NBF: Investor pessimism overdone. Copy from Globe and mail (easier to copy than from NBF)
The investor pessimism swirling around Air Canada (AC-T -0.84% decrease) and its peers feels “overdone,” according to National Bank Financial analyst Cameron Doerksen.
“We appreciate that the market is concerned about the sustainability of air travel demand and pricing as well as the ongoing contract talks with Air Canada’s pilot union,” he said. “However, we believe that the current share price reflects an overly dire scenario for Air Canada.
“On our updated 2024 forecast, which assumes a 3.0-per-cent decline in passenger unit revenues and non-fuel unit costs towards the high end of Air Canada’s guidance range, Air Canada shares are trading at just 2.9 times EV/EBITDA and 7.0 times P/E. This is below the historical average forward multiples (excluding the pandemic years) of 4.3 times EV/EBITDA and 9.0 times P/E. If we assumed that AC’s shares should trade at its historical average forward EV/EBITDA multiple in a trough earnings scenario, the current share price implies that 2024 EBITDA would come in at $2.5-billion, a 38-per-cent decline from the $4.0-billion Air Canada generated in 2023. We note that Q1/24 EBITDA was higher year-over-year.”
In a research report released Wednesday previewing its second-quarter financial results, Mr. Doerksen emphasized the airline’s current valuation now sits “at levels last seen during the depths of the pandemic.”
“During the pandemic, which effectively shut down air travel and forced airlines into survival mode, Air Canada saw its market cap fall from over $13-billion in January 2020 to just over $3-billion in March of that year (a decline of over 75 per cent),” he noted. “AC’s market cap rebounded late in 2020 and again in mid-2021 (briefly hovering over $10-billion, although this was partially due to two separate share issuances in Q4/20 and Q2/21) but has largely declined since then despite a dramatic financial turnaround and de-leveraging through 2023 (market cap currently sits at approximately $6.4-billion).
“In addition, compared to the U.S. peer group, Air Canada’s share price performance has largely underperformed since the beginning of 2023, only outperforming American Airlines (noting that this is mostly due to a large decline in AAL’s stock price in May after a profit warning). Delta shares have increased 42 per cent since the start of 2023 and United is up 28 per cent while AC’s stock has declined over 7 per cent over the same period.”
Mr. Doerksen thinks the primary headwind to investor sentiment for Air Canada shares in the near-term remains the uncertainty around negotiations with its pilot union, and he expects that to continue until a deal is reach. Following the disruptions caused by the strike by WestJet’s mechanics union, he predicts the federal government may get involved given Air Canada’s market position and the potential impact of the disruption to the country’s travel industry.
Believing its financial position “remains strong,” the analyst emphasized the demand for air travel “is not collapsing.”
“Based on CATSA passenger screening data at Canada’s largest airports, the most recent 7-day rolling average of passenger traffic in Canada was up 4.8 per cent year-over-year and so far this year, has largely been higher than last year. Airfares in Canada have stabilized the last three months with the most recent numbers from Statistics Canada showing prices up 4.5 per cent year-over-year in May and 15.6 per cent ahead of May 2019. We expect some yield erosion for AC in the coming quarters due mainly to tough comps, especially on Atlantic routes, but domestic prices look relatively health.”
“Overall Canadian industry domestic capacity in Q3/24, as measured by seats, is projected to be up 0.9 per cent year-over-year but down 7.1 per cent versus Q3/19. The U.S. trans-border market will see industry capacity up 13.7 per cent year-over-year in Q3 while international capacity to and from Canada is set to increase 8.7 per cent year-over-year. Air Canada should see particular strength this summer on Pacific routes where traffic was up 36 per cent in Q1 and yields flat despite a 38-per-cent increase in capacity.”
With updates to his 2024 forecast, which assumes a 3-per-cent decline in passenger unit revenues and non-fuel unit costs towards the high end of its guidance range, Mr. Doerksen trimmed his target for Air Canada shares to $28 from $30, keeping an “outperform” rating. The average target on the Street is $26.72, according to LSEG data.