Skip to main content

Some investors are worried Air Canada will create its own rewards program when its contract with Aimia expires but other analysts find the probability of a break exceptionally low.

Every year or so, I write an article that says the good news at Aimia Inc. is at least a year away. Unfortunately for the company's shareholders, this is yet another one of those stories.

In the summer of 2013, the company was flying high. The operator of Air Canada's Aeroplan air-miles program settled its uncertainty about its credit-card partner by signing up Toronto-Dominion Bank. It announced a revamp of the program that would depress margins in the short term but deliver profits in the long term. By late 2014, it was clear it would take longer than expected for the Aeroplan overhaul to work its way down to Aimia's bottom line.

Now, a host of bad news and new worries have served to drive Aimia's stock price to lows not seen since the 2008-09 financial crisis. But while the clouds remain over the company, the collapse in the share price means there's actually something good to say this time around: The stock is now cheap enough for long-term investors to take a serious look.

"As much as I've criticized Aimia for trading too high or being too expensive in the past, I think investors have overpenalized it for the volatility and uncertainty, because I think there's a very solid underlying business to this," said Neil Lindsell, an analyst at Industrial Alliance who is just one of two with "buy" ratings on the stock. "So [the market's] overreacted on the downside. And I think when we get 12 months from now, a lot of the issues will be, if not fixed, will be clearer."

Aimia was once part of Air Canada and the bulk of its business is running Aeroplan. It has taken that expertise and gone outside the borders, however, to operate loyalty programs in Europe and emerging markets. It has been a compelling investment thesis: A stable, cash-generating Canadian business that takes its show on the road to find global growth.

At the risk of oversimplification, Aimia's loyalty program business works like this: Aimia sells the reward-program points to the credit-card issuer or retailers that award them to their customers. Then, when the customers go to cash in the points, Aimia buys the rewards for them. The key to profitability is selling the points for more than the rewards cost, but the timing differences between when customers earn points and cash them in can create lumpy results. It also makes Aimia's partner relationships paramount, because rewards programs don't work without successful companies with great consumer reach offering the perks.

A great deal of what has investors down on Aimia falls into the preceding description. The company closed its Nectar rewards program in Italy in February because of that country's economic problems. In Britain, Aimia's profitability dropped sharply after heavy redemptions and major partners, such as grocer Sainsbury's, cutting the Nectar points it awards customers.

Meanwhile, Aeroplan's transformation was slowed in part by uncertainty over the "interchange fees" that card issuers get from customers' banks and which help cover the amounts they pay to Aimia for points. Add in, as well, issues with Canadian consumer confidence over the past 12 months.

In a recent note, BMO Nesbitt Burns analyst Tim Casey said the Aeroplan transition has produced "uneven results and stalled growth amidst a challenging economic backdrop." Combined with the economic and competitive challenges in Europe, "this is clearly a 'show me' story regarding any return to growth."

Aimia certainly believes it can move past some of these economic and structural issues, because its most recent earnings announcement included a 5-per-cent increase in its dividend, to an annual payout that yields roughly 10 per cent, and a continuation of its stock-buyback program.

Yet, investors have found new worries, chiefly that Aeroplan's contract with Air Canada expires in 2020, and the airline's focus on cost savings could at least squeeze Aimia, or worse, prompt Air Canada to create a new loyalty program in-house to capture the profit itself. The most pessimistic Aimia watchers wonder how the uncertainty will affect the company's debt refinancings from 2017 to 2019.

"We believe there is longer-term existential uncertainty around the Air Canada contract expiry in 2020," said BMO's Mr. Casey, who has a "market perform" rating and $10 target price.

Mr. Lindsell and Kenric Tyghe of Raymond James Canada Ltd., the other analyst with a "buy" rating, according to Bloomberg, find the probability of an Air Canada-Aimia break exceptionally low. Aimia already has relationships with credit-card issuers and it's not clear which big bank Air Canada could recruit for its own plan. Aimia is believed to purchase $700-million in airfares from Air Canada and its partner Star Alliance each year, making it the airline's biggest customer.

Mr. Tyghe believes that not only will Air Canada and Aimia strike a deal to renew the contract, they won't wait until the last minute – meaning this particular cloud of uncertainty will dissipate sooner than many expect. "I don't believe we have a thousand lashes and three more years of this pain.… The sentiment is so irrationally negative as to the risks to the model, the risks to the cash flow." (Air Canada declined to comment for this story.)

Rupert Duchesne, Aimia's chief executive, said in an interview on Friday that "it's pretty bizarre this is happening more than four years ahead of a renewal." Mr. Duchesne notes that Aimia helped refinance Air Canada in 2009, and that Aimia has settled past worries about its major partnership deals. "This idea that these sort of existential negotiations are always stacked against us are a little strange."

Analysts, of course, don't care for what Mr. Casey called "show me" stories, particularly ones where the showing is likely to occur more than 12 months later. While the average target price of $10.14 represents a healthy 24-per-cent return from Friday's close of $8.18, many, burned by Aimia's failure to take off, have placed "hold" ratings on the shares despite the implied upside.

Mr. Tyghe is the clear outlier, suggesting a $15 target price, which he derives from placing a multiple of 12 times his estimate of 2016 adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, as adjusted by the company. That multiple is aggressive – Mr. Lindsell, who has an $11 target price, uses eight times his 2017 estimate. But Mr. Tyghe says his multiple is deserved, given Aimia's global loyalty positioning and the inherent strengths of Aeroplan.

"Everything they've done has made this [Aeroplan miles] currency more valued than any other frequent-flier program available in the Canadian market," he said. "When the dust settles and the grocery wars play out and the Canadian economy finds its feet, that's what will matter more."

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe