TD: Target at 26 $ (from 25$)Q2/22; Strong Bookings Provide Confidence in Pricing Power
Event
Air Canada reported Q2/22 EBITDA of $154 million vs. TD/consensus (ex-outliers) at $135/$193 million. FCF was stronger-than-expected, 2022 EBITDA margin guidance was unchanged and there was (not surprisingly) no update to 2024 targets.
Impact: SLIGHTLY POSITIVE
We are increasing our Air Canada target price to $26.00 from $25.00 and maintaining our BUY recommendation. The increase in our target is due to one less quarter of discounting our year-end 2024 equity value, partially offset by a slight decrease in our valuation period (Q1/24-Q4/24) forecast earnings.
Air Canada reported strong Q2/22 results, with FCF and EBITDA coming in stronger than expected. We believe that strong booking trends continue to provide airlines with pricing power that can offset cost increases, resulting from operational challenges and inflationary pressures. However, we believe that there is a risk of a moderation in the rate of recovery in the latter part of 2022 and into 2023 as Air Canada's exposure to price-insensitive travelers moderates, while exposure to more value-conscious travelers increases. Our certainty as to the trajectory of air travel demand over the medium term is relatively low due to economic conditions. However, we believe that Air Canada's disciplined approach to capacity expansion, focus on cost control and balance sheet prudence will reward shareholders over a 12-month horizon and beyond.
We forecast 2022 passenger revenue equal 83% of 2019, with further improvements in 2023 and in 2024 when we expect passenger revenue will surpass 2019. We believe that Air Canada's 2022 financial guidance and 2024 targets are realistic and support our view that earnings potential will drive a much higher share price by the middle of 2023. In the short term, we believe equity market sentiment regarding the probability and magnitude of a recession will play a larger-than-normal role in determining AC's share price direction.
TD Investment Conclusion
Air Canada is trading at an attractive valuation, when considering its earnings potential in 2024 and beyond. Based on our current assumptions, we believe that Air Canada's aircraft deliveries, capacity plans, and pricing power will allow it to navigate short-term headwinds and reward investors who ride out the current volatility.