Nat Bank : overly pessimistic valuation (by markt) Note: Target was lowered two weeks ago from 28$.
Q2 results in-line with preliminary release
Air Canada reported Q2 results this morning that were consistent with the
company's preliminary Q2 results released on July 22nd. For more detail, see
our Q2 results Flash (link to AC Q2/24 results Flash).
Yield weakness pronounced on international routes
Q2 passenger RASM in Canada was up 2.9% y/y but was down in all other
markets including an 8.7% drop on Atlantic routes (after an exceptional
performance last summer), a 7.7% decline on Pacific routes (largely due to a
32.4% increase in capacity y/y), a 2.9% decline on U.S. transborder routes, and
a 5.7% decline on other routes (LATAM and Caribbean mainly). Management
expects yield softness to continue in Q3 but sees some stabilization in Q4
based on an easier comparable and a trimming of capacity.
Growth plans scaled back
Air Canada is scaling back some of its capacity growth in H2, notably on routes
to Europe where competitive capacity growth this summer was particularly
aggressive. In addition, management indicates that it is assessing its capacity
plans on domestic routes but will continue to grow on the U.S. transborder as
the airline pursues its 6th Freedom connection strategy.
Maintain Outperform and $24.00 target
We maintain our Outperform rating and $24.00 target on Air Canada shares.
Our view on Air Canada has been that while we recognize that there is
weakness in yields that will pressure y/y results in the coming quarters, and
the stock is likely to remain under pressure until a new agreement with the
pilots is reached, the current valuation reflects an overly pessimistic earnings
outlook for the company. On our updated 2024 EBITDA forecast, which is at
the low end of management’s guidance range, Air Canada shares are trading
at just 2.9x EV/EBITDA, well below the historical average for the stock of 4.3x
forward EV/EBITDA.