Inside the Market’s roundup of some of today’s key analyst actions
While he continues to like the long-term setup for Air Canada (AC-T), Citi analyst Stephen Trent warns investors 2025 could be “tricky.”
“Air Canada appears to be on a solid, long-term trajectory, in light of its strong premium cabin offerings, ongoing strong international demand and as its loyalty/co-branded cash flow streams continue to spool up,” he said. “However, in contrast with its U.S. network peers, 2025 cash flow looks less robust, while the potential for incremental Canadian dollar depreciation against the US$ is worth watching, with respect to both cross-border passenger demand and seat mile costs.”
In a research report released Monday before the bell, Mr. Trent said the weakness of the Canadian dollar is likely to have a notable impact on the airline’s fortunes over the next 12 months.
“On a positive note, Air Canada could see RASM-accretive [revenue per available seat mile] TransPacific traffic growth, considering relative currency performance,” he said. “Over the past five years, the Canadian dollar has appreciated against the currencies of India, South Korea and Japan, all of which are important Asian destinations for the carrier. However, closer to home, U.S. dollar strength could at least modestly pressure cross-border demand, as Canadian dollar purchasing power for U.S. trips declines. Strong partnerships with United and Copa could help relieve some of this pressure, while greater co-branded card penetration might also help Air Canada to increase its US$ cash flow weighting.”
The analyst lowered his 2025 and 2026 earnings per share projections to $2.30 and $2.96, respectively, from $3.15 and $3.55, citing a lower, expected RASM growth, slightly higher cost per available seat mile (CASM) excluding fuel, lower, expected fuel prices and higher depreciation/taxation.
That led Mr. Trent to reduce his target for Air Canada shares to $26.50 from $28.50, maintaining a “buy” recommendation. The average target on the Street is $27.55, according to LSEG data.
“While Citi maintains Copa as its favorite carrier, we nudge Delta Air Lines down two notches, now behind United and American.” he added. “As a result of this adjustment, the revised rank order is Copa, United, American, Delta, Alaska Air, Volaris and Air Canada, followed by Neutral-rated Southwest, LATAM Airlines, JetBlue and then Frontier. Buy-rated American Airlines remains on Citi’s Focus List. Within Canadian aviation/aerospace, Citi also continues to prefer jet manufacturer Bombardier.”
“We rate Air Canada Buy, which is based on strong global potential for a continued recovery in international long-haul passenger revenue, and what looks to be a stock price dip. Although the carrier’s margins seem unlikely to catch those of several of its southern peers, this carrier has the most international long-haul exposure among Citi’s Americas Airline coverage.”
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RBC Dominion Securities analyst Greg Pardy thinks Vermilion Energy Inc.’s (VET-T) $1.1-billion acquisition of private energy producer Westbrick Energy will “serve to replenish and enhance its Deep Basin position and is a part of its bigger strategic thrust.”
“Admittedly, the Westbrick deal left us somewhat perplexed,” he added in a research note. “Why expend $1 billion on a 75-per-cent natural gas production weighted deal given the depressed state of AECO? And why dilute Vermilion’s European natural gas production weighting (and uniqueness) next year from about 20 per cent to 13 per cent?”
“In a nutshell, Vermilion looks upon the Montney and Deep Basin as two segments of its portfolio where it wants to achieve operating scale. The company remains committed to growing its European gas production organically (as in Germany) or via acquisition, the timing of which it cannot choose. As a part of a bigger strategic thrust, the disposition of non-core assets within the company’s North American portfolio — something we’ve been keen to see for years — is also set to get underway.”
Mr. Pardy said the deal, announced last Monday, “passes the litmus test” on the key financial metrics that he focuses on and called the price “reasonable,” seeing it accretive to his 2025 cash flow per share estimates “under both our base and futures analysis, reflecting stable cash taxes and the use of debt in the funding structure.”
While pleased the disposition of non-core assets within the company’s North American portfolio has begun, the analyst said “just what assets the company elects to sell is an open question.” However, he said he sees “little strategic value in Vermilion’s limited U.S. footprint, which supports 2024 production that we peg at 5,400 boe/d (78-per-cent oil & ngls, 6 per cent of equivalent production).”
“Vermilion also owns about 22 per cent (on a partially diluted basis) of Coelacanth Energy which has lands proximate to its Mica Montney position, which could be fully consolidated down the road,” he added.
Maintaining a “sector perform” recommendation for Vermilion shares, Mr. Pardy trimmed his target by $1 to $16. The average target on the Street is $17.83.
“At current levels under our base outlook, Vermilion is trading at a 2025 debt-adjusted cash flow multiple of 3.2 times (vs. our North American E&P peer group avg. of 3.8 times) and a free cash flow yields (on market cap) of 17 per cent (vs. peers at 9 per cent) and 9 per cent (on EV, vs. peers at 6 per cent) in 2025,” he explained. “In our minds, Vermilion should trade at a below average relative valuation, reflective of its relatively shallow production decline rate and shareholder returns, partially off-set by its modestly increased financial leverage and highly diversified portfolio.”
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D. Boral Capital analyst Jesse Sobelson thinks Horizon Aircraft Ltd.’s (HOVR-Q) recent $8.4-million capital raise is “material” for the Toronto-based company, providing the ability to further finance its operations and technical investment “well into late 2025.”
“Further, the investment is from an initial SPAC participant that is a well-known strategic investor & aviation-oriented operator based in Canada that believes in HOVR’s technology and is involved in the business with a long- term results oriented mindset,” he said in a note.
“We look favorably upon industry experts providing some validation for HOVR’s technological effort by investing in the business & providing their industry expertise. Lastly, we anticipate the capital will be used to fund the company’s research efforts & bring the Cavorite X7 closer to its important & defining transition flight milestone.”
Mr. Sobelson, currently the lone analyst covering the Canadian hybrid electric Vertical TakeOff and Landing aircraft (eVTOL) developer, maintained his forecast as well as a “buy” recommendation and $2 target for its shares.
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