RBC Raise Target RBC Dominion Securities analyst Walter Spracklin is taking a “more conservative view” on the Canadian airlines/aerospace sector for the next year, saying he’s “cautious on the sustainability of high pricing as consumer confidence weakens and the percentage of non-mainline carrier fleet expands putting pressure on prices.”
In a research report released Wednesday, he revealed the firm’s Get Out and Travel (GOAT) index, which analyzes consumer patterns, inflected downward in the second quarter for the first time, which he said is “a sign that travel demand may potentially be turning over.” He also emphasizing travel search interest is trending lower.
“Generally, the airlines/aerospace sector underperformed the market in Q2, except for [Air Canada], which significantly outperformed on robust summer travel demand and normalizing fuel prices,” said Mr. Spracklin.
“Based on the data and associate trends, we are increasing our Q2 estimates for AC (due to fuel cost declines) and take a more conservative view in our out-year estimates, supported by weakening travel indicators observed in the RBC Elements data. The remainder of our coverage Q2 estimates remains unchanged ahead of reporting season. Key areas of focus for us this quarter will be: 1) sustainability of higher airfares, given macro concerns and new entrants, 2) update on booking trends, 3) the impact of materially higher labour costs and pilot negotiations, and 4) expansion of capacity, especially as infrastructure issues persist.”
Mr. Spracklin increased his target for Exchange Income Corp. (“outperform”) to $71 from $70. The average is $66.77.
“We flag EIF as attractively valued, in our view, with valuation not reflecting our expectation for mid-teen 3-year EBITDA CAGR 2022 to 2025,” he said.
“Our Q2 estimate remains unchanged at $147-million, ahead of consensus $143-million on higher Aviation EBITDA. Our 2023 EBITDA estimate also remains unchanged at $568-million, toward the top end of guidance for EBITDA of $540-million to $570-million, and ahead of consensus $559-million. We now value EIF off our 2025 EBITDA estimate of $708-million (cons. $675-million) to fully capture new business wins; and discount back one-year at 8 per cent.”