Fixed Income Analysis /

Azul: Q2 19 – Positive business outlook; reiterate Buy

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    13 August 2019
    Published by

    Azul S.A., the issuer of Azul Investments LLP’s US$400mn 5.875% senior unsecured bonds due 2024 (B1/B+/BB-), reported strong yoy results in Q2 19 as well as in the last twelve months (LTM). Operating revenues stood at US$667.5mn and EBITDA was US$186.9mn, compared with revenues of US$508.5mn and EBITDA of US$133.0mn, respectively a year ago.

    Operationally, the company confirmed its number one status in Brazil in terms of (1) number of destinations (114 – ten more than a year ago), (2) number of markets served (the only carrier operating in 72% of the routes, out of which it is the leader in 85% of them), (3) fleet efficiency, with 130 aircrafts including 29 next-generation aircrafts, and (4) profitability and credit metrics, with the highest EBITDA margin and lowest leverage in the Brazilian airlines market.

    Despite an increase of 18.6% in jet fuel price, the 8.7% BRL depreciation and the impact of BRL31mn from payroll taxes, the company still managed to improve its operating margin to 13% in Q2 19 (compared with 10% in Q2 18). In addition, Azul reported a net income of US$88.1mn in Q2 19, reversing a net loss of US$201.8mn in Q2 18. That being said, this reversal was due to the fact that Azul had a negative foreign exchange impact of cUS$292.9mn in Q2 18, which was positive in Q2 19 (US$48.8 mn).

    In terms of the balance sheet, Azul reported cash of US$315.1mn and short-term investments of US$68.0mn in Q2 19. This compares with cash of US$301.8mn and short-term investments of US$133.5mn at the end of 2018, and US$219.0mn and US$187.1mn, respectively a year ago.

    Total debt (which includes leases under the new IFRS standards) was US$3.28bn in Q2 19, compared with US$2.96bn in Q2 18. Leverage increased to 4.4x in Q2 19, compared with 3.9x a year ago. Still, the company maintains a comfortable amortisation schedule with short-term debt of US$391.4mn at the end of Q2 19.

    The bonds are currently trading at cUS$102.596 (ALLQ) to yield c5.18% (g-spread 367bps; z-spread 372bps). This compares with Gol Linhas Aereas Inteligentes’ (GOLLBZ) US$650mn, 7.0% senior unsecured bonds (B-/B+), which are currently trading at cUS$104.434 (ALLQ) to yield c6.88% (g-spread 537bps; z-spread 542bps) and which we also rate a Buy. We believe that the spread differential is justified given Azul’s higher rating and the fact that the most recent results for Gol were negatively affected by the grounding of its Super MAX aircraft. This is something that Gol is seeking to compensate via alternative equipment, but that makes its business outlook for the remainder of the year less positive than Azul’s.

    We reiterate our Buy recommendation on Azul’s bonds and expect an even stronger H2 19.