Sell Transat A.T. Inc.

The very contagious Delta variant of COVID-19 is expected to reduce the amount of air travel by tourists coming to Canada and Canadians flying abroad—a new blow to airlines.

Transat_AT_Inc

A fourth wave of COVID-19 will likely reduce air travel even more–a further blow to commercial airlines.

We regularly review transportation stocks on The Back Page. We’re concerned about the outlook for commercial airlines. That’s because the highly-contagious Delta variant of COVID-19 is spreading around the world. This has already had an impact on air travel. The Olympic venues in Tokyo, for instance, were empty as tourists were kept out of Japan. North Americans who could formerly only fly between Canada and the US will soon resume driving over the border. In fact, fully-vaccinated Americans can already do just that. That’s likely to weigh on demand for cross-border air travel.

In April we rated Montreal-based consumer stock Transat A.T. Inc. (TSX—TRZ) a ‘sell’. It remains a sell. Transat is “a leading integrated international tourism company . . .. It offers vacation packages, hotel stays and air travel to some 60 destinations in over 25 countries in the Americas and Europe.”

Transat A.T. remains a sell

Transat is expected to lose $10.20 a share in the year to Halloween. In fiscal 2022, which starts on November 1, it’s expected to lose $4.20 a share. This will drive the company’s book value per share deeper into negative territory from today’s minus $1.75 a share. Transat bled cash flow of nearly $386 million over the latest four quarters. As a result, we cannot calculate a net debt-to-cash-flow ratio nor a net debt-to-equity ratio. Transat’s net debt of $1.011 billion exceeds its net available cash of $486 million.

Transat’s weakened finances call its long-term viability into question. This, in turn, may make some consumers nervous about making deposits. After all, if the airline were to seek protection from its creditors, including customers, these consumers could lose their money and may have to make arrangements to fly with another carrier.

Transat’s “discussions with Mr. Pierre Karl Péladeau concerning the potential acquisition of all of the shares of Transat through his company . . . have ended. On April 7, 2021, Mr. Péladeau delivered . . . a non-binding proposal contemplating a transaction to acquire all of the shares of Transat for $5.00 per share, payable in cash. Considering the current share price, the price offered no longer provides a reasonable basis to envision receiving the level of shareholder approval required in order to allow the transaction to proceed. Accordingly, [Mr. Péladeau’s company] confirmed that it was withdrawing from the discussions. In light of the foregoing, the work of the special committee charged with reviewing strategic alternatives will cease, and Transat intends to focus its efforts on the implementation of its strategic plan and on the upcoming restart of its operations and flights, on July 30. Transat also intends to examine possibilities to optimize its financing structure, which could include the issuance of shares of its capital or bond financing on more favorable terms than those attached to a portion of the liquidities made available to Transat under the Large Employer Emergency Financing Facility (LEEFF).”

We wish Transat bon voyage, but would stay away from its offerings. If you own Transat, sell the shares immediately. Reinvest in buy-rated stocks that at least pay dividends.

This is an edited version of an article that was originally published for subscribers in the August 20, 2021, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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