Cost Cutting measures and Fleet Productivity Lead to Margin Expansion: Air Canada (TSX: AC) is the largest provider of scheduled passenger services across the Canadian market, serving more than 210 airports across six continents. 

The group has resumed its service post March 31, 2020 and will continue operating across selective Canadian cities. The company is also operating international and U.S. transborder terminals from the selective Canadian cities.

FY19 Financial Highlights: AC came up with its full-year results, wherein the company reported operating revenue of CAD 19,131 million, reflecting a growth of 6.3% over FY18. The increase was driven by improvement in air traffic coupled with 4.6% higher yield from additional Aeroplan flight redemptions and other revenues. The company reported higher EBITDA of CAD 3,636 million, improved from CAD 3,213 million in FY18 along with an improvement in the margin (FY19 EBITDA margin at 19% vs 17.8% in FY18).The increase was driven by higher average fleet utilization and lower fuel cost. Net profit surged to CAD 1,476 million from CAD 37 million in FY18. The rise in net profit was on account of higher operating income, lower interest expense combined with again from foreign exchange. Free cash flow stood higher at CAD 2,075 million, higher than CAD 1,327 in the previous financial year. Cash and cash equivalent stood higher at CAD 5,889 million as on December 31, 2019, as compared to CAD 4,707 million in FY18.

FY19 Financial Highlights (Source: Company Reports)

Stock Recommendation: The stock of AC is closed CAD 20.08, with a market capitalization of CAD 5.25 billion on 9 April 2020. During the last one month and three months, the stock corrected by ~34% and ~59%, respectively on account of halt in operations due to COVID 19. The stock has generated a solid return of ~36.41% in the last five trading sessions, outperforming the index by ~26.12%. In FY19, the company has generated a robust ROE growth of 38.50%, as compared to 1.1% in FY18.The group holds a commanding position within the Canadian airline market, and we believe the company will resume its growth phase through improved air-traffic as the economy rebounds. Notably, during FY19, the business witnessed lower fuel costs due to the positive impact of falling crude-oil prices. Furthermore, AC is focusing on a reduction in unit costs and expand margins through fleet modernization and improvement in fleet productivity. However, owing to the uncertainties driven by COVID 19 outbreak, we would like to assess the situation further and suggest ‘Watch’ stance on the stock at the closing market price of CAD 20.08 per share as on April 9, 2020.

AC One-Year Daily Price Chart (Source: Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.