Air Canada T.AC

RE:AC is a very strong investment opportunity in near/long term

[Rouge10]

**********************Minor correction in EPS numbers*******************

Corrected 2023 Q3 (TTM) EPS number from $5.64 to $5.80 Please bear in mind these are non adjusted EPS numbers.

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Air Canada financial numbers in next few weeks (Q4 results and end of Q1) are going to take a huge leap forward. Not only historical performance (TTM) has been stellar but also coming Qs and years are going to surpass past performance. We will be able to see the proof of financial performance trends in coming weeks. Stock price will be up and down (normal to AC stock) but next few weeks/months will provide enough financial performance to trend it upwards.

Let’s look at key metrics below to understand how AC is reversing the numbers from 2022 to 2024 substantially.

                        EPS (TTM)       FCF(TTM)      Net Debt          LR                    
2022 Q4           -$5.33              $0.8B               $7.5B            ~5.0
2023 Q1           -$2.64              $1.7B               $6.5B             3.08
2023 Q2           $0.81               $2.3B               $5.3B              1.7
2023 Q3           $5.80               $2.1B               $5.4B              1.4
2023 Q4(est)  $6.XX              $2.7B               $4.6B             1.1
2024 Q1(est)  $7.XX              $2.5B               $3.5B             0.8
2024(est)         $8.XX              $2.2B                $2.7B              0.6

Q1 and Q2 have largest FCF and will bring net debt down substantially in few weeks. Q1 money is almost already in pocket. Both Qs will provide very solid base to AC to tackle any business environment; recession or not. Pre-covid, sp was >$50 at Net Debt of ~$3.0 and LT ~0.7. We will see same net debt and LR numbers this summer.

2025 to 2027 numbers are based on the IATA and US Airlines demand forecast long term trends. Even after catching up on covid gap (air travel) and immigration influx, there will be unmet demand based on airline revenue as %age of GDP. Industry wide capacity shortage, would also keep yields up. Increased capacity (2025/26 fleet upgrades and growth), will allow AC to reduce unit cost and improve unit revenue. The metrics will pan out as follows, including planned capex

2025(est)         $10.XX             $2.0B               $0.8B              0.1
2026(est)         $12.XX             $0.7B               $0.2B             0.0
2027(est)        $14.XX              $5.0B             -$4.5B             -0.8

Above numbers assume no share buyback or dividends.
 
In last 12 months (2023), AC has/would have (by Q4 results)

 

1. Improved EPS (TTM) from -$5.33 to ~$6.XX (est).
2. Decreased net debt from $7.5B to $4.6B (est.), reduction of $2.9B (38% reduction)
3. Improved FCF(TTM) from $0.8B to $2.7B
4. Decreased LR from 5 to 1.1. Target was 1.5 by end of 2024.

Analyst community has been underestimating AC and from past Qs, AC has beaten expectations time and again. In about 7 weeks (end of Q1) from now, AC will lock LR ~ 0.8, which is going to be industry best. US airlines are far behind. Once again, AC is becoming one of the best financially managed airline in the world.
 

In next 12 months (2024), AC will

 

1. Improve EPS (TTM) from ~$6.XX (est) to $8.XX.
2. Decrease net debt from $4.6B (est.) to ~$2.7B (est.)
3. Sustainable FCF of $2.2B.
4. Decrease LR from 1.1 to 0.6.

 
Expect in near term:

1. Most of the fuel for Q1 is already purchased. Strong US economy, Canada’s recent job gain and other pointers indicate no recession in sight. First 5 weeks of CATSA travel is at 99.X% of 2019 and 110% of 2023. There is no indication of demand destruction.
2. Exaggerated concerns on travel demand for Air Canada will diminish in coming months. Domestic yield could go lower but international yield will stay strong and that is the business focus for AC.
3. Q1 numbers (TTM EPS: $7.XX, Net Debt: $3.5B) are almost secured. This will provide a solid foundation to AC for strong ongoing financial performance. Once Q1 is achieved, no form of recession is going to reverse the financial baseline for AC. 
4. Investor grade in near future leading to stock price stability.
5. With billions of FCF, share buy back will start. Lower stock price will lead to higher number of shares buy back. This will increase EPS even higher than mentioned above. We have seen this before in 2019 and will repeat again.

 

Expect in longer term:

1. AC had recently announced large capex program for 2025/2026. Many investors would be concerned about that. But the timing of pend is carefully planned, it obvious. And if need be, such programs can be shifted by months/quarters to align with demand.
2. If there would be any recession/soft landing (H2 ’24), it will be over by 2025 and with strong demand and yield environment, capex will be easily manageable. And still produce substantial FCF, even in 2026, the highest planned capex year. Usually, one can expect delivery and spend schedule will be different when the time comes.
3. In a scenario, there is no recession, cash flow will be even stronger, way stronger than 2023.
4. By 2026/27, new efficient fleet (mix of replacement and growth) will be in place, enhancing the margins, leading to even stronger FCF. We should expect next 3-year targets on next investor day, though AC will take a very conservative approach. They usually under promise and over deliver.

 
AC is back on the journey it paused during covid and that too with a stronger and better business model. Fear mongering can impact temporarily only, until the results are out. AC financial and business performance is back.