2006 | 2007 | ||||||
Price: | 31.00 | EPS | |||||
Shares Out. (in M): | 0 | P/E | |||||
Market Cap (in $M): | 3,750 | P/FCF | |||||
Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
TEV (in $M): | 0 | TEV/EBIT |
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ACE Aviation (ACE) is a significantly undervalued asset play, with catalysts already in motion to eliminate the asset discount over the next six months. An investment of $31 in one share of ACE today should result in distributions of $25 (in units of its publicly traded Jazz and Aeroplan subsidiaries) over the next six months, publicly traded shares in Air Canada worth $15-25. Expressed differently, a net outlay of $6 over the next six months gets you Air
ACE is the parent holding company of various transportation and related service companies and partnerships including: Air
ACE is traded under the ticker ACE.A (for foreign investors) on the Toronto Stock Exchange (TSX), but its ADRs are easily tradeable in the
After I wrote ACE up, I realized that it had previously been written up by roch801 in December 2004 under ACEAF (in fact, I had asked a follow-up question!). However, roch801’s focus was on Air
All analysis below is in Canadian dollars, which currently trade at approximately US$1 = C$1.12
Please note that I currently have a long position in ACE, but this may change at any time.
BACKGROUND
In early 2003, Air
On September 30, 2004, ACE's predecessor corporation and its now wholly-owned subsidiary, Air
BUSINESS
In terms of the airline industry in general, ahab931 does a great job making a positive case for the future performance of legacy carriers in his recommendation of United Airlines (UAUA) and the thread that follows. I will discuss the specific investment opportunity at ACE.
ACE operates as a holding company for its various subsidiaries, with the explicitly stated goal of maximizing the value of each of these subsidiaries.
ACE's businesses are operated as four reportable segments which include: (i) Transportation services; (ii) Jazz; (iii) Aeroplan; and (iv) ACTS
(i) Transportation services:
Transportation services includes Air
Air
Air
ACE currently owns 100% of Air
AC Cargo LP and Air
Ground Handling Services:
ACGHS LP (and its
Touram LP / Air
Touram LP conducts business under the trade names Air Canada Vacations. Air Canada Vacations is a major Canadian tour operator, offering a variety of leisure vacation package options which include air transportation supplied by Air
(ii) Jazz (JAZ on the TSX):
Jazz, the Corporation's regional carrier, provides service to lower density markets and to higher density markets at off-peak times throughout
On February 2, 2006, Jazz Air Income Fund completed its IPO; ACE holds a 79.7% ownership interest in Jazz.
Based on OAG data, as measured by ASMs, ACE estimates that it provides approximately 61% of the Canadian airline industry's overall domestic scheduled capacity, 42% of the overall transborder scheduled capacity, and 46% of the overall scheduled international capacity between Canada and Europe and Canada and Asia.
(iii) Aeroplan (AER on the TSX):
The Aeroplan Program is one of
On June 29, 2005, Aeroplan Income Fund completed its IPO; ACE currently holds a 75.5% ownership interest in Aeroplan
(iv) ACTS (AC Technical Services):
ACTS LP is a full service MRO (Maintenance, repair and overhaul) organization that competes on a global basis, with major maintenance facilities in
A monetization of ACTS is expected in early 2007, probably through a sale.
ANALYSIS
Based on various analyst reports, we have the following estimates (in C$ millions): |
| |||
|
2006 |
|
2007 |
|
Transportation EBITDAR |
$ 1,000 |
|
$ 1,140 |
|
Jazz EBITDA |
170 |
|
170 |
|
Aeroplan EBITDA |
220 |
|
220 |
|
ACTS EBITDA |
40 |
|
90 |
|
ACE EBITDAR |
1,430 |
|
1,620 |
|
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|
Transportation services includes Air | ||||
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Also, as of June 30, 2006 (in C$ millions), |
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Cash |
|
Debt |
Net debt |
Transportation |
$ 2,214 |
|
$ 3,502 |
$ 1,288 |
Jazz |
110 |
|
115 |
5 |
Aeroplan |
498 |
|
- |
(498) |
ACTS |
- |
|
- |
- |
ACE convertible debt |
|
|
247 |
247 |
ACE total |
2,822 |
|
3,864 |
1,042 |
ACE convertible preferred |
|
|
157 |
|
ACE total debt + convertible preferred |
|
|
4,021 |
|
|
|
|
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|
Transportation Operating Leases (7 x $660 rent) capitalized |
|
2,640 |
| |
Transportation Net debt |
|
|
|
3,928 |
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Valuation |
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In C$ millions, except per share amounts |
2006 |
|
2007 |
|
|
|
|
|
|
Air |
|
|
|
|
EV @ 5.5 x EBITDAR |
$5,510 |
|
$6,300 |
|
Net debt |
(3,928) |
|
(3,928) |
|
Equity value to ACE |
$1,582 |
- |
$2,372 |
|
Value per ACE share |
$13.07 |
|
$19.60 |
|
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Jazz |
|
|
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Jazz share price |
$9 |
|
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|
# units owned by ACE (79.7% = 99.4) |
99.4 |
|
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Equity value to ACE |
$894.6 |
|
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Value per ACE share |
$7.39 |
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Aeroplan |
|
|
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Aeroplan share price |
$14 |
|
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|
# units owned by ACE (75.3% x 200) |
150 |
|
|
|
Equity value to ACE |
$2,100.0 |
|
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Value per ACE share |
$17.36 |
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ACTS |
|
|
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|
EV @ 6.5 x EBITDA |
$ 250 |
|
$ 580 |
|
Net debt |
- |
|
- |
|
Equity value to ACE |
250 |
- |
580 |
|
Value per ACE share |
$2.07 |
|
$4.79 |
|
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Total ACE equity value |
$ 4,827 |
- |
$ 5,947 |
|
Options proceeds (3.35 million @ $23.87) |
80 |
- |
80 |
|
Net ACE equity value |
4,907 |
- |
6,027 |
|
|
|
|
|
|
Fully diluted ACE shares (millions) |
121 |
|
|
|
|
|
|
|
|
Per share ACE equity value |
$ 40.55 |
- |
$ 49.81 |
|
The multiple for Transportation services is justified below in Valuation Metrics. Analyst reports use 6.5x for ACTS, but in any case, it is a small piece of the pie.
TAXES
ACE has pre-tax NOLs of approximately $6 billion. The company plans to leave Air
While distributions of units in JAZ and AER are made on a tax-free basis to Canadian shareholders, U.S. non-"qualified purchasers"of ACE will be paid the cash proceeds by selling off the relevant JAZ and AER units, which will be conducted on an orderly basis by ACE.
VALUATION METRICS
EV/EBITDAR of 5.5x for Air
|
TTM EV/EBITDAR | |
American Airlines |
7.3x |
|
Continental Airlines |
8.5x |
|
British Airways |
4.3x |
|
United Airlines |
9.2x |
|
US Airways Group |
9.7x |
|
|
10.7x |
|
Average |
8.3x |
|
Note that the multiples for the comps are somewhat overstated, given the airlines are likely to improve 2006 EBITDAR versus TTM, with likely significant improvements for United and US Airways, having recently emerged from bankruptcy. Also note that Air Canada will retain $3 billion of NOLs as an independent company.
RISKS
The risks associated with investing in airlines are well known. The company provides a comprehensive set of risks on pages 60-67 of its 2005 Annual Report (available at http://www.aceaviation.com/en/investors/documents/2005_ar.pdf)
One can mitigate the risk here via arbitraging the basis of your future Air
Purchase ACE |
$ 31 |
|
|
Short 0.82 shares JAZ |
(7) |
|
|
Short 1.24 shares AER |
(17) |
|
|
|
6 |
|
|
|
|
|
|
As shown above, this stub should trade for |
$ 14 |
- |
$ 26 |
providing a total return on the stub of |
125% |
- |
311% |
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