Air Canada's new shares face selloff

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Air Canada's new shares face selloff

Post by Blastor » Sun Aug 29, 2004 5:51 am

Air Canada's new shares face selloff

A buying opportunity?: RBC's Nick Morton calls it a speculative buy, sets $49 target

Scott Adams Financial Post

The new Air Canada shares haven't started trading yet, but RBC Capital Markets already has a "speculative buy" on them.

Once the new shares do start trading, get ready for them to go on a rollercoaster ride.

Air Canada's current common shares and class A shares will stop trading after the market closes today(AUG 25), while the new shares, under the name ACE Aviation Holdings Inc., should start trading near the end of September or early October.

The implied value of the new shares coming out of bankruptcy protection is about $31. RBC analyst Nick Morton believes they should be worth $49 one year out.

Most of the new Air Canada shares, or ACE Aviation shares, will be held by creditors. Current holders of Air Canada common shares or class A shares will receive only 0.01% of the new company.

Creditors will receive 46% of the new equity, plus rights to another 42% of the equity. Deutsche Bank AG has agreed to raise up to $850-million for the new airline by agreeing to exercise any rights not exercised by creditors. Cerberus Capital Management LC, a U.S. institutional investor, has agreed to buy another 9% of the company in convertible preferred shares, while management gets 3% of the new company. (Yes, management gets 3% of the new company while current Air Canada stock holders get 0.01%.)

"Expect massive selling from creditors who receive shares and immediately sell into an uninformed and disillusioned market," Mr. Morton said in a research note yesterday. "This may drive the share price down to very attractive levels and may present a very attractive entry point. Hedge funds are likely to be very active."

Mr. Morton believes ACE Aviation can earn $1.6-billion in earnings before interest, tax, depreciation, amortization and rent in 2005 and that the new stock should trade at six times EBITDAR.

The trust Ponzi scheme: Oil and gas royalty trusts have been terrific to investors, giving them fat, friendly dividends and rising unit equity prices to boot.

Some day, though, there will be a day of reckoning, if not for some of trusts then the industry as a whole.

As the assets of royalty trusts are depleted, the trusts have to make acquisitions to keep oil pumping out of the ground. If the trusts keep using equity units to pay for the acquisitions, then the original unit holders keep getting diluted with each acquisition.

The rising price of oil has pushed off the day of reckoning so far, but some numbers are proving out how the unit holders are getting diluted as we speak.

Scotia Capital tracks 25 oil and gas royalty trusts and found that average cash flow per unit for the second quarter declined 8% from last year.

For the long-term investors, the safest royalty trusts to own will be those that can increase cash flow per share and maintain low (strong) payout ratios (assuming you can buy these trusts at a reasonable valuation).

Scotia analyst Brian Ector lists Focus Energy Trust (up 23%), Freehold Royalty Trust (up 8%) and NAL Oil & Gas Trust (up 7%) as trusts with the strongest cash flow per share growth and Bonavista Energy Trust (55%), Focus Energy Trust (58%) and ARC Energy Trust (67%) as the trusts with the lowest (strongest) payout ratios.

Toxic soil wanted Bennett Environmental Inc. rose 19% or $1.21 to $7.72 on Monday because a Federal Court quashed an order to form a panel to do an environmental review of Bennett's new Belledune plant.

But who cares whether the plant is allowed to open if the company doesn't have any product -- contaminated soil -- to run through it.

"We remind investors that a more noteworthy event will take place in September, that being the design review that will determine the contamination level of the Federal Creosote site in New Jersey," Research Capital analyst John Chu said in a research note yesterday.

If the Creosote review finds that contamination levels are high enough to warrant excavation and treatment, then that could bode well for Bennett and its new plant.

Mr. Chu figures that if Creosote can fill Bennett's facilities, Bennett's stock is worth $11. If it can't, the stock is worth $5. His target is $8, which is the midpoint between the two scenarios.

Bennett fell 43 cents to $7.29 yesterday.

The oil trade One of the strange and wonderful stories this year has been how oil keeps rising but oil stocks don't. Oil rose 31.4% from the end of June to Aug. 23, while the S&P/TSX Energy sector only rose 2.5%.

CIBC World Markets quantitative analyst Yin Luo traced the history of how oil stocks react to the price of oil and has found that every 1% increase in oil should imply a 0.21% increase in energy stocks.

"The current divergence between rising oil price and flat energy stocks suggests that the market expects the oil price to fall or believes that energy stocks are undervalued," Mr. Luo said in a research note yesterday.

"A potential trading strategy is to long energy stocks and short the commodity itself."

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Re: Air Canada's new shares face selloff

Post by LT » Sun Aug 29, 2004 10:38 am

Blastor wrote: The implied value of the new shares coming out of bankruptcy protection is about $31. RBC analyst believes they should be worth $49 one year out.
Think those are the guy that said BreX, Enron and Nortel would be worth $150 and "buy buy buy".....
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