RBC...price target from $59. to $58. Q4 results and 2020 guide below expectations; but
yields our main concern
Our view: While we view AC as fundamentally undervalued, we are
mindful of the valuation impact shifts in capacity and yields can have on
airline stocks. With the service disruptions into China and the imminent
(?) ungrounding of the MAX, we are mindful of the impact to yields.
Accordingly we see the AC stock as likely volatile in 2020 and advise
investors to be tactical. Maintain Outperform.
Key points:
Q4 weaker than expected. Q4/19 EBITDA of $665MM came in below
consensus of $707MM and our $690MM. Variance was mainly on higherthan-expected CASM, as higher stock based comp and reservation issues
(which combined for $60MM) together with service disruptions into China
and the MAX grounding, weighed on costs. Traffic and capacity were all in
line, however, yield growth moderated to 2.3% (vs. our 4.5%) and slower
than the 5.6% achieved YTD to Q3. The cadence of yield growth is a focus
for us, which we address below.
New 2020 guidance lower than street estimates. Mgmt provided new
2020 guidance for 19% EBITDA margin and a small increase in EBITDA over
the $3,636MM in 2019. This was slightly below our prior $3,826MM, and
more notably below consensus of $4,008MM.
Our eyes on the yield. We are increasingly cautious as to how the market
will react to capacity impacts relating to service into China and the MAX
re-entry. On one hand, the MAX grounding in our view had been a yieldenhancing event; however, with the reallocation of China capacity, we see
this as a yield-negative. Further, once the MAX is re-certified, we expect
further pressure on yields. We have reflected this into our estimates
accordingly.
Estimate changes. Per above, we are reducing our yield assumption to flat
(from 3%) in Q1/20 (to account for reallocation of China capacity) and to
flat in 2021 (from 2%) to account for MAX re-entry. This reduces slightly
our 2020E to $3,692MM (from $3,826MM), which is nevertheless in line
with guidance. Our 2021E goes to $4,408MM (from $4,628MM). With the
slight reduction to our estimate, our price target goes to $58 (from $59).
Our take.On the positive side (and the basis for our continued Outperform
rating), we are impressed by the new-found resiliency in the AC operations
following several unexpected shocks to the network; and we are optimistic
on the contribution of Aeroplan (and Transat if approved). On the flip side,
we are cautious around the capacity impact of the service disruptions
into China, as well as MAX re-entry. We note that capacity shifts such
as these and the potential negative impact on yields rarely bodes well
for airline stocks; and as a result we recommend investors act tactically
around potential share price volatility in 2020.