Following better-than-expected third-quarter results and touting its buyback plan as a “significant catalyst heading into 2025,” ATB Capital Markets analyst Chris Murray continues to see “good value” in Air Canada (
“AC delivered solid Q3/24 results, despite operating in a normalizing yield environment, combined with the threat of a work stoppage in September,” he said in a research report released Monday. “Management increased full-year guidance with Q3/24 results, reflecting favourable demand conditions and easing cost pressures, particularly around fuel and labour, which we see boding well for 2025. The Company announced a normal course issuer bid (NCIB) with results reinforcing management’s constructive outlook, improved balance sheet, and better visibility around the cost structure after reaching a new labour agreement with its
pilots in early Q4/24.
“Management on the call confirmed that it plans to begin executing ‘aggressively’ on its buyback beginning on November 5. Management confirmed that it maintains the balance sheet flexibility to execute its fleet upgrade plan and buyback concurrently while adhering to investment-grade leverage metrics. We expect management’s strategy around capital allocation to be a focus of its investor day, planned for December 17, 2024, in Toronto.”
On Friday, Air Canada shares surged 14 per cent after it reported revenue of $6.21-bilion, down 3.8 per cent year-over-year but above the Street’s expectation of $6.102. On an adjusted basis, it said it earned $2.57 per diluted share, down from a $3.41 a year earlier but well above the consensus projection of $1.58.
The airline has slightly boosted its earnings expectations for 2024, with adjusted EBITDA now seen to total $3.5-billion, up from between $3.1-billion and $3.4-billion earlier.
“AC reported better-than-expected Q3/24 results, driven by strong load factors (86.9 per cent) and cost containment, offsetting normalizing yields, particularly on Atlantic-based routes,” said Mr. Murray. “Healthy demand conditions and better visibility around the cost structure led management to increase full-year EBITDA guidance to $3.5-billion (from $3.1-$3.4-billion) on expectations for 2.0-per-cent Adjusted CASM [cost per available seat mile] growth (prior: 2.5 per cent to 3.5 per cent). Revised guidance implies expectations for EBITDA of $600-million (up 17.0 per cent year-over-year) in Q4/24 with yields expected to increase quarter-over-quarter.”
“Management was positive on the booking curve and yield trends heading into 2025 and highlighted that capacity and Adjusted CASM are expected to increase at mid-single digit and low to mid-single-digit rates,
acknowledging Adjusted CASM has benefitted from a $100-million maintenance contract adjustment in 2024. AC will provide guidance for 2025 at its investor day. We expect the presentation to include a fulsome discussion around the capital allocation strategy, given the new NCIB and ongoing fleet modernization.”
After raising his 2025 expectations and introducing his 2026 estimates, Mr. Murray increased his 12-month target for Air Canada shares to $28 from $26.50, reaffirming an “outperform” recommendation. The average target on the Street is $24.56, according to LSEG data.
Elsewhere, Stifel’s Daryl Young upgraded Air Canada to “buy” from “hold” previously, seeing its near-term remaining “healthy” with a “more rational” capacity outlook. His target rose to $25.50 from $20.
“Q3 results were much better-than-feared with AC managing costs well amid a tough environment, and with a boost from lower fuel prices (first look here),” he said. “We are upgrading our recommendation to Buy from Hold as the environment appears to be rationalizing faster than we expected and given increased clarity on 2025. Management noted a more balanced capacity outlook, upside from falling fuel prices, stable demand for leisure travel (forecasting healthy outlook for the next three quarters), business travel recovering, and high-margin AsiaPacific routes being restored. Moreover, AC expects to be active on capital returns, noting the potential to re-lever its balance sheet up to 1.5 times and given expectations for break-even/positive 2025 FCF. Despite AC’s more than 40 per cent share price gain since its August lows, the stock is still trading at 3.1 times EBITDA, well below its pre-pandemic average of 3.9 times and the U.S. peers at 5.7 times, supportive of a continued catch-up trade”.
Other analysts making target changes include:
* National Bank’s Cameron Doerksen to $27 from $22 with an “outperform” rating.
“We continue to view Air Canada’s valuation as attractive,” said Mr. Doerksen. “On our updated 2025 forecast, Air Canada shares are trading at just 3.0 times EV/EBITDA. This is below the historical average forward multiple (excluding the pandemic years) of 4.3 times EV/EBITDA and is also below the U.S. legacy airline peer group, which trades at 5.0 times 2025 EV/EBITDA on average.”
* Scotia’s Konark Gupta to $26.50 from $24 with a “sector outperform” rating.
“We maintain our SO rating while increasing our target ... after AC positively surprised us by delivering much stronger-than-feared Q3 results and raising 2024 guidance despite pilot-related traffic disruptions and significant pilot wage growth (under new contract),” said Mr. Gupta. “However, as we were anticipating, management decided to return capital to shareholders through buybacks. The company will provide further updates on its capital allocation strategy, along with 2025 guidance, at an investor day on December 17. We expect to hear about aircraft sale/leaseback opportunities as management confirmed our view that AC currently owns more aircraft than warranted. Fundamentally, yields are turning the corner this winter while meaningful margin expansion and FCF generation (excluding sale/leaseback) likely have to wait until 2026 and 2027, respectively. Although the stock has rebounded 40 per cent over the past three months, it remains too cheap at 3.1 times EV/EBITDA on 2025E vs. U.S. peers at 5.0 times and its historical average of 4.0 times (including periods of major labour/pension issues). We see upside risk to more than $30 over the next two years as the multiple re-rates higher and margin/FCF normalize.”
* RBC’s James McGarragle to $22 from $17 with a “sector perform” rating.
“Q3 results and the 2024 guide came in ahead of prior consensus on fuel and one-time contract-related adjustments – and we therefore view the core operating results as in line,” he said. “The buyback was well-received with the shares up more than 10 per cent; however, given the flat to positive 2025 FCF guide, we expect any repurchases to be mostly financed with debt. We remain cautious on the yield environment into next year given meaningful expected capacity increases across the industry and recent cuts to Canadian immigration targets, and therefore see downside risk to consensus yield and load factor estimates.”
* CIBC’s Kevin Chiang to $27 from $25 with an “outperformer” rating.
* JP Morgan’s Jamie Baker to $34 (Street high) from $32 with an “overweight” rating.
AIR CANADA
21.51+2.82 (15.09%)