TD: Target at 26$ (From 30$)Transportation & Aerospace :Environment & Assumption Updates Support Lower Targets
TD Investment Conclusion
We are reducing our target price on Air Canada to $26.00 (from $30.00) and on Chorus Aviation to $5.50 (from $6.00). Our Transat A.T. target price remains unchanged as we updated our assumptions and estimates following the company's Q2/F22 report on June 9. Our BUY recommendations on Air Canada and Chorus Aviation, and our REDUCE recommendation on Transat A.T. are unchanged.
We believe that pent-up demand for air travel provides airlines with strong pricing power that can offset a significant portion of the higher jet fuel prices in the short term. However, we believe that there is an increasing risk that the extent and duration of the required increase in air fares, inflation in the other components of leisure travel, and the developing risks to the economy and consumer confidence could lead to a more challenging environment for earnings growth later in 2022 and 2023. Regardless, we believe that the significant share-price weakness in recent months already discounts this risk, and leaves upside potential for investors with a 12-month view, and those willing to accept the risk of further short-term downside and/or volatility.
The decrease in our Air Canada target price is primarily due to updated jet fuel price assumptions and an increase in net debt due to a revised approach to workingcapital forecasting, in particular advance ticket sales and Aeroplan deferred revenue. In addition, we have eliminated the use of an EBITDA multiple in our target price methodology. Although we reintroduced an EBITDA-based valuation during the pandemic, we always maintained that its value was impaired with the implementation of IFRS 16 in 2019, and at this time, we believe that it is appropriate to revert back to just the more relevant P/E-based valuation.