RBC ups target price to $35. from $33. Price target at $35 (from $33), Reiterate Outperform rating
We revised our 2019/20 estimates higher mainly due to the unit revenue trends. Our 2018
EBITDAR estimate now sits at $2,764MM (from $2,780MM), and 2019 moves up to $3,376MM
(from $3,134MM), and 2020 moves to $3,768MM (from $3,566MM). These changes lead to
an increase in our price target to $35 (from $33). That implies a substantial 40%+ return (even
after the early move today).
Our take - focus in on resiliency: Permeating throughout this release was the theme of
resiliency - and we pointed to this above in terms of the EBITDAR trend in spite of higher fuel.
On top of this being an outright cheap stock based on current operating metrics, we believe a
multiple expansion driver is coming from the resiliency of the operations, which had not
originally been considered in our valuation thesis when it was formed. AC continues to trade at a 1.7x discount to peers, and we see this narrowing to 0.8pt over the next year (for starters).
We continue to view AC as our best idea in our transportation coverage universe.
Resiliency on display as fuel pricing offset;
reiterate Air Canada as our best idea
Our view: Our thesis on AC remains centred on the step-function growth
in FCF, significant de-leveraging, and ultimately, an upward re-rating of
the equity. Q3 results reaffirmed this path, with free cash flow guidance
revised higher as yield enhancing initiatives have offset the substantial rise
in jet fuel - a testament to the company's growing resiliency. Valuation
discount remains a mystery, and we see this evaporating. Reiterate OP.
Key points:
Q3 better than expected across virtually all metrics. EBITDAR of
$1,265MM was better than consensus of $1,238MM and our $1,218MM.
Variance due to better traffic numbers at +7.5% (RBC: +6.5%) on in-line
capacity of +6.7% (RBC: +6.5%). The key metrics of yield +3.4% (RBC:
+3.5%) and RASM +4.2% (RBC +3.2%) both measured very well. Costs were
well controlled with CASM at +1.1%, vs. the +2% to +3% prior guide (RBC
+1.6%). Overall a solid quarter for AC on virtually all metrics.
• Yields expected to ramp significantly. Management indicated that it
has now fully offset fuel price increases with higher fares. Reaffirming
this, the company guided to PRASM growth in Q4 to be in excess of
Q3's 4.2% ... and by our measure 6% or more if we square it with the
reiterated 16% 2018 margin guidance.
• EBITDAR margins guided to ramp in 2019. With fuel offset,
management is reiterating its expectation that margins will swing back
up into the 17%-20% range. All things considered, we consider it
impressive and a testament to resiliency that EBITDAR in 2018E is only
trending down 5% amid fuel expense being up 35% (and notable that
fuel is 34% of total expenses).
• FCF ratcheted higher. For investors that have been concerned regarding
AC's leverage over its history; we note that the strong Q3 resulted in
an upward guidance of ~$125MM for 2018 and the leverage has now
dropped to 2.0x and on pace to 1.2x by 2020 per guidance (and on pace
to be in a debt free position by 2022).
Increasing estimates. We are increasing our 2019/20 estimates as a result
of the notably higher yield guidance (see Exhibit 4). AC continues to trade
at a 1.7pt discount to peers, and we see this narrowing to 0.8pt over the
next year (for starters). That alone gets our target to $35, which implies a
substantial 40%+ return (even after the early move today). We continue
to view AC as our best idea in our transportation coverage universe.
Our take - focus in on resiliency: Permeating throughout this release was
the theme of resiliency - and we pointed to this above in terms of the
EBITDAR trend in spite of higher fuel. On top of this being an outright
cheap stock based on current operating metrics, we believe a multiple
expansion driver is coming from the resiliency of the operations, which
had not originally been considered in our valuation thesis when it was
formed