TD: Maintain at 25$Q3/22; Demand Provides Pricing Power to Offset Cost Inflation
Event Air Canada reported Q3/22 EBITDA of $1.057 billion vs. TD/consensus (excluding outliers) at $903 million/$841 million.
Impact: SLIGHTLY POSITIVE
We are maintaining our $25.00 target price and BUY recommendation. Our unchanged target price reflects the net impact of slightly lower valuation-period adjusted EPS, offset by one less quarter of discounting our year-end 2024 equity value. Lower valuation-period forecast EPS is primarily due to higher fuel price assumptions and the impact of currency and higher capital expenditures on debt and interest expense. Air Canada reported strong Q3/22 results, with revenue, EBITDA, and FCF stronger than expected, and an outlook that shows no signs of weakness related to growing economic headwinds. We believe that strong demand continues to provide
Air Canada with the pricing power necessary to offset cost increases resulting from operational challenges and inflation. Our conviction in the trajectory of air-travel demand over the short-to-medium term is relatively low due to a lack of historical precedents for the cross-currents of pent-up demand and economic headwinds. Although we believe that pricing power will moderate in 2023, we believe that strong revenue growth and margin expansion will still occur based on the extremely depressed results that were being generated by Air Canada in Q1/22 and Q2/22 as a result of pandemic-related travel restrictions.
In the short term, we believe that equity market sentiment regarding the downside risk related to the broader economy will play an outsized role in determining Air Canada's share-price direction. We believe that investors should continue to anticipate shareprice volatility, but focus on the company's strong financial position, ability to generate relatively strong revenue and earnings growth in 2023 relative to other industrial sectors, and valuation when considering 2024 and 2025 earnings power.
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.