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Air Transat, Airbus A-330, courtesy Transat A.T. Inc. (Hand-Out/TRANSAT A.T.)
Air Transat, Airbus A-330, courtesy Transat A.T. Inc. (Hand-Out/TRANSAT A.T.)

Eye on Equities

New Air Canada carrier a slight negative for Transat: analyst Add to ...

A Globe and Mail story on Air Canada’s plan to launch a low-cost airline is being seen a “slight negative” for Transat A.T. Inc.

Air Canada is seeking to bring in a foreign investor as a junior partner in order to compete with Transat and other operators on leisure routes. However, the move is facing resistance from unions, as Air Canada is looking to outsource pilot work for the prospective airline.

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“We view this development at Air Canada as a slight negative for Transat,” says Desjardins Securities Inc. analyst Benoit Poirier. He believes Air Canada’s plan to launch a low-cost carrier with 50 aircraft would increase capacity, but not to the extent that some industry participants suspect. “Our sense is that Air Canada would likely shift some flying capacity from the mainline carrier to its low-cost carrier, thus limiting incremental capacity growth.”

Mr. Poirier adds that his view is echoed by comments from Transat management that net capacity would not increase following the launch of a new low-cost carrier by Air Canada. However, such a carrier would likely add some pressure on pricing for leisure routes.

“We do not expect Transat’s shares to react materially to this news,” he says. “In our view, the shares will trade sideways until more colour is provided on the profitability of the 2012 winter season. We reiterate our view that industry conditions need to improve before Transat can return to past profitability levels.”

Upside: Mr. Poirier is maintaining his “hold” rating and $7 target price.

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The ramp-up to full production at a pair of African mines should drive earnings and cash flow for the remainder of Paladin Energy Ltd.’s fiscal year, says CIBC World Markets Inc. analyst Ian Parkinson.

The uranium producer’s Langer Heinrich (Namibia) and Kayelekera (Malawi) mines are near completion, and feasibility study results for the Langer Heinrich Phase IV expansion will likely be the next major news for the company, says Mr. Parkinson.

“The continued progress towards nameplate production at both mines has progressed well over the quarter and the continued success will be imperative for the company to generate positive cash flow,” he says. “Help from the uranium price is also expected. Look to these two in 2012 for key catalysts.”

Upside: Mr. Parkinson is maintaining his “sector outperform” rating and $4.30 (U.S.) target price.

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The Canadian banking sector will see a drop in earnings growth this year and could see some volatility in results as International Financial Reporting Standards (IFRS) accounting standards are introduced, according to CIBC World Markets Inc. analyst Robert Sedran.

While the banks provided restated fiscal 2011 financials under the new accounting standards in late January, there are still some differences within the quarters that may surprise, Mr. Sedran notes.

For the first quarter that ended in January, “we look for an improved result from the sector with a lower margin, better capital markets revenues and expense control being the dominant themes,” he says. His estimates for the big banks assume 7 per cent average quarter-over-quarter growth, but a 3 per cent year-over-year average decline.

“We think the year will be defined by slowing revenue growth and the importance of operating leverage,” says Mr. Sedran. “In both cases, we believe the larger Canadian banks are better positioned than the smaller ones.”

Upside: He is maintaining his “market weight” rating for the sector and reiterates his ratings for Toronto Dominion Bank and Bank of Nova Scotia as “sector outperformers.”

More: Canadian bank IFRS transition was easy sailing

Also: Canadian banks to meet with U.S. regulators over Volcker rule

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Student Transportation Inc. , which this week reported a 24 per cent rise in quarterly revenue from a year earlier, has a bright future but the stock is already trading at a rich valuation, said Raymond James Ltd. analyst Steve Hansen. Acquisitions and a strong bidding season for its bus services allowed the company to lock in 18 to 20 per cent growth for fiscal 2012, and in 2013, management expects opportunities arising from U.S. state governments converting bus services to private ones, he noted.

“We continue to view STB as attractive for income-oriented investors seeking a well-supported dividend yield (8.0 per cent) in a defensive sector. However, STB’s rich valuation compels us to maintain our (market perform) rating,” he said.

Upside: Mr. Hansen raised his price target by 25 cents to $7, close to the current trading price.

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Migao Corp has reported another disappointing quarter, and Canaccord Genuity analyst Keith Carpenter believes the Chinese fertilizer firm faces further challenges given depressed margins and cost pressures. “As a result, we are downgrading to sell from hold as we believe the company will be hard pressed in the near term to reverse the negative outlook on the pressures that appear to be affecting the company’s earnings,” he said.

Downside: Mr. Carpenter cut his price target to $2.75 from $3.25.

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