Air Canada BUY and FLY

AC.B : TSX : C$8.36

Target: C$12.00

Air Canada, together with Jazz, operates an average of
1,370 scheduled flights each day and carries over 33
million passengers. Air Canada, together with Jazz,
provided direct passenger service to 158 destinations
and, through commercial agreements with other
unaffiliated regional airlines, to an additional 14
destinations, for a total of 172 direct destinations on five
continents. Air Canada trades on the TSX under the
symbols AC.A and AC.B.
All amounts in C$ unless otherwise noted.

Transportation and Industrials — Airlines and Aerospace
Building on a fabulous 2013, but risks too
2013 was a stunning year for AC investors: AC’s share price rose 323%. Is
it time to take profits or can AC’s share price appreciate much more?
We think there is near-term share price risk due to forecast risk from FX,
fuel and weather headwinds. We believe there is substantial longer-term
share price appreciation potential from AC’s three major initiatives, 1)
high-density B777s, 2) rouge, and 3) B787s.
Given AC’s strong long-term potential, we continue to recommend
investors BUY AC shares.
Major initiatives have substantial upside potential
We estimate AC’s initiatives could boost EBITDAR by $500 million or
more by 2019.
A $500 million increase in EBITDAR would generate a $9.75 increase in
our share price target, using our 5.5x EV/EBITDAR valuation multiple.
However, our outlook risk remains high for AC because 1) high degree of
uncertainty in AC’s initiatives, and 2) short-term volatility risk from
shocks (e.g., fuel, FX, weather).
Near-term forecast cut, long-term boosted
We have updated our forecast and target to reflect our new assessment of
the company’s near-term and long-term prospects.
More specifically, we have cut our Q4/13 and H1/14 forecast due to the
weak Canadian dollar, higher fuel costs and weather and boosted our
mid- and long-term outlook based on our assessment of AC’s initiatives.
Conservative valuation maintained
We have increased our valuation multiple 1.0x 5.5x EV / NTM
EBITDAR (5.5x Q3/14E EV to Q4/14E – Q3/15E EBITDAR) to reflect
the upside potential from AC’s initiatives. We believe our AC valuation
metric is in line to below the sector average, reflecting above average
outlook risk. There may be some multiple upside as AC’s initiatives are
de-risked, which we expect to occur in 2014 and 2015.


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