TD: earning revision, target maintained at 26$Flare-ups & Persistent Travel Restrictions Shaping Recovery
Event :
We are updating our forecasts to reflect a more modest recovery in air travel demand in H2/20 and H1/21 due to the resurgence of cases of COVID-19, and our view of the expected impact on travel restrictions and traveller behaviour. Our long-term outlook for 2022 earnings (driving our target) and revenue returning to the 2019 level by 2023 remains relatively unchanged.
Impact: SLIGHTLY NEGATIVE
We are maintaining our BUY recommendation and $26.00 target price. The revisions to our 2020 and 2021 forecast earnings reflect a slower recovery in revenue in H2/20 and H1/21 due to an increase in COVID-19 cases, the corresponding impact on air travel demand, and our assumption of a more drawn-out lifting of governmentmandated travel and quarantine restrictions.
We continue to believe that leisure travel will return to, if not exceed, 2019 demand by 2023, and that business travel will recover significantly relative to 2020, albeit more slowly than leisure travel. We believe that Air Canada's financial position provides it with the necessary liquidity to navigate a slower recovery than what we have factored into our current forecasts. We forecast that the company will end 2020 with over $6 billion in cash and 2021 with approximately $3.9 billion, comfortably in excess of its stated minimum comfort level of $2.4 billion. We consider the company's early actions aimed at ensuring the long-term viability of the business to be successful.
We believe that the potential for a flare-up in COVID-19 cases in Canada and the U.S. (arguably already beginning), and its implications on sentiment towards air travel and the willingness of decision-makers to loosen travel restrictions means that short-term share price upside could be limited, and that the return to our target will likely occur in the second half of our 12-month investment horizon.
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, and limited debtrepayment requirements will allow it to navigate this challenging environment and reward investors who decide to ride-out the current period of uncertainty