CIBC: Target at 22$ (prior 23$)
Preparing For A Slow Recovery
Our Conclusion
While the airline industry faces significant uncertainty, AC is as wellpositioned as any global carrier for when a recovery does emerge. Its strong balance sheet entering this crisis, improved liquidity buffer, and declining cash burn highlight that the company is doing a good job controlling the variables it can control. We have tweaked our estimates reflecting a slower recovery than we had previously been forecasting. Our price target moves down $1 to $22, and we maintain our Outperformer rating.
Key Points
AC’s Q2 results and Q3 capacity outlook highlight that air passenger traffic is recovering more slowly in Canada than in other parts of the world. For example, looking at recent data, ticket sales are down ~85% in Canada, 5-10 points lower than in the U.S. This reflects Canada’s more stringent travel rules with government continuing to recommend against non-essential travel, 14-day quarantining rules, interprovincial travel barriers, and international travel restrictions. That said, we continue to see AC controlling the variables it can control, putting it in a position to benefit when air traffic does return. In this note, we outline our key takeaways from AC’s second quarter.
Controlling The Controllable: AC continues to do a good job controlling the controllable. It has increased its liquidity buffer to $9.12 billion versus $6.523 billion at the end of Q1. AC's excess cash sits at $6.82 billion as the company has called out $2.4 billion in minimum cash to run its operations. Its unencumbered asset pool (excluding the value of Aeroplan and Air Canada Vacations) sits at ~$2.5 billion. Daily cash burn is expected to be $15 million- $17 million in Q3, down from ~$19 million in Q2. Third quarter cash burn includes $4 million per day in capex and $5 million per day in lease and debt service costs. This infers ~19 months of liquidity. And if we assume that all capex will be financed, that would extend out AC’s liquidity to ~26 months. While demand remains soft given spiking COVID-19 cases in the U.S. and travel restrictions in Canada, we continue to see AC with sufficient liquidity to manage through this crisis.