TD: Maintain at 32$Q2/21; Loosening Restrictions Pave Road to Recovery
Event
Air Canada reported Q2/21 EBITDA of -$656 million vs. TD/consensus (excluding outliers) at -$691 million/-$645 million (consensus range excluding outliers was - $470 million to -$749 million).
Impact: SLIGHTLY POSITIVE
We are maintaining our BUY recommendation and $32.00 target price. Our unchanged target price reflects the net impact of higher 2023 EPS and one less quarter of discounting the year-end 2022 equity value, offset by a reduction in our target EV/EBITDA multiple to 5.5x, from 6.5x, and our target P/E to 11.0x, from 12.0x. The higher EBITDA and EPS forecasts reflect the carry-forward of the stronger-thanexpected cost performance in Q2/21 and other minor modelling updates.
We are reducing our valuation multiples to reflect our view of the increased uncertainty around international travel recovery as a result of increasing COVID-19 cases in many countries, and the heightened competitive risk in key North American markets. Over the past year, we had been adjusting our target multiples higher to reflect our expectation that valuations would be bid higher based on investor demand for shares in businesses that should benefit from the post-pandemic recovery. We believe that we are now at a point where international uncertainty, combined with an increased focus by investors on valuations, will lead to more conservative trading multiples in 12 months than our previous expectation.
We believe that Q2/21 results highlight the significant impact that loosening travel restrictions can have on financial results. Q3/21 capacity guidance is in line with our forecast, and cash-burn guidance supports our existing expectations, which include significant sequential improvements as bookings recover. We believe that global COVID-19 case trends and evolving government travel restrictions will be important share-price drivers in the short term, while long-term earnings expectations remain secondary.
TD Investment Conclusion
Air Canada is trading at an attractive valuation when considering its earnings potential in 2023 and beyond. Based on our current assumptions regarding the impact from COVID-19, we believe that Air Canada's liquidity, capacity cuts, and limited debt-repayment requirements will allow it to navigate this environment and reward investors who decide to ride out the current volatility and elevated risk