RBC: Sitting in the fenceComments from Tempo1: Walter Sparklin is one of the most serious analyst basing lts research on a lot of airlines and travellers datas (as good as the BNC which is strong on fares asked surveys, a predictive data). He is cautious on AC for the short term (target at 18$) but surprinsingly, a part of his analysis is about his confidence in the AC long term perspective.(look after the summary, I post a part of his complete analysis).
This guy is sitting on the fence understanding that the AC niche is strong. He was right on the last 6 months for his target but does it will stand for more ? Positive factors will clear the clouds over the share. The 18$ SP could not last long.
Note: I didn't publish it before, it would have been bashed. It needs to be read after the dust settle.
Our cautious thesis remains intact; here's why
Our view:
We have a high conviction and (very) non-consensus view on the AC stock. Our $18 target is 41% below the average street target and this is on the back of a fundamentally differing view on how price, demand, capacity and the cost of air travel evolves in 2024. Longer-term we very much like the AC (more on that on pg. 4). But given the setup into 2024 and the level of expectation built into consensus outlooks, we see better opportunities elsewhere. Remain SP.
Key points:
• Q4/23 below expectations. EBITDA of $521MM came in below our street-low $521MM, and well below consensus $558MM. Revenue was in-line, but higher costs impacted results (margin of 10.1% vs cons. 10.9%) resulting in the weaker print.
• Mgmt updates 2024 guide. Mgmt had set a 2024 target back in February 2023; and the guidance provided for 2024 replaces that outlook. Mgmt is now calling for EBITDA of $3.7B to $4.2B (vs. prior cons $3.8MM, 2023 of $4B and the prior objective range of $3.5B to $4.0B). Key is that this guidance is predicated on flat per-unit metrics in top-line and 2.5% to 4.5% higher per unit costs. So with higher costs and no expansion in PRASM, for AC to match last year's $4B number will be contingent on the contribution from higher capacity (guiding at 6% to 8%) and benefit from lower fuel. The company pulled its FCF guidance on the basis that the cumulative $2.5B had already been achieved; however we note that the $13B capital program over 2024 to 2027 announced last quarter means the FCF recently achieved will be difficult to match (we are calling for usage of $0.5B in FCF in 24-27 vs $3.5B in the prior two years).
• Where we differ from street (and guidance). As it stands, our estimates for 2024 have been street-low at 9% below consensus and our target price is 41% below the consensus (ex-RBC). Our non-consensus view is predicated on: the view that 2022-23 constituted peak demand (which we see normalizing in 2024 - see our leading indicator heat map); capacity at AC and its smaller domestic peers will be up; we expect load factors to contract on the back of higher capacity and lower demand; and we expect airfare pricing to decline (mgmt guiding to flat). On the cost front, we expect costs to be up materially (we believe mgmt has prudently guided to an appropriate cost escalation). And because of the inherent sensitively to these metrics in our model (particularly pricing), our 2024 EBITDA forecasts are substantially below street and cons., at $3.4B (vs guidance $3.7B to $4.2B). Finally, we view FCF as challenged in 2025-27 due to capital program, limiting shareholder return opportunities. Maintain $18 target, reiterate SP rating.
Why we like AC long term.
While the operating environment remains challenging for AC, we like the company's long-term fundamentals for the following reasons.
Tighter capacity growth. We see AC benefitting from responsible capacity growth as the company can pivot to different markets (as we saw during the pandemic) depending on changing demand patterns. We like that the company has the ability to scale back on domestic routes due to excess capacity from competition and reallocate that towards APAC, which is recovering. Tighter capacity growth promotes profitable growth over market share gains; therefore, we see this benefitting AC going forward.
Rationalization of the competitive landscape. While the competitive landscape is heating up with non-mainline operators increasing capacity and expanding routes almost weekly, we ultimately see higher costs disproportionately impacting the less liquid and less diversified players. UAL spoke to cost convergence occurring between legacy and LCCs, which has a more significant impact on LCCs, who cannot charge higher prices for less service. Overall, we see AC as benefiting from industry consolidation when it occurs.
Secular tailwinds from immigration. Increased immigration has been a tailwind for AC's transatlantic segment, which the company continues to target as Canada increases its immigration targets. Coupled with that is recovering capacity from APAC, which remains an essential source of immigrants. In addition, the Emirates partnership increases AC's reach to popular VFR markets in India and the Middle East, which we see the company uniquely positioned to benefit from.