Exchange Income Corporation
EIF signs LOI to provide regional service in Eastern Canada on behalf of Air Canada
TSX: EIF | CAD 54.56 | Outperform | Price Target CAD 66.00
Sentiment: Positive
Our view. EIF today announced it signed a letter of intent to provide regional service in Eastern Canada on behalf of Air Canada, a positive in our view. We caught up with management earlier this morning with key highlights below.
• We believe the deal is of strategic importance to EIF in Eastern Canada. Our view is that the new agreement increases EIF's scale in the region providing a platform for growth looking ahead. Key is that the agreement does not represent a change in strategy as EIF already operates Dash 8-400 aircraft in the region.
• EBITDA impact estimated at ~$15MM in our view. While financial details were not disclosed, the company noted it would be acquiring six Dash-8 aircraft. Assuming a $10MM to $15MM investment per plane and returns in line with EIF's historical 20% EBITDA return target would imply EBITDA of roughly $15MM annually. We note that this would represent upside to management's 2024 EBITDA guide of $600MM and that we see upside risk to this number reflecting the tight capacity environment and believe that Regional One will be important in sourcing the aircraft.
Overall, we remain positive on EIF shares at today's prices. The shares trade at 7x forward consensus EV/EBITDA despite the company's solid growth outlook with consensus estimates for growth of +22% in 2023 and of +12% in 2024. EIF remains on RBC's Canadian Small Cap Conviction List.
What happened? PAL Airlines, a subsidiary of EIF, has completed a letter of intent (LOI) with Air Canada as a preliminary step towards the finalization of a commercial agreement between the two airlines for the provision of regional air services in Eastern Canada. The proposed agreement, which remains subject to final negotiations between the parties, would see PAL Airlines acquire up to six additional Dash 8-400 aircraft to be operated on behalf of Air Canada for a term of up to five years on regional routes in Eastern Canada. The routes would be in addition to the existing PAL Airlines scheduled and charter network throughout Eastern and Atlantic Canada.