RE:TD raises its TP to $27More technical adjustments than change of view: Here is the summary:
Event
Following the issuance of $1.23 billion in new debt capital on Monday, Air Canada has issued a total of $5.5 billion in new capital in 2020 in an effort to provide the necessary liquidity to emerge from the pandemic-driven downturn in demand for air travel. We believe that Air Canada has more than enough liquidity to manage through the cash burn implied by our forecasts, and that it will be in a position to meet its 2021 debt obligations without the need for additional new capital.
Impact: NEUTRAL
We are maintaining our BUY recommendation and increasing our target price to $27.00 from $26.00. The updated target price is due to minor adjustments in our financial forecasts, combined with an updated valuation methodology. We have updated our forecasts to reflect revised working capital assumptions, a slightly slower revenue recovery in 2020, and the issuance of new debt announced on Monday. We have changed our valuation methodology to one which uses the average equity value derived from applying an 8.0x multiple to 2022 forecast adjusted EPS and 4.5x to 2022 forecast EBITDAR. Due to the extensive capital raising initiatives in 2020, depressed EPS, and our view that investors should be looking to more normalized earnings in 2022, we believe that this is the best approach to setting a 12- month target price at this time. We are trying to use relatively conservative valuation multiples due to the unprecedented uncertainty in our financial forecasts.
This note and associated bulletin include the results of a scenario analysis that considers the impact of different assumptions regarding the CTA's approach to the refunding of customer deposits held by Air Canada for cancelled flights on: 1) our current operating cash flow forecast; 2) no improvement in cash flow relative to Q2/20; and 3) a midpoint scenario. TD Investment
Conclusion
Air Canada is trading at an attractive valuation when considering its earnings potential beyond 2021. Based on our current assumptions regarding the impact from COVID-19, we believe that Air Canada's strong liquidity, capacity cuts, and limited debt-repayment requirements will allow it to navigate this challenging environment and reward investors who decide to ride-out the current volatility and elevated risk