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Aimia Shares Enter Over Sold Territory

Shares of Aimia (AIM-T) traded as low as $1.49/share before closing at $1.53 on Wednesday. Air Canada (AC-T) released an announcement in mid May which stated they will be creating their own loyalty program and dropping the current partnership with Aeroplan rewards beginning in the year 2020. The Aeroplan program is owned and operated by Aimia. The decision for Air Canada to drop the Aeroplan rewards program has led to significant investor panic resulting in the shares plunging from over $9.00 to current levels not seen before.

Many investors are trying to forecast the impact which Air Canada’s lost business will cost Aimia. To make things worse Aimia released a statement earlier today which announced the suspension of all dividends including those on preferred shares. The dividend elimination created an additional 27% sell of for Aimia shares.

The Executive Chairman of Aimia, Robert E. Brown released the following statement: “The Company currently has the requisite liquidity to pay these dividends, however the statutory capital impairment test legally prohibits us from doing so. Our business continues to perform well and generate strong free cash flow. We reported $331.7 million of cash and cash equivalents, restricted cash and short-term investments and $225.5 million of long-term investments in corporate and government bonds as at March 31, 2017.”

Aimia now has a market capitalization of $233 million, down more than 80% from 2 months ago. At this point investors seem to be pricing in a worst-case scenario for the Aimia and there is panic to get out fast. We have seen this type of panic earlier in the year with Home Capital Group when they announced large withdrawals of cash from their accounts. Shares of Home Capital plunged from over $25.00/share to $5.06 over a short period of time and since have rallied to over $12.00.

Here are some things to consider if you plan on taking a position in Aimia:

  • Air Canada will still be using Aimia until the end of contract in 2020
  • Aeroplan members will continue to collect and redeem points but will be restricted on redeeming points on Air Canada flights after the contract expires in 2020
  • Cumulative dividends on the preferred shares will prevent any future dividends being paid to common share holders until all preferred shareholders are reimbursed
  • Although Air Canada is a significant partner for Aimia in the Aeroplan rewards program, there will be other opportunities for Aeroplan members to redeem rewards
  • Aimia is expected to record an impairment charge resulting in the future relationship severing with Air Canada

Although I offer no predictions on the value for Aimia and the Air Canada partnership I do think the selling is an over reaction. As we seen when BREXIT was first announced there was a shakeup for many stocks. It didn’t take long for investors to get back into these names and realize the timetable for such a transition was much further into the future before any impact would be felt. Given the 2020 transition period this offers Aimia time to transition and find new partners which can bring even further value to their customers.

For those that can ride the near-term volatility, Aimia could offer some great upside potential. At the time of writing I am long Aimia and have no position in Air Canada. My 12 month price target for Aimia is $4.00.

 

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