AIM.TO - Aimia

[txfan2424]

Has anyone spent time on this? 10% div yield; 12% FCF yield. Mexico JV is going public at rumored $1B valuation (AIM owns half and AIM's own EV is $1.5B).

 

Seems very cheap.

[Cardboard]

Yes, and I would focus on the preferreds: more yield, similar upside, less risk.

 

Cardboard

[sculpin]

 

AIMIA | AIM-TSX | price C$8.23 | Outperform

Estimates revised.  Maintain C$15.00 target price.

Adj. EBITDA (mln):  2016E C$236 to C$234        2017E C$256 to C$255

Mkt Cap (mln): C$1,257                                      Net Debt (mln): C$733                        Yield: 9.1%

AIM: 1Q16 Results; Short on (British) Gas, Long on Dividend

Kenric S. Tyghe, MBA | RJL | 416.777.7188 | kenric.tyghe@raymondjames.ca

Summary:

♦        While the results were below consensus of $55.8 mln (on adjusted EBITDA of $50.6 mln), we expect investors to look through the miss (given its attribution).

♦        We believe that the 5% dividend increase is well supported given the performance of the Aeroplan program and our belief that fears around refinancing risks are at odds with realities of the FCF generation and balance sheet strength of AIMIA.

♦        The Aeroplan program's performance, specifically the financial card partner billings growth and strong engagement, were key positives in the quarter, in our view.

♦        Aeroplan's absolute (and relative) loyalty value proposition delta continues to widen, with a recent change to allow use of Aeroplan miles for taxes and fees.

 

AIMIA May 16, 2016

AIM-TSX Company Comment

Kenric S. Tyghe MBA | 416.777.7188 | kenric.tyghe@raymondjames.ca

Krisztina Katai (Associate) | 416.777.7060 | krisztina.katai@raymondjames.ca

 

Consumer & Retail

1Q16 Results; Short on (British) Gas, Long on Dividend

 

Recommendation

 

We reiterate our Outperform rating on AIMIA following 1Q16 results. While the

results were below consensus of $55.8 mln (on adjusted EBITDA of $50.6 mln), we

expect investors to look through the miss (given its attribution) and focus on the

5% dividend increase (and the implicit messaging of the increase). The Aeroplan

program’s performance was solid (given the comps and macro dynamic), for flat

loyalty unit revenues, with credit card partner billings increasing and very healthy

engagement (as highlighted by the burn ratio). The International segment was the

largest driver of the miss on a 7.6% decrease in gross billings, which was driven by

the Nectar Italia exit, the shift to bonus miles at Sainsbury’s (seasonal bonus

volatility) and regulatory changes impacting British Gas. The Sainsbury’s dynamic

was a $15 mln billings headwind with British Gas a further $10.0 mln (of the total

expected $30 mln 2016E impact) drag. In addition, AIMIA incurred $4.0 mln (of the

total expected $10 mln transition cost) relating to the HP outsourcing agreement in

1Q16. We believe that the 5% dividend increase is well supported given the

performance of the Aeroplan program and our belief that fears around refinancing

risks are at odds with realities of the FCF generation and balance sheet strength of

AIMIA. We are buyers at current levels.

 

Analysis

 

 The Aeroplan program’s performance, specifically the financial card partner

billings growth and strong engagement, were key positives in the quarter, in our

view. We have long been of the view that macro-driven concerns on credit card

billings growth are misplaced, which both industry and AIMIA results served to

reaffirm in quarter.

 

 Aeroplan’s absolute (and relative) loyalty value proposition delta continues to

widen, with a recent change to allow use of Aeroplan miles for taxes and fees. The

combination of markedly increased seat availability, access to front of the plane (and

line), and now using miles for surcharges is in our view particularly compelling.

 

 With the noise and (new) seasonality in the Nectar numbers, we believe that

investors should look through the 1Q16 miss (which was led by Nectar). The reality

is that not only was Nectar UK lapping the old base driven Sainsbury’s model (the

reset occurred in April 2015), but also accumulation was continuing in Nectar Italia.

 

Valuation

 

Our $15.00 target price is based on the average of a 12.0x multiple on our 2016E

adjusted EBITDA and an 8.0% FCF yield. Despite current market dynamics, our target

multiple is in-line with its loyalty and transaction processing peer group average of

12.0x, which we believe is warranted given AIMIA’s global loyalty positioning.

[SafetyinNumbers]

Is there new speculation on IPO timing for Club Premier? The last I read was in 2015 for an IPO event in 2017.

[txfan2424]

Still a 2016/2017 expected event.

 

Preferreds are interesting but don't like that they're perpetual. If there were a way to compel management to refinance the prefs, it would make them very very interesting.

 

 

[Cardboard]

If you want to gauge the interest of investing in the preferreds instead of the stock, just take a look at the preferreds of DC.A and CF. Once some uncertainty was lifted, they matched or outperformed the stock.

 

AIM preferreds are the last case of fixed rate reset preferreds and floating preferreds that have not rebounded following last Fall debacle and the secret of these things is out. I expect a very strong rebound even if the company's results remain stable as soon as something positive happens. They trade like the company is going bankrupt.

 

Actually, oil at $50 is already a big positive since a lot of the weakness in Aimia is due to fear related to Western Canada travel.

 

Cardboard

[Vanshon]

http://www.theglobeandmail.com/globe-investor/inside-the-market/aimias-share-price-collapse-could-be-good-news-for-long-term-investors/article30193984/

 

Good article summarizing the current thoughts about Aimia.

[txfan2424]

Care to post the article? It is behind a pay wall.

[gokou3]

Have been following this for a while.  I guess one fundamental question is how competitive is the Aeroplan program?  I am shopping for a new credit card recently and discover that Elite" Mastercards from various issuers (BMO, MBNA, Capital One) offer 2% cash back on all purchases.  Capital One even offers a $400 welcome bonus.  The redemption process is very flexible too.

 

By comparison, the best Aeroplan card I found, from TD, pays 1.25 miles per $1 purchase.  Not sure if that translates to a 2% reward value for air tickets, but for gift rewards the value is closer to 1%.

 

 

 

[MrB]

If you want to gauge the interest of investing in the preferreds instead of the stock, just take a look at the preferreds of DC.A and CF. Once some uncertainty was lifted, they matched or outperformed the stock.

 

AIM preferreds are the last case of fixed rate reset preferreds and floating preferreds that have not rebounded following last Fall debacle and the secret of these things is out. I expect a very strong rebound even if the company's results remain stable as soon as something positive happens. They trade like the company is going bankrupt.

 

Actually, oil at $50 is already a big positive since a lot of the weakness in Aimia is due to fear related to Western Canada travel.

 

Cardboard

 

CB, why do you think Burgundy is getting out?

[Cardboard]

They held 12.1% per the latest Management Circular. Where did you see that they were getting out? If so, maybe that they are switching to the preferreds? LOL

 

Looking at the chart, they must also be contemplating some heavy losses unless they bought most of their stake close to recent lows.

 

For their real reason to sell (is it trimming?) you would have to ask them.

 

Cardboard

[MrB]

See attached

[Cardboard]

Right, so they have not sold a share since March 14 or the date of the Management circular for the AGM. I have not seen any insider trade from them since then (for which they would qualify being above 10%).

 

12.1% of outstanding is still a heck of vote of confidence IMO.

 

Cardboard

[Nelson]

I bought the Series 3 (AIM.PR.C) prefs today at $14. Locked in 11.2% until the reset in 2019.

 

This reminds me a heck of a lot like the Dundee and Canaccord pref situations over the last few months. There's no way I should be getting 11% on an Aimia pref. The company generates plenty of free cash flow and has cash in the bank. Management has also been smart to really buy back shares when they've been low. Sure, they got in a little too early, but we've all made that mistake before.

 

Aimia reminds me a lot of the insurance business. Miles that have been bought but haven't yet been redeemed are a lot like insurance float. The bigger Aimia gets the bigger this float will become. I like float. I really like float plus a stock that trades at between 6 and 7 times forward free cash flow.

[Cardboard]

I own some "C"s as well but, the "B"s is my larger position. The current distribution, plus the gap to catch to the "A"s into which they are convertible in 2020 gives them roughly a 12% overall yield.

 

Their current yield is 10.3% which is enormous for a floater. You still give up a bit of current income vs the "C"s but, you also have larger upside to reach par if some sort of corporate transaction occurs.

 

Cardboard

[SafetyinNumbers]

The B's are definitely the better value and as Cardboard said you have more capital gains upside, not only from a corporate transaction, but also when the C's reset and the dividend amount between the two classes tightens. I also prefer capital gains to dividend income.

[misterkrusty]

So apparently Aimia's current deal (CPSA) with Air Canada grants them access to 8% of AC's seats at a special discounted rate.  Anybody have an idea how big this discount is?  I'm trying to figure out what Aimia's cash flows will look like under a renegotiated deal when the current one expires mid-2020.  New terms won't be as good - question is how much worse.

 

Has anyone ever seen the current CPSA?  I can't find it anywhere.

[Cardboard]

I have not seen it. I assume it is confidential or if disclosed, must be under the headline Material Contract on Sedar whenever it was signed.

 

While there is a risk that this might get negotiated negatively for Aimia, I do believe that the risk of a major cut is small as Aeroplan is a key partner for Air Canada that effectively cannot be replaced.

 

However, why bothering with the stock when you can buy AIM.PR.B below $10 right now?

 

Just look at the total amount paid in dividends to the common vs all dividends paid to the 3 series of preferreds. Then think of the fact that you are ahead of them in the capital structure. The risk for dividends to not be paid on the preferreds is very small IMO and would require a massive breakdown in the business which Brexit and this new deal cannot do.

 

Cardboard

[sculpin]

So apparently Aimia's current deal (CPSA) with Air Canada grants them access to 8% of AC's seats at a special discounted rate.  Anybody have an idea how big this discount is?  I'm trying to figure out what Aimia's cash flows will look like under a renegotiated deal when the current one expires mid-2020.  New terms won't be as good - question is how much worse.

 

Has anyone ever seen the current CPSA?  I can't find it anywhere.

 

This is from an Oct 15 report from Industrial Alliance:

 

Air Canada Partnership is a Key and Secured Driver to Aimia’s

Success

 

Event

 

The Commercial Participation and Services Agreement (“CPSA”) between Aimia

and Air Canada (AC-T, Not Rated) is up for renewal on June 29, 2020. We

examine the relationship between the two organizations and explain why we

remain convinced in the ongoing mutual benefit.

 

Highlights

 

 Aeroplan and Air Canada make a good team – Air Canada, with its Star

Alliance partners, is Aeroplan’s largest Redemption Partner. Conversely,

Aeroplan is Air Canada’s largest single customer. The partnership makes Air

Canada more competitive through attractive pricing which helps increase

the airline’s market share in a challenging leisure travel market. In 2014,

~71% of all rewards claimed by Aeroplan members were for air travel.

 

 Air Canada is a net beneficiary of payments – While Air Canada provides

approximately $250M per year to Aimia to purchase Aeroplan Miles to

reward its frequent fliers, Aeroplan purchases tickets on Air Canada flights

worth approximately $540M per year.

 

 Aimia will benefit as Air Canada grows Rouge – The expansion of Rouge

will only further contribute to Gross Billings, especially since Air Canada has

shifted Rouge’s fixed Miles allocation to the percentage format used by the

rest of Air Canada.

 

 The 2020 CPSA renewal will likely result in a $ based reward vs. distance

– As we see occurring in other airline loyalty programs, we would expect to

see Air Canada modify its reward system to base Aeroplan Miles issued on

the price paid per ticket rather than distance flown.

 

Summary

 

Some investors have expressed concern over the approaching June 29, 2020 renewal date between Aimia and Air Canada

(“AC”) of their Commercial Participation and Services Agreement (“CPSA”). For AC, Aeroplan has only grown in importance

since being spun-out from the carrier, and is the single largest purchaser of seats on AC flights. While AC pays approximately

$250M to Aeroplan each year for Miles to reward fliers, Aeroplan pays out approximately $540M per year for travel rewards

on AC flights. Approximately 71% of all rewards claimed by Aeroplan members in 2014 were used for air travel. Thus, we see

renewal of the CPSA as a certainty although we do foresee that the negotiation will provide the opportunity for Air Canada to

the way it awards Aeroplan Miles to be based on the value of the tickets that members purchased rather than on the distance

flown.

 

Overview of Aeroplan Program

 

On January 1, 2002, Aeroplan, an incentive program created by Air Canada in 1984, was spun-out as a wholly-owned limited

partnership of Air Canada, Canada’s largest domestic and international full-service airline. Aeroplan went public in 2005.

Aeroplan now acts as Air Canada’s exclusive loyalty marketing provider in Canada and earns service fees for managing the

airline’s tier membership program in addition to booking, service and administrative fees from members who redeem their

Aeroplan Miles when flying Air Canada, Air Canada Express and Air Canada Rouge, or with Star Alliance members and small

regional airlines. In return, Air Canada earns a stable and recurring revenue stream. Aeroplan extends to retail as well,

consisting of many partners across Canada. In H1/15, over 45% of Gross Billings from its sale of Loyalty Units stemmed from

deals with the Company’s three financial/credit card partners (TD, CIBC, AMEX), while Sainsbury’s represented 21% and Air

Canada 14%. More importantly, in 2014, ~71% of all rewards claimed by Aeroplan members were for air travel.

 

On January 1, 2014, Aimia introduced several new initiatives meant to improve Aeroplan’s operations and increase

membership, even if breakage and short-term profitability weaken. First, the new Distinction program awards top

accumulating members with preferential mileage levels for redemption, bonus mile offers and exclusive privileges. Moreover,

Distinction members, who achieve different levels based on the number of miles earned, are 2.5x more likely to visit Aeroplan

stores and 85% hold Aeroplan-affiliated credit cards. Secondly, the new Market Fare Flight Rewards (“MFFR”) replaced

ClassicPlus Flight Rewards, allowing members to redeem awards with 20% fewer miles for any seat on any Air Canada flight

based on a market rate. As a result, as more seats become available because of fleet and route expansion, more points will be

accumulated, which should benefit Aimia. Finally, in order to improve engagement, Aeroplan canceled the seven-year mileage

redemption policy so that Miles no longer expire after seven years if a member has at least one accumulation or redemption

activity every 12 months. Thus, while this strategy may weaken the Company’s profitability, higher engagement should help

lower Breakage, which is a gauge of active participation by members.

 

Overall, these changes are amongst some of the initiatives that Aimia is taking in order to handle complaints that Aimia’s

points are difficult and expensive to redeem, that the number of available seats to choose from are limited (MFFRs extend to

100% of available seats).

 

Air Canada and Aeroplan Depend on Each Other

 

Air Canada, with its Star Alliance partners, is Aeroplan’s largest Redemption Partner. Conversely, Aeroplan is Air Canada’s

single largest customer. Aeroplan helps Air Canada be more competitive through attractive pricing, which helps increase the

airline’s market share in challenging leisure travel markets. Aeroplan’s partnership with Air Canada is further enhanced by its

ancillary relationship with car rental companies and hotels, which allow members to accumulate Aeroplan Miles and use them

towards airline ticket rewards.

 

In order to participate in the Aeroplan Program, Air Canada pays a fee which is based on Aeroplan Miles awarded to Air

Canada customers who travel on AC flights as part of Aimia’s Gross Billings. Aeroplan must annually purchase a minimum

number of reward travel seats on AC flights, or 85% of the average number of seats utilized in the three preceding calendar

years (currently ~$460.5M based on the previous three years). The CPSA prevents any other transportation business that

competes with Air Canada or Star Alliance members from participating in the Aeroplan Program. In 2014, Air Canada

purchased $248M Aeroplan Miles and the estimated minimum requirement in 2015 (based on an average from the past three

years) is $212M.

 

Success of Air Canada’s Turnaround

 

Over the past two years, CEO Calin Rovinescu has successfully turned around a once near-penny-stock airline faced with

significant labour issues, high expenses, unhealthy debt levels and poor pension plan funding. Its new budget segment, carrier

Air Canada Rouge, has provided improved core results and record load factors. Although the addition of more economy-class

seats through Rouge and the new high-density aircraft has brought about lower yields (the average fare paid per mile flown),

the cost per available seat mile is declining faster than yields, resulting in higher profitability. Air Canada is looking to expand

internationally through Rouge, whose cost per available seat mile is said to be 29% lower than Air Canada’s mainline fleet and

whose labour costs make up a much smaller percentage on long-range flights than domestic ones.

 

The interest for air travel from Aeroplan members has resulted in significant demand for Air Canada tickets. Air Canada

continues to be an important contributor to Gross Billings, even as Aeroplan’s expansion into new business segments (such as

the yet to be detailed partnership with Toyota) has reduced its contribution, highlighted by the gradual share decline in

Exhibit 1.

 

One of the benefits of using Aeroplan is that Air Canada can entice members towards routes that it wants to increase its load

factor on, by offering bonus Miles, but also by offering more reward seat availability on certain routes at certain times to

entice members to cash in Miles and further fill planes. We expect that the additional aircraft being added for the expansion

of Air Canada Rouge will result in Air Canada leveraging this tool.

 

Air Canada Enticing More Members to use Rouge – Showing the Value that it Places on Aeroplan

Initially, Air Canada significantly reduced the number of Aeroplan Miles that it provided members for booking through Tango

and on Rouge flights with its launch in 2012. By November 2013 (see Exhibit 2) Air Canada Rouge fliers started earning Miles

comparable to the mainline carrier. With Rouge, Air Canada was looking to increase its business to leisure destinations in

Europe and the Caribbean with lower prices, more seats per plane, and lower costs. Contributing to the lower costs was a

reduction in the number of Aeroplan Miles that members earned for flights because Miles earned were based on a fixed rate.

Air Canada now seems to have re-evaluated the importance of Aeroplan Miles in customer decision making and in rewarding

loyalty and has significantly increased rewards on Rouge flights to match rewards on the main carrier. This further

demonstrates the importance and value of Aeroplan Miles to Air Canada.

 

Our Forecast for a Change in Aeroplan Miles Reward Structure (from Air Canada only)

 

Air Canada and Aeroplan have modified earnings and redemption grids several times to optimize the program. We expect that

with the CPSA renewal in 2020, the partners will move more to a dollar-based earning model to more closely align Air

Canada’s marketing spend with revenue generation. We have seen other airlines following the same track, such as WestJet’s

reward program issuing WestJet dollars, and Delta’s use of both base SkyMiles on flights combined with Medallion Qualifying

Dollars to track member spending on Delta flights.

[kab60]

I think this Company looks very interesting - espescially since Tor Lønnum joined. Check out the returns at Danish Tryg since he joine. Also like his comment on the recent CC. Anyway, I need to understand the business better. Anyone have a primer on the industry? And some good public comps?

[Sunrider]

Could someone kindly point me to the prospectuses for the series 1 - 3 prefs? Google and the aimia website's search function are letting me down.

 

Thank you

C

[nodnub]

Could someone kindly point me to the prospectuses for the series 1 - 3 prefs? Google and the aimia website's search function are letting me down.

 

Thank you

C

 

try this: 

https://www.preferredstockchannel.com/symbol/aim.pra.ca/

Link to PDF Prospectus in middle of page.

 

Don't see the other series on that site.  But they should all be on SEDAR under issuer name of Groupe Aeroplan or AIMIA or something.

 

 

[Sunrider]

Thank you - I had found that but the site now wants me to register. I've not been able to find the other ones.

 

SEDAR is just a disgrace.

 

C.

Could someone kindly point me to the prospectuses for the series 1 - 3 prefs? Google and the aimia website's search function are letting me down.

 

Thank you

C

 

try this: 

https://www.preferredstockchannel.com/symbol/aim.pra.ca/

Link to PDF Prospectus in middle of page.

 

Don't see the other series on that site.  But they should all be on SEDAR under issuer name of Groupe Aeroplan or AIMIA or something.

[misterkrusty]

kab60-  the only pure-play comps I know of are Multiplus and Smiles in Brazil.  But ADS has a loyalty division in which they manage an air miles program called LoyaltyOne.  ADS is a big company so maybe there is some decent disclosure.

 

 

[petec]

I used to know this quite well and I also know Multiplus and Smiles.  I tend to think it is a fairly good business especially when card penetration is growing.  However it is very dependent on the details of the contract with the airline, so my two questions would be:

 

1) why don't customers prefer cashback cards?

 

2) how do we get confidence that the Air Canada agreement will stay favourable (renegotiated in 2020 I believe).

 

The sweet spot for these companies is when individual flyers get points for business flights (i.e., that they didn't pay for) that can be redeemed in ways that boost the airline's load factor (i.e. the airline generates loyalty at no additional cost).