Air Canada

Air Canada (TSX: AC) is a leading service provider of scheduled passenger services in the Canadian market, the Canada-U.S. transborder market, and in the international market to and from Canada.

Key Highlights:

• Positive technical: On the daily chart, the stock of AC closed above its 50-days and 100-days simple moving average (SMA), indicating a potential up move in the coming trading sessions. Moreover, the stock also ended its downward trend, which also shows strength in the stock price.

 Technical Price Chart (as on November 04, 2021). Source: REFINITIV, Analysis by Kalkine Group 

• Improved operational metrics: In Q3FY21, the company posted improved operating performance and reported its Revenue passenger miles (RPM) of 7,915 million, which increased from 2,517 million in pcp. A higher RPM denoted higher traffic and is a healthy sign. Moreover, Passenger revenue per RPM improved to 20.7 cents, from 20.2 cents in pcp. The above indicates improved operational performance.

• Ample liquidity: At the end of Q3FY21, the company reported its liquidity of CAD 14,412 million which includes CAD 9,473 million in cash and cash equivalents, short-term and long-term investments, and CAD 4,939 million available under undrawn credit facilities. The above is higher than CAD 8,013 million of available liquidity reported at the end of FY20. Considering the capital-intensive nature of the business, a higher liquidity is preferable.

Q3FY21 Financial Highlights:

• AC announces its quarterly result, wherein the company posted its total revenue of CAD 2,103 million, jumped from CAD 757 million in pcp. The growth was primarily driven by increase in the passenger revenue (CAD 1,636 million v/s CAD 507 million in pcp) due to better operating environment in the North American market as Canadian provinces and along with several US territories gradually rolled out reopening plans.
• Total operating expenses stood at CAD 2,467 million, increased from CAD 1,542 million in pcp, due to higher aircraft fuel costs, increase in wages, salaries and benefits expense and a jump in regional airlines expense. Operating loss reduced to CAD 364 million, from a loss of CAD 785 million in pcp.
• The company reported its net loss of CAD 640 million, which reduced from a net loss of CAD 685 million in pcp.              

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: The company operations are directly linked with the fuel costs, and in Q3FY21, aircraft fuel increased to CAD 472 million, significantly higher than CAD 175 million in pcp. Continuation of the above trend would likely to dampen the company’s margins and cash flows. 

Valuation Methodology (Illustrative): EV to Sales Based

Stock Recommendation:

The company showed strong growth from its cargo segment and reported revenue of CAD 634 million in 9MFY21, higher than CAD 371 million in pcp. We expected the above momentum to continue in the coming quarters and would support the company’s overall performance. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Passenger transportation services) median on an NTM basis. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of AC at the last traded price of CAD 24.80 on November 04, 2021.

Technical Analysis Summary:

One-Year Technical Price Chart (as on November 04, 2021). Source: Kalkine, Analysis by Kalkine Group 

*The reference data in this report has been partly sourced from REFINITIV.

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