National Post (National Edition)
HOW TO PERCEIVE WESTJET AIRLINES’ NEGATIVE OUTLOOK DESPITE RECENT BUMP
WestJet Airlines Ltd.’ s firstquarter earnings were above analysts’ expectations, but its negative outlook came as somewhat of a surprise. The company’s Q2 revenue per available seat mile (RASM) guidance was down moderately on a year-over-year basis, suggesting a decline between four and five per cent.
Kevin Chiang at CIBC World Markets doesn’t think investors should be concerned about how this relates to WestJet’s growth strategy since its Encore regional airline is still in its early stages, which is putting pressure on average fares and load factors. However, he expects these metrics will normalize as the brand matures.
Chiang also noted that WestJet’s bundling of fares is leading to an increase in Econo fares, negatively impacting yields. Yet the company continues to evolve its Plus product and is reconfiguring seats in this fare cat-
s largest competitor in the ethers market is developing an ultra-high purity specialty dissolving pulp — dubbed Ice Bear — that could take a bite out of the Montrealbased forest products maker’s business.
Norway-based Borregaard ASA hinted at the project for cellulose-based polymers at its March 2014 investor day, initially saying they would target “niches within niches.”
Now the company has provided more details, noting that customer testing has begun. Regular commercial volumes are expected in mid-2016, but the new products are currently only offered by a few suppliers.
Paul Quinn, a paper and packaging analyst at RBC Capital Markets, expects a slow ramp-up of the specialty pulp grades Borregaard is creating. However, he believes the company is targeting some of Tembec’s market share, while Rayonier Advanced Materials Inc. continues to aggressively seek a home for its excess capacity in the ethers market.
As a result, Quinn downgraded Tembec to sector perform from outperform and cut his price target on the stock to $3 from $3.25. The analyst also cited the company’s disappointing second-quarter results and a discouraging outlook for its specialty pulp volumes.
“As a relatively higher-cost producer across most of its products, we see a more challenging outlook for the company in 2015/16 given the volatile pricing environment for many of its commodities,” he said in a research note.
Tembec’s recently completed Temiscaming project is expected to significantly improve its cost position, but Quinn sees more competition in the specialty dissolving pulp market due to displaced acetate pulp capacity and new innovation out of Norway. A report suggesting Western Union Co. is in talks to buy Moneygram International Inc. is sure to raise some eyebrows, particularly because antitrust regulators objected to a tie-up between the rivals two decades ago.
Western Union’s interest in Moneygram is new, but J.P. Morgan points out that a potential sale of Moneygram isn’t.
Analyst Tien-tsin Huang noted that reports emerged in 2013 that private-equity firms and Euronet Worldwide Inc. were looking at buying Moneygram. The company is majority owned by Thomas H. Lee Partners and Goldman Sachs Group Inc.
What might a deal look like? Moneygram had a market cap of US$415 million, before its share shot up on the report. However, it also has US$840 million in net debt and an estimated US$175 million worth egory to offer a more premium atmosphere.
WestJet plans to charge three to nine per cent more for the no middle row seat option (it will still be there, but a table over the seat will prevent anyone sitting there), which should help boost yields.
David Tyerman at Canaccord Genuity is a little more concerned, trimming his price target on the stock to $33 from $38, noting that margins should narrow much faster than previously expected.
“We had expected the benefit for much lower fuel prices to dissipate over time, but Q2 guidance suggests we were too optimistic,” Tyerman said.
It appears WestJet is translating lower costs into lower unit revenues, which is helping to sustain volumes, but the analyst noted that this is coming with the cost of more modest profit margin increases. He thinks there is a risk that this process will accelerate in the second half of 2015. of convertible preferred shares outstanding.
Since Western Union has US$800 million of available liquidity in the U.S. and US$1.8 billion overall, Huang noted that funding such a transaction would probably include equity. That assumes Western Union wants to keep its investment-grade debt rating and is willing to give up its share buyback program, which is set to drive 1.5 per cent of its EPS growth this year.
The analyst noted the potential for meaningful synergies in a merger would likely depend on whether Western Union retains the MoneyGram brand.
Huang thinks Western Union could see EPS accretion if a deal is done at between US$10 and US$11 per MoneyGram share. However, he warned that dilution is possible if the price tag exceeds US$20 per share.