Air Canada T.AC

AC: Correlation between net debt, leverage ratio & stock pri

[Rouge10]

It’s a matter of time. With every passing Q, as financial performance builds up (and surpass any of the previous results), stock price will go up. Below is the story since 2012, when AC started the new chapter; 6^th freedom expansion, fleet upgrades (high capex), Aeroplan/Credit card, international expansion, etc… 
 
Year                Net Debt       EBITDA        Leverage ratio       FCF              Stock price
2012                  $4.25B            $1.45B            3.0                     $0.19B                  $2.X               
2013                  $4.35B            $1.43B            3.1                    -$0.23B                  $7.5
2014                  $5.13B            $1.67B            3.1                    -$0.55B                  $12.X
2015                  $6.3B              $2.53B            2.5                      $0.21B                  $10.X
2016                  $7.0B              $2.77B            2.5                     -$0.15B                  $14.X
2017                  $6.2B              $2.92B            2.1                      $1.06B                  $26.X
2018                  $5.86B           $2.85               2.0                      $1.30B                  $26.X
2019                  $2.9B             $3.67B            0.8                       $2.08B                 $50.X
2020                                COVID                   v high
2021                                COVID                   v high
2022                 $7.5B              $1.5B               5.0                     $0.8B                    $20.X                 
2023                 $4.6B             $3.97B             1.1                     $2.75B                $18.X
2024 Q1           $3.7B              $4.1B              0.9                 >$2.5B (TTM)            ??
2024 Q2           $2.9B              $4.2B              0.7                 >$2.5B (TTM)            ??

2025, 2026  will keep leverage ratio <0.8 , net debt low enough and FCF large enough to give the boost to sp. 
 
 
Historical Note:

1. In initial years, FCF was negative to 0 because of high capex for fleet upgrades with relatively low EBITDA. In those years, lower EBITDA restricted FCF because of high capex.
2. Now the story has evolved, AC has expanded, revenue has almost doubled, and debt levels are similar to the ones in 2012. Ability to generate large EBITDA and FCF is much stronger than ever before.
3. In 2016, stock price was ~$15 even with negative FCF and leverage ratio of 2.5. Not because of weak financials but cash flow was not sufficient to fund high capex. That happened because airline was much smaller than today with limited ability to generate cash.
4. From 2017-2019 AC produced $4.0B FCF and reduced net debt (and leverage ratio) to record low levels.
5. COVID was an unfortunate event, but AC has recovered since then and is in a much stronger position than ever before.

Going forward:

1. In few weeks, net debt and leverage ratio will be at record low levels with record TTM FCF numbers.
2. As per the CFO, expect substantial sustainable annual FCF even in the high capex years (2026).
3. Today’s AC is much larger, stronger with diverse revenue (6^th freedom focus, credit card, international focus, young fleet, low interest cost (70% is fixed), new technology, insourced loyalty (Aeroplan), etc…) . AC can generate large FCF to fund high capex with cash from operations.
4. This operating model will give a very sound base to AC to produce large FCF, which will be used to return capital to shareholders, even after funding the capex.
5. It is just a matter of time when stock will surpass pre-covid market cap.