Air Canada

Air Canada (TSX: AC) is an airline service company, which caters to over 210 airports and more than 50 million customers annually. It has a fleet size of around 400 aircraft.

Recent News

5^th June 2020: The Group announced offerings of convertible senior notes and equity shares for raising approximately CAD 1.6 billion in gross proceeds.

First-Quarter Results (as on 4^th May 2020)

As per the recent trading update for the first-quarter 2020, EBITDA stood at CAD 71 million as against CAD 583 million in Q1 FY19. Consequently, the Group reported an operating loss of CAD 433 million versus operating income of CAD 127 million. As at 31^st March 2020, the Group reported an unrestricted liquidity of CAD 6.5 billion as compared to CAD 7.4 billion at the end of FY19. The weak performance was inevitably impacted by the Coronavirus-imposed restrictions, which led to the darkest phase ever in the aviation industry. Moreover, the Company withdrawn all its guidance regarding the financial year 2020.

Share Price Performance

Daily Chart as of 5^th June 2020, before the market close (Source: Refinitiv, Thomson Reuters)

AC’s shares were trading at CAD 21.36 on 5^th June 2020 (before the market close). Stock's 52 weeks High is CAD 52.71 and Low is CAD 9.26. From the technical standpoint, 3 days, 9 days and 14 days relative strength index of the stock was unfavourable, and the price could fall further from the current trading level. 

Valuation Methodology: EV to Sales Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Refinitiv (Thomson Reuters), NTM: Next Twelve Months 

Risk Analysis

Overall aviation industry is tremendously hit by the COVID-19 crisis and it will keep impacting the market over the next couple of years. Moreover, Air Canada is selling equity to raise funds, which is not a rational sign for a mature company. The airline business is quite a capital-intensive venture which cannot sustain for long without regular cash flow and substantial funds in place.

Conclusion

Invariably, the COVID-19 mayhem has adversely impacted the air travel demand and therefore, Company estimate that it would take at least three years to operate at the capacity of 2019 again. Subsequently, the Group has decided to reduce the capacity by 85 to 90 per cent during the second quarter of 2020 (as compared to Q2 FY19). However, the Group has adopted several measures to withstand the downturn, such as drawing down credit lines, shedding capacity by over 90 per cent, substantial cost, and capital reduction, implementing a furlough of employees and reductions in management wages. From the perspective of technical analysis, the stock is trading at an overbought situation through the relative strength index (RSI) indicator. We have valued the stock using EV/Sales relative valuation and arrived at a potential upside of low single digit. For the said purpose we have considered Industry (Passenger Transportation Services) Median multiple.

Based on the above rationale, we have given a “Watch” recommendation at the current price of CAD 21.36 (as on 5^th June 2020, before the market close), while we look for any upcoming catalysts in the near term.

Disclaimer

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