TD Waterhouse March 12 - 2020 -56$-45$-28$ in 19 days Another revised target : TD at 45$
Canadian Airline Forecast Update
Preliminary Assumptions For COVID-19 Impact
TD Investment Conclusion
We are reducing our forecasts to account for our preliminary assumptions regarding
the potential impact of COVID-19 on air travel demand for Air Canada and aircraft
leasing transactions for Chorus Aviation. While the impact is negative and highly
uncertain, assuming the impact begins to dissipate by the end of 2020, we believe
both Chorus and Air Canada share prices will be significantly higher in 12-months
(not withstanding the potential for more downside in the meantime).
We are reducing our Air Canada target to $45.00 from $56.00 and maintaining our
BUY recommendation. The lower target is due to the impact of slightly lower valuation
period forecasts (2021) and a reduction in our target P/E multiple to 8.0x from 9.0x
previously. Our updated forecasts contain an unusually high degree of uncertainty.
We have observed recent indications of changes in demand from airlines around the
globe in order to generate what we believe are reasonable starting assumptions for
the impact on Air Canada's financial results (page 2). While we assume that 2020
earnings and FCF will be immaterial, we assume 2021 earnings return to a level
close to our previous forecast, a year that we believe will be the determinant of the
share price 12-months from today. Importantly, we believe that Air Canada has the
operating flexibility, cash and capital commitment flexibility to sustain itself through
a prolonged downturn as a result of COVID-19.
We have always used valuation multiples for air transportation companies that reflect
the potential risks to the businesses posed by unexpected events that are beyond the
control of management such as COVID-19. As a result, we believe further downside
risk to multiples is limited, though the longer-term upside to multiples which we have
always maintained exists, may also be impeded by this global event.