CIBC: Target +1$ at 31$Positive Guidance Update Highlights A Strong Demand And Lower Fuel Price Environment
Our Conclusion
AC raised its 2023 adj. EBITDA guidance to $3.5B-$4B from its previous outlook for $2.5B-$3B, reflecting a stronger-than-anticipated demand environment and lower fuel price assumption. This supports our view that the Canadian airlines continue to benefit from a countercyclical recovery even as the economy slows, reflecting the pent-up demand to travel. We maintain our Outperformer rating with our price target moving up from $30 to $31.
Key Points
Positive 2023 Guidance Update:
AC updated its guidance and raised its adj. EBITDA expectations for the year to $3.5B-$4.5B from $2.5B-$3.0B. The company has essentially maintained its ASM guidance but noted it is benefiting from an improvement in traffic and yields, reflecting a strongerthan-anticipated demand environment. AC is also benefiting from a lower fuel price environment versus what was assumed in its original guidance (now assuming $1.09/litre versus $1.30/litre previously). These tailwinds are more than offsetting an uptick in the adj. CASM guidance, which is now expected to be down 0.5%-2.5% Y/Y (previous guidance was for adj. CASM to be up 13%-15% versus 2019 levels, which inferred down 5.1%-6.8% Y/Y).
Expect 2024 Targets To Move Up On May 12:
AC has not updated its 2024 outlook at this time. AC reports Q1 results on May 12 and we expect more details on its expectations for next year. AC is currently guiding to adj. EBITDA of $3.5B-$4.0B and we are at $4.2B. We also expect AC to benefit from higher cumulative FCF and accelerated deleveraging given its updated earnings outlook. Currently, AC is guiding to $2.5B of cumulative FCF from 2022-2024 (we see this increasing to ~$3.5B) and a leverage ratio of ~1.5x (we see this falling to 1x-1.5x). Can Demand Hold Up? Yes It Can: AC’s updated guidance supports our positive thesis on the company and the recent note we published titled
Can Demand Hold Up? (link to note).
With a more uncertain economic backdrop and rising interest rates expected to pinch consumer spending, the question we often get asked is whether the current demand environment is as good as it gets for AC. Investors are looking for any signs of demand deterioration. At this juncture, we have not seen any. We maintain our view that the Canadian airlines can continue to benefit from a countercyclical recovery. We continue to expect Canadian air traffic to remain resilient. One of the continued tailwinds from which the Canadian airline sector benefits is higher pent-up demand to travel, as measured by the recovery rate versus 2019 levels. Canada's traffic has yet to fully recover (the U.S. has). We also note that household savings rates have not corrected as much as in the U.S., which is an incremental positive for travel spend. AC is in the earlier innings of this recovery ballgame, and we believe this reduces the risk around its near- to medium-term earnings trajectory