Post by
lb1temporary on May 28, 2021 5:34am
CIBC: Target at 3$
Will FQ2 Results Be A Dose Of Reality?
Our Conclusion
TRZ reports its FQ2 results on June 10. We believe its upcoming earnings will be a dose of reality for a stock that has done well in the last four weeks on the broader optimism around the aviation sector and after receiving government aid. TRZ has been up 18% since April 28 versus AC up 9% and the XAL Airline Index up 3%. What makes this outperformance even more remarkable was that during this period, Mr. Pladeau announced he had walked away from his $5/share bid for TRZ. We view TRZ’s valuation as stretched on normalized earnings, while it is also further away from becoming cash-burn neutral given its structurally lower margin profile and limited exposure to domestic travel versus mainline carriers. We maintain our Underperformer rating while our price target goes from $4 to $3 on our revised earnings forecasts.
Key Points
Don’t Expect Much Of A Summer Season: We do not expect a pickup in international leisure travel until the Canadian Government eases travel and quarantine restrictions, which will hopefully be later this year. We currently expect a pickup in international travel beginning this winter. We would point out though that the winter has historically been a weak earnings period for TRZ. Looking back prior to the pandemic, TRZ was consistently reporting an earnings loss during the winter. This suggests TRZ’s financial position may not begin to see an improvement until the summer of 2022. In other words, TRZ is further away from becoming cash-burn neutral, given its structurally lower margin profile and limited exposure to domestic travel.
Does TRZ Have Enough Of A Liquidity Buffer?: While TRZ received ~$820MM in financial assistance from the Canadian Government, ~$310MM is available only for refunding customers, which leaves ~$510MM for TRZ to manage its core cash burn. TRZ has noted that it needs ~$500MMM in financing to get through 2021. We estimate TRZ's pro-forma liquidity at the end of FQ2 leaves it with a year's worth of liquidity at its current cash burn rate – not a lot of wiggle room if TRZ’s earnings recovery does not begin to take hold until next summer.
Valuation Looks Stretched On Normalized Earnings: Assuming TRZ returns to pre-pandemic EBITDA by F2025, its current share price infers an EV/EBITDA multiple of over 6x discounted back to F2022 at 10%. For context, pre-pandemic, AC was trading at ~4x and Big 4 U.S. carriers were trading at an average of ~6x. In our opinion, TRZ should fundamentally trade at a discount to the North American airlines