RE:CIBC: see significant upsideSo many AC pumpers and propagandists on this board, like the one below
Earnings And Leverage Back To Pre-pandemic Levels But EV ~29% Lower
Our Conclusion
On the back of AC’s Q4 results, its shares reacted negatively to its 2024 adj. CASM guidance. We believe the reaction to AC’s 2024 adj. CASM guidance fails to give the airline credit for its revenue levers. We also believe that 2024 will be the last year we’ll see the pronounced lagging impact from elevated industry inflation on AC’s cost structure, and that 2025 should reflect a transitionary year. Putting things into perspective, AC’s EBITDA and leverage ratio are now back to pre-pandemic levels, but its EV (enterprise value) is 25% lower. We see significant upside in AC as its network continues to rebuild post-pandemic. We keep our Outperformer rating and our price target remains at $30.
Key Points
2024 Adj. CASM Guidance Higher Than Expected – Knee-jerk Reaction Is Always Negative: AC reported a solid end to 2023 and the mid-point of its 2024 guidance was above consensus expectations. Its shares are weaker though, as its 2024 adj. CASM guidance of up 2.5% - 4.5% Y/Y was higher than expected. For context, we previously expected a flattish trend, but we also expected higher ASM growth. This alone is worth just over two points to our adj. CASM expectations. Nonetheless, it is a consistent reaction we often see with airline equities – if one surprises to the downside on unit costs, the share price declines. We think some perspective is needed here.
First, even accounting for the differences in ASM assumptions, the mid-point of the adj. CASM guide is still a point above what we would have expected. Driving factors include accruing for a new pilot agreement, new regulations (i.e., APPR), and higher airport fees. It would appear to us though that some of the inflation AC is seeing has an outsized impact in 2024. For example, we believe the new pilot agreement will impact Year 1 more. The incremental inflation from the amendments to APPR is likely most pronounced this year. AC’s headcount has stabilized the last four quarters at ~36,000 employees, suggesting AC is in a position to begin reaping the benefits of improved labour productivity. Lastly, with AC’s ASM still tracking below pre-pandemic levels this year, as the airline adds capacity (expected to take on 18 more planes in 2025, which are also more efficient), this helps improve fixed-cost absorption. Summing this up, we do believe that 2024 will be the last year we’ll see the pronounced lagging impact from elevated industry inflation on AC’s cost structure, and 2025 should reflect a transitionary year.
Second, as we have written about before (please refer to our report titled Canadian Airlines: Will Rising Costs Derail The Recovery?), the inflation AC is facing is industry-wide and not company-specific. AC is not uniquely disadvantaged. As the sector looks to absorb these costs, this has an impact on yields