TD REPORT - Air Canada (AC-T) C$31.64 Q4/18 Preview UpdateEvent We are lowering our fuel expense forecast for Q4/18 due to an incorrect realized fuel price assumption embedded in our previous forecast. The impact is positive for our Q4/18 and annual earnings forecasts beyond 2018, but it has an immaterial impact on our 12-month target price. Air Canada will report its Q4/18 results on February 15 and host a conference call on February 21 to discuss the impact of IFRS 16; it will also host an investor day on February 28. Impact: NEUTRAL We are maintaining our ACTION LIST BUY recommendation and increasing our target price to $45.00 from $44.00, reflecting higher EBITDAR and EPS forecasts, which are the result of the lower forecast fuel expense. We expect the company to release its new long-term financial targets at its investor day on February 28. These could include updates to previous EBITDAR margin, ROIC, FCF, and leverage targets based on the acquisition of Aeroplan and other changes in the outlook, or the introduction of new long-term financial target metrics. Air Canada's share price is close to its all-time high, while its U.S. airline comparable group is approximately 10% below its 52-week highs. Air Canada's 2019E P/E multiple is slightly (0.4x) below its U.S comparable group, while its EV/EBITDAR multiple is approximately 1.5x below. Air Canada's P/E discount is the narrowest in over five years, while the EV/EBITDAR discount is the narrowest in over two years. We believe that Air Canada's recent strength relative to comparables may limit any short-term upside that could result from the Q4 report or 2019 outlook. However, we believe that the upside potential to 2019 consensus estimates, its attractive EPS and FCF-based valuation, significant EV/EBITDAR discount relative to comparables, and the upcoming investor day will move the stock higher beyond any initial short-term share-price response. TD Investment Conclusion Air Canada is trading at an attractive valuation relative to U.S. mainline comparables and other Canadian industrial companies. We believe that as Air Canada executes on its strategy, the market will more appropriately discount the improving quality of the business through higher valuation multiples, which, combined with earnings growth and FCF, will lead to significant share-price upside.