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 and has presence across Six continents.

Q2FY20 Financial Highlights: AC declared its quarterly results, wherein the Company reported total revenue of CAD 527 million as compared to CAD 4,738 million in the previous corresponding quarter. The decline was primarily attributable to the overall restrictions to travel ban, which was imposed due to COVID-19 pandemic. During the quarter, the Group reduced capacity by ~92% from Q2FY19’s. Ban on foreign nationals travelling for nonessential reasons arriving from the U.S. has also contributed to the performance decline. The Company posted an EBITDA loss of CAD 832 million as compared to a profit of CAD 916 million in the previous corresponding period (pcp). Revenue passenger miles (RPM) reduced to CAD 783 million, as compared to CAD 23,463 million, a year ago. Passenger load factor declined to 34.9% from 84.1% in pcp. The Company posted a net loss of CAD 1,752 million as compared to a net profit of CAD 343 million, a year ago. The Company has reported a higher net debt of CAD 4,564 million, from CAD 3,277 million, a year ago.

Q2FY20 Financial Snapshot (Source: Company Reports)

Risks: The Company derives its revenue from the aviation segment, and the ongoing restrictions imposed on account of the pandemic has caused a tremendous impact on the Company’s performance. Continuation of the travel ban would hamper the group’s financial and operational performance. Further, an increase in the total debt component would lead to hinder the overall financial flexibility.

Stock Recommendation: The stock of AC corrected ~67% so far this year amid the volatility in the equity market. The Company witnessed severe headwinds from the recent travel restrictions on account of containment measures put in place to reduce the impact of COVID-19. To ensure stable liquidity in order to support the Working capital requirements, the Company drew down its USD 600 million and USD 200 million revolving credit facilities for aggregate net proceeds of USD 1.027 billion. The Company is focusing on cost reduction and capital reduction and deferral program in order to combat the current downturn and achiever approximately USD1.3 billion of capital conservation, which is encouraging. The 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 raised funds via equity dilution, which is not a rational sign for a mature company. Air Canada reduced second quarter of 2020 capacity by 92% compared to the second quarter of 2019 and plans to reduce its third quarter 2020 capacity by approximately 80% compared to the third quarter of 2019. The airline will continue to dynamically adjust capacity and take other measures as required to adjust for demand including as a result of health warnings, travel restrictions, border closures and passenger demand. Further, the airline business is quite a capital-intensive venture, which cannot sustain for long without regular cash flow and substantial funds in place. Hence, considering the aforesaid facts, we prefer to remain on the sideline and recommend a ‘Watch’ stance on the stock at the closing market price of CAD 15.87 on August 18, 2020.

AC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Canadian Apartment Properties Real Estate Investment Trust

Canadian Apartment Properties Real Estate Investment Trust (TSX: CAR.UN) is a leading real estate investment trusts in Canada and engaged in the acquisition and leasing of multi-unit residential rental properties located near major urban centers across the region. The portfolio of the company mainly composed of apartments and townhouses situated near public amenities. The group’s holdings are aimed towards the mid-tier and luxury markets in terms of demographic segments.

The management declared a monthly dividend of CAD 0.11500 per common share, payable on September 15, 2020. Recently, the Company informed that it had purchased a brand new 88-suite apartment property in the West Bedford near Halifax, Nova Scotia at a price consideration of CAD 22.4 million, financed by CAPREIT’s cash and cash equivalents invested in short-term investments.

Q2FY20 Financial highlights: CAR.UN declared its quarterly results, wherein the Company posted Net rental income of CAD 143.233 million as compared to CAD 125.767 million in the previous corresponding period (pcp). The increase was driven by higher net Average Monthly Rent (AMR) on account of strong rents on turnovers in Ontario, Nova Scotia, Québec and the Netherlands. Net income before income taxes stood at CAD 64.578 million, declined from CAD 170.352 million in pcp, primarily attributed a loss from fair value adjustments of investment properties amounting to CAD 4.053 million against a gain of CAD 86.62 million in Q2FY19. The quarter was marked by an extended loss from non-controlling interest amounting to CAD 34.65 million against CAD 6.699 million in pcp and higher interest and other finance costs. Net income stood at CAD 61.262 million against CAD 167.329 million in pcp. Total assets at the end of the quarter, stood at CAD 14,489.006 million, while total debt stood at CAD 608.005 million. During the month of June 2020, rent collections from the Canadian portfolio stood at ~98% for the combined residential and MHC portfolio and ~97% including commercial and ancillary income. Net Operating income margin stood slightly lower at 65.1%, against 65.7%, a year ago.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to the current economic cycle, the company witnessed a loss from fair value adjustments of investment properties and continuation of the above trend would suppress the bottom-line.

Valuation Methodology: EV/EBITDA Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of CAR.UN plunged ~12% so far this year. The group reported a decent occupancy rate, while the quarter witnessed a lower bottom-line due to a significant fall in fair value adjustments of investment properties, which is a drag. However, the Company reported growth from the monthly rents on lease renewals, amidst the current jolt in the economy, which is encouraging and indicates business resilience. The group’s financial position remains strong, with CAD 213.5 million of cash and cash equivalents and CAD 124.8 million of available liquidity on Credit Facilities. Further, Debt Service Coverage ratio improved to 1.99 as at June 30, 2020 compared to 1.87 as of December 31, 2019. We have valued the stock using EV to EBITDA value-based relative valuation method and have arrived at a target downside of lower double-digit (in percentage terms). For the said purposes, we have considered peers like Killam Apartment REIT, Allied Properties Real Estate Investment Trust etc. Hence, we recommend a ‘Watch’ stance on the stock at the current market price of CAD 46.64 on August 18, 2020.

CAR.UN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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