Air Canada T.AC

RE:AC so far and beyond Q2

[JuIieRichards]

Bumping useful AC investor article for long weekend reading:

Rouge10 - (8/29/2023 10:42:02 PM)

AC so far and beyond Q2

2023 will be the year of full financial turnaround for AC. From demand/ price improvements to substantial reduction in leverage ratio, year 2023 will unfold the financial powerhouse. Let’s check the evolution of net debt, leverage ratio and stock price based on multiples. See the table below to understand the Q by Q progress of financials and impact on SP.

Assumptions:

1. Demand:
   1. Q2 results are already published. Numbers are taken from results.
   2. Q3-Q1’24 numbers are based on strong demand forecast given by AC till Q1 at least. Keep in mind, US airlines are very bullish on demand growth for years to come. But for now, assume 2024 (H1) performance will be similar to 2023 (H1). There is flexibility between additional capacity and price movement.
   3. China market is still unfolding. Though market is in recession, pent up demand is waiting for government to open air travel market. E.g. precovid AC had 35 weekly flights and its down to 4 weekly flights. It means 10 less WB planes (almost 7-8% overall capacity) allocated to China market. Besides other opportunities, this will open up in 2024, even if Chinese market is in recession.
2. Financials
   1. Assume SP based on Q2 results at $25.
   2. Oil price to hover around ~$80.
   3. Deleveraging strategy will continue in near term. No buy backs. FCF generation will be very very strong for next few Qs.
   4. 1.5 year (2022/23) FCF has already surpassed 3 year forecast (2022-24) given by AC. At some point AC will have to update FCF forecast.
   5. Banks are giving target EV/EBITDA multiple of ~4.0. Though precovid it was 5.0 for AC and for US airlines it was 5.5-6.0
   6. EPS multiple historically was 10 and current target should be in range. Though its lower in current market.

Refer to my post from Jun 7th 2023 re: leverage ratio. Q2 EBITDA, net debt and leverage ratio turned out to be better than my estimates. https://stockhouse.com/companies/bullboard?symbol=t.ac&postid=35484374

Table below shows possible SP based on financials. Market dynamics will playout but can’t escape ratios for too long.

Year       Net Debt    Leverage Ratio      EPS     EV/EBITDA       SP               EPS Multiple

2022        $7.5B              5.1              -$1.0(H2)        10                 $20                     NA
Q1 '23     $6.5B              3.1                  $0.01            7                  $20                     NA
Q2 '23     $5.3B              1.7                  $2.32           4.6                $25                     18                    
Q3 '23     $4.6B              1.2                   $2.8            4.6(3.3)       $38($25)              8.3(5.4)            
2023       $4.1B               1.0                  $5.3             4.6(2.9)      $45($25)              8.5(4.6)
Q1 '24     $3.4B               0.8                  $0.3            4.6 (2.6)      $50($25)              8.8(4.4)            
Q2 '24     $2.8B               0.6                  $2.3            4.7 (2.4)      $55($25)              9.6(4.4)
 
Read the table above as follows:

1. Assume current SP (Q2 results) to be $25. This translates into EV/EBITDA ratio of 4.6 and TTM EPS multiple of 20.
2. Q3 results forecast: Leverage ratio of ~1.2
   1. If SP continues unchanged ($25) the EV/EBITDA will be 3.3, lower than analysts ratio and much lower than historical ratio. TTM EPS multiple will be 5.4, much lower than target.
   2. To maintain current EV/EBITDA ratio (4.6), SP has to be around $38 and that will take TTM EPS multiple to 8.3, still lower  than target.
3. Q4 results forecast: Leverage ratio of ~ 1.0
   1. If SP continues unchanged ($25) the EV/EBITDA will be 2.9, much lower than analysts and much lower than historical ratio. TTM EPS multiple will be 4.6, much lower than target.
   2. To maintain current EV/EBITDA ratio (4.6), SP has to be around $45 and that will take EPS multiple to 8.5, still lower than target.
4. Q1 ‘24 results forecast: Leverage ratio of ~ 0.8
   1. If SP continues unchanged ($25) the EV/EBITDA will be 2.6, much lower than analysts and much lower than historical ratio. TTM EPS multiple will be 4.4, much lower than target.
   2. To maintain current EV/EBITDA ratio (4.6), SP has to be around $50 and that will take EPS multiple to 8.8, still lower than target.

At some point the SP will move from current ratios to target ratios. Current ratios will be become very discounted after Q3 results and there will be upward pressure on SP. T

o compare, precovid, leverage ratio was 0.8, EV/EBITDA ratio was close to 5.0 and TTM EPS multiple was close to 10. One more thing to consider is that sp target should be based on future 12 month EPS forecasts, which will move upwards in coming months.