Air Canada (TSX: AC) is the Canada's leading airline provider of scheduled passenger services across the Canadian market, the Canada-U.S. transborder market, and in the international market to and from Canada. The company caters nearly 50 million passengers each year together with its regional partners.

Key Updates:

• Impressive operational metrics suggest demand recovery: In FY21, the company reported its passenger revenue per miles(*RPM) of 21.4 cent, which is 13.3% higher over FY20 of 18.9 cents. Passenger load factor also increase to 63% in FY21, as compared to 61.6% in FY20. These indicates better yield from operations and is a key positive. Notably, operating revenue per **ASM stood at 19.2 cents in FY21, as compared to 15.5 cents in FY20, which illustrates improved performance and worth mentioning.

*RPM= Revenue passenger miles

**ASM= Available seat miles

• Solid growth from the Cargo segment: During Q4FY21, the company witnessed a tremendous growth in cargo revenues at CAD 490 million, 71.4% higher than CAD 286 million in Q4FY20. The period was also marked by 35% and 27% y-o-y surge in volume and yield, which is encouraging. AC witnessed strong momentum from Pacific market and North American markets.

Cargo revenues by geographic region (Source: Company Report)

• Reported positive EBITDA: The company reported its Q4FY21 adjusted EBITDA of CAD 22 million, as compared to an EBITDA loss of CAD 728 million in Q4FY20. This suggest a recovery in the operations despite the effect of Omicron variant during Q4FY21, which is a key positive. Meanwhile, the company reported a positive EBITDA in the last seven quarters.
• Network expansion: Recently, the company reported that it has expanded its North American Network by introducing seven new launches from three Canadian hub. This is likely to support the company’s upcoming operations.
  

Risks associated with the investments:

The operations might be hindered due to rising fuel costs, decline in the passenger number due to imposed restrictions on account of pandemic and rising debt levels.

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• AC announces its full-year results, wherein the company posted its total revenue of CAD 6,400 million, grew from CAD 5,833 million in FY20. The surge was driven by improved income from the passenger segment coupled with strong growth from the cargo business.
• Despite a lower total operating expense (CAD 9,449 million v/s CAD 9,609 million in FY20), the company posted an operating loss of CAD 3,049 million, as compared to an operating loss of CAD 3,776 million in FY20.The loss was primarily due to higher input costs in respect to the company’s income.
• Interest expense stood at lower foreign exchange loss and a decline in Loss on financial instruments recorded at fair value, partially offset by increase in interest expense. Total non-operating expense stood lower at CAD 932 million, as compared to CAD 1,077 million in FY20. The company reported a lower net loss of CAD 3,602 million in FY21, as compared to a net loss of CAD 4,647 million in FY20. 

 Valuation Methodology (Illustrative): Price to CF-based

 Analysis by Kalkine Group

Stock Recommendation:

The company is witnessing demand revival, supported by improved passenger numbers, while the North American flying reaching 90% of pre-pandemic levels, which is encouraging. Moreover, with the recent addition of seven new routes, the company is well poised to take advantages of the growing sectoral demand within both passenger and cargo segments. We have valued the stock using the Price to CF-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered industry (Passenger transportation services) median on an NTM basis. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of AC at the closing price of CAD 19.59 on March 07, 2022.

One-Year Technical Price Chart (as on March 07, 2022). Source: REFINITIV, Analysis by Kalkine Group 

  Technical Analysis Summary

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

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