Air Canada (TSX: AC) is Canada's largest airline, generally serving nearly 50 million passengers each year together with its regional partners. Air Canada is a sixth freedom airline, like Gulf carriers, which flies many U.S. nationals on long-haul trips with a layover in Canada.

Key Highlights:

• Increased revenue and Available Seat Miles (ASMs): During Q1FY22, the company reported a higher total operating revenue of CAD 2,573 million as compared to the total operating revenue of CAD 729 million in Q1FY21. The passenger segment (which contributes 74.5% to the total operating revenue) reported the sales at CAD 1,917 million in the given period (Q1FY22) which is higher than the CAD 395 million in Q1FY21. Total of 5,435 k passengers travelled in Q1FY22 against 1,124 K passengers in Q1FY21, showing that the influx of passengers resulting in the higher revenues from passenger segment.

• Strong liquidity profile: During Q1FY22, the company's quick ratio stood at a higher level of 1.23x, as compared to the industry median of 0.92x. Further, the company’s current ratio was stated at 1.26x for Q1FY22, against the industry median of 0.99x. The higher quick ratio and current ratio is an indication that the company is capable to meet its short-term obligations falling within one year time, without any hindrance, ensuring the smooth running of the business operations.

Source: Refinitiv, Analysis by Kalkine Group

• Improved operational efficiency: In Q1FY22, the company showcased efficiency which is reflected in the increase in RPM’s million (Revenue passenger miles) CAD 9,481 million against CAD 1,831 million in Q1FY21. The passenger load factor increased to 66.3% in Q1FY22 which is higher than the 43.5% in Q1FY21.
  

Risks associated with investment

The company is vulnerable to any economic slowdown, restrictions related to COVID-19, rise in fuel costs, currency volatility, etc can hamper its financial performance.   

Financial overview of Q1FY22 (Expressed in millions of CAD)

Source: Company Filing 

• The group reported an increase in the total revenue to CAD 2,573 million during Q1FY22, against CAD 729 million during Q1FY21. The increase was primarily from the surge in the revenue from the passenger segment which was clubbed with the improved economic activity.

• The operating expenses rose to CAD 3,123 million in Q1FY22 vs CAD 1,778 million in Q1FY21. The increased cost of aircraft fuel, wages, salaries, and benefits along with the regional airline's expenses, pushed the overall expenses in Q1FY22.

• The group narrowed down its net losses to CAD 974 million during Q1FY22 as compared to the net losses of CAD 1,304 million in Q1FY21.

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The group reported an increase in revenue to CAD 2,573 million in Q1FY22 as compared to the total revenue of CAD 729 million in Q1FY21 supported by the increase in RPMs (Revenue passenger miles) and reduced operating expenses per ASM in Q1FY22. The net losses were trimmed down to CAD 974 million in the Q1FY22 against the net losses of CAD 1,304 million in Q1FY21 and the operating EBITDA also curtailed down to (negative) CAD 143 million in the similar period against the operating EBITDA (negative) CAD 763 million in Q1FY21. The management is optimistic for FY22 and stated ambitious plans to increase ASM for FY22 by 150% as compared to ASM in FY21 and estimated the EBITDA margin in between 8% to 11% in FY22.  On the valuation front, the stock is measured on the EV/ Sales based multiple and the stock is currently trading at 0.8x as compared to the industry (industrials) mean of 3.2x, suggesting the stock is still undervalued. We have considered Ryanair Holdings PLC, United Airlines Holdings Inc., etc as the peer group for the comparison. 

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock of AC at the last closing price of CAD 21.02 on May 25, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as of May 25, 2022). Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

Disclaimer

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