After market closed on Tuesday, Air Canada (TSE:AC) decided on the 2014 pension funding regulations and stated a NCIB for up to 10 million shares (3.5% of shares outstanding).
The opt-out is not a surprise derived from AC’s pension surplus and previous management commentary. We continue to expect that de-risking the pension is one of the major achievements by AC’s management team.
The pension opt-out provides flexibility with regard to both dividends and share buybacks. Considering that AC has noteworthy capital commitments of $9 billion over the next few years for fleet purchases and wants to improve its balance sheet/credit rating, timing of the NCIB is a little surprising. That said, the amount put to the NCIB is very small ($120 million -$130 million at recent share price levels) and the buyback program is discretionary.
The shares may react optimistically to the news especially as the NCIB should give management another tool to support the shares especially during periods of volatility. We anticipate more news at AC’s upcoming investor day where management is inclined to provide new targets on CASM & ROIC. There is no change to our target price of $17.00. We maintain “Sector Outperform” rating. Lower-than-expected traffic and yield enhancement, increased competition and liquidity issues are key risks to be considered before investing.