Investment Thesis
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Air Canada (AC.TO; OTCQX:ACDVF) is the largest Canadian airline by capacity and has shown amazing returns since 2012, with share prices up 25-fold since their lows under $0.90. (All dollar figures in this article are in Canadian dollars and refer to the Toronto-traded Air Canada stock.) Air Canada's management has set aggressive targets to reduce their financial leverage by 2020. These targets parallel targets set by the same management in 2013 and 2015, all of which were exceeded.
This reduction in leverage will allow Air Canada to achieve investment-grade bond ratings, and potentially save them $150 million per year in interest, allowing strong future returns to shareholders and reinvestment into the airline. Air Canada will also be aided by taking over its own loyalty program in 2020, which will add $500 million to $2.5 billion in value to the business.
Further, Air Canada is undervalued on nearly all metrics compared to its peers. My DCF valuation of Air Canada shows 61 to 87% upside for the airline. Similarly, pricing multiples show that Air Canada is priced less than each of five peer airlines in each of PE ratio (trailing), PE ratio (forward), EV/EBITDA (trailing), and EV/EBITDA (forward). These multiples show 14 to 243% upside.