TRZBF - Transat Shows Growth Path Ahead
2023-06-16 15:39:21 ET
Summary
- Transat A.T. Inc. reported its FQ2 2023 financial results on June 8, 2023.
- The firm operates an international leisure-oriented airline in Canada.
- Management has produced strong growth and recent operating income.
- Dropping oil prices and continued pent-up consumer demand against still-limited supply mean the shares have more potential upside, so I'm a Buy for Transat A.T. Inc. stock at around $3.65.
A Quick Take On Transat A.T.
Transat A.T. Inc. ( TRZBF ) reported its FQ2 2023 financial results on June 8, 2023, generating year-over-year revenue growth of 143%, reaching revenue of $870 million.
The firm provides a range of travel-related services and products as an integrated leisure airline, tour operator and travel retailer.
With Transat A.T. Inc. management’s continued focus on transforming the airline business, if energy prices cooperate, the company could see a lift in its stock price.
My outlook is a Buy at around $3.65 per share.
Transat Overview
Montreal, Canada-based Transat was founded in 1987 to provide customers with leisure travel transportation, tours and related services.
In 2019, Air Canada made an offer to acquire Transat for approximately $520 million.
However, the deal was ultimately blocked by the European Union in April 2021, due to concerns that it would reduce competition in the European air travel market.
Since then, Transat has been operating as an independent firm and expects to continue taking deliveries of long-range Airbus aircraft to enable it to provide more air service between Canada and the European continent.
The firm is headed by president and Chief Executive Officer Ms. Annick Guerard who has been with the firm since 2002. Prior to that, she was a senior consultant at Deloitte Consulting and a senior engineer at Agra Monenco.
The company’s primary offerings include the following:
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Airline transportation
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Vacation packages
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Related services.
Transat acquires customers through its online reservation system, omnichannel marketing efforts and partnerships with travel agencies.
Transat’s Market & Competition
According to a 2023 market research report by imarc, the global market for leisure travel was estimated at $804 billion in 2022 and is forecasted to reach $1.3 trillion by 2028.
This represents a forecast CAGR (Compound Annual Growth Rate) of 8.11% from 2023 to 2028.
The main drivers for this expected growth are a recovery in demand for services since the waning of the pandemic and a likely increase in demand as younger demographics place a higher priority on "experience travel."
Also, the "rapid integration of big data analytics, the Internet of Things [IoT], and artificial intelligence [AI] in the tourism industry is also propelling the market."
Major competitive or other industry participants include:
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TUI Airways
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Norwegian Air
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SunExpress
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Thomas Cook Airline Ltd.
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Vueling
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Ryanair
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easyJet
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Others.
Transat’s Recent Financial Trends
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Total revenue by quarter has risen sharply in recent quarters; Operating income by quarter has turned slightly positive in the most recent quarter:
Total Revenue and Operating Income (Seeking Alpha)
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Gross profit margin by quarter has turned positive in recent quarters; Selling, G&A expenses as a percentage of total revenue by quarter have remained stable more recently:
Gross Profit Margin and Selling, G&A % Of Revenue (Seeking Alpha)
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Earnings per share (Diluted), while still negative, have improved recently:
Earnings Per Share (Seeking Alpha)
(All data in the above charts is GAAP.)
In the past 12 months, TRZBF’s stock price has risen 27.74% vs. that of Frontier Group Holdings’ ( ULCC ) drop of 4.18%, as the chart indicates below:
52-Week Stock Price Comparison (Seeking Alpha)
For the balance sheet , the firm ended the quarter with $460.3 million in cash and equivalents and $535.6 million in total debt, of which $16.1 million was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash flow was $166.4 million, during which capital expenditures were $27.6 million. The company paid only $100,000 in stock-based compensation in the last four quarters.
Valuation And Other Metrics For Transat
Below is a table of relevant capitalization and valuation figures for the company:
| Measure [TTM] |
| Amount |
| Enterprise Value / Sales |
| 0.5 |
| Enterprise Value / EBITDA |
| NM |
| Price / Sales |
| 0.1 |
| Revenue Growth Rate |
| 311.8% |
| Net Income Margin |
| -12.2% |
| EBITDA % |
| -8.7% |
| Net Debt To Annual EBITDA |
| -0.5 |
| Market Capitalization |
| $142,330,000 |
| Enterprise Value |
| $1,010,000,000 |
| Operating Cash Flow |
| $194,050,000 |
| Earnings Per Share (Fully Diluted) |
| -$6.32 |
(Source - Seeking Alpha.)
As a reference, a relevant partial public comparable would be Frontier Group; shown below is a comparison of their primary valuation metrics:
| Metric [TTM] |
| Frontier Group |
| Transat A.T. |
| Variance |
| Enterprise Value / Sales |
| 1.2 |
| 0.5 |
| -58.1% |
| Enterprise Value / EBITDA |
| NM |
| NM |
| --% |
| Revenue Growth Rate |
| 49.1% |
| 311.8% |
| 535.4% |
| Net Income Margin |
| 2.0% |
| -12.2% |
| -711.1% |
| Operating Cash Flow |
| -$16,000,000 |
| $194,050,000 |
| --% |
(Source - Seeking Alpha.)
Commentary On Transat
In its last earnings call ( Source - Seeking Alpha ), covering FQ2 2023’s results, management highlighted the strong demand environment due to pent-up travel demand after the pandemic.
Consumer confidence in travel is high, and summer yields are expected to be 29% higher than in 2019.
The company is also in the second phase of its codeshare partnership with Porter Airlines, which should create ‘a natural feeder network for Transat, increasing traffic, especially for our European routes.’
Management said that its revenue management is becoming more advanced with the incorporation of analytics.
Total revenue for Q1 2023 rose 130.4% year-over-year and gross profit margin increased 21.4 percentage points.
Selling, G&A expenses as a percentage of revenue showed no change, while operating income was positive.
Looking ahead, management guided adjusted EBITDA for the full year 2023 to 6.3%.
The company's financial position is strong, with plenty of liquidity, reasonable debt and strong free cash flow generation.
From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:
Earnings Transcript Key Terms Frequency (Seeking Alpha)
I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited "Uncertain" once, "Challeng[es][ing]" three times and "Macro" once.
The negative terms refer to the current uncertain macroeconomic environment as the industry copes with capacity constraints in the face of stronger demand for travel, at least in the short term.
Analysts questioned leadership about its approach to generating margins versus growth, especially as capacity returns over time.
CEO Guerard stated that the company is focused more on the "airline profitability drivers" going forward so that it is "much more equipped in order to be able to generate higher margin in the future" as the market achieves greater parity between supply and demand.
A potential upside catalyst to the stock could include a continued downward price trend for energy costs, as the one-year chart shows here:
WTI Crude Oil Chart - One Year (Trading Economics)
While forecasting the price of crude oil is beyond the scope of this analysis, the current environment appears favorable for Transat to continue to deliver strong growth and operating profits.
With management’s continued focus on transforming the airline business, if energy prices cooperate, the company could see a lift in its stock price.
My outlook for Transat A.T. Inc. stock is a Buy at around $3.65 per share.
For further details see:
Transat Shows Growth Path Ahead