TD: Target from 29$ to 31$Q4/21 Results; Air Canada is Ready for the Recovery
Event
Friday morning, Air Canada reported Q4/21 EBITDA of $22 million vs. TD/consensus (ex-outliers) at -$51 million/-$23 million.
Impact: SLIGHTLY POSITIVE
We are maintaining our BUY recommendation and increasing our target price to $31.00 from $29.00. The target-price increase reflects one less quarter of discounting our year-end 2024 equity value, slightly higher 2024 forecast adjusted EBITDA resulting from minor modelling updates, including an updated view of long-term cargo revenue potential, and slightly lower forecast net debt as a result of the Q4/21 results. We believe that valuation-multiple considerations for the short-term shareprice direction will take a back seat to the impact of improving sentiment towards Canadian airlines as traffic accelerates in H1/22 and risks related to the pandemic continue to fade.
We view Q4/21 positively due to the strong FCF, significant improvement in the advance ticket sales liability, management commentary around expectations of demand trends through the year, plans to acquire the 10 additional A220 that had originally been cancelled in November 2020, and the fact that it represented the first quarter of positive EBITDA since the onset of the pandemic.
We believe that Air Canada's cash and liquidity are sufficient for dealing with any unexpected setbacks in the recovery, or for providing the company with the funding necessary to complete aircraft purchases planned for 2022 and 2023. We estimate that domestic passenger revenue will return to pre-pandemic levels by the end of 2022 and that international revenue will not return until the end of 2024, weighed down primarily by the Pacific market. The recovery in corporate travel demand has been prolonged; however, management is optimistic that there will be improving traffic in 2022, driven by SMEs and corporate Canada returning to the office.
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 passenger air-travel recovery, we believe that Air Canada's liquidity, capacity increases, and limited debt-repayment requirements will allow it to navigate shortterm headwinds and reward investors who decide to ride out the current volatility and elevated risk