
by the 5%-6% rise in our EBITDAR estimates and roll-forward of our valuation
period. AC shares now trade at 4.5x EV/2015 EBITDAR, a 1x discount to US peers.
We believe upside will come from strong earnings growth and some multiple
expansion as successful strategy implementation becomes more visible and risk
falls. There may also be upside to our estimates from load factors and fuel
price.