TD Banks take is OK . 27 target !
Equity Research
Air Canada
(AC-T) C$27.00
Air Canada Announces Canadian Government Financial Package Event
Last night, Air Canada announced that it has entered into debt and equity financing agreements with the Government of Canada, which will provide access to up to $5.9 billion through the Large Employer Emergency Financing Facility (LEEFF).
Impact: MIXED
Air Canada has been working on a financing package with the Government of Canada for many months, and a definitive agreement was widely expected. We believe that Air Canada's access to this capital will prove to be insurance as opposed to necessary liquidity required to finance operations (excluding the return of non- refundable deposits) or capital expenditures in 2021 and beyond. We believe that the resurgence of COVID-19 cases in Canada in recent weeks has further delayed the recovery, and we have adjusted our forecasts accordingly. Our target price declines to $29.00 due to the negative impact of greater short-term cash-burn and the impact of the dilution from the share and warrant issue on the P/E component of our target. Although our target has declined, investors should also keep in mind that we believe the downside risk has been reduced by the financial security provided by the government aid package.
Despite the challenging environment, we continue to believe that the planned vaccination of the Canadian population by the fall, along with the eventual loosening of travel restrictions, will lead to a return to normal levels of domestic leisure travel demand in 2022, and a return to normal international leisure travel behaviour in 2023. Unfortunately, the recovery of and outlook for high-margin business travel remains more uncertain and represents one of the key reasons why we believe Air Canada's access to this additional liquidity from the Government of Canada represents valuable insurance.
TD Investment Conclusion
We believe that over the long term, there is additional upside to Air Canada's share price beyond our target. However, we do not expect this to come to fruition over the next 12 months. In the meantime, we believe that the current valuation and uncertainty justify a HOLD recommendation despite the possibility of momentum- driven short-term upside when COVID-19 cases resume a downward trend i