Fixed Income Analysis /

Azul: Mixed Q1 results, but positive outlook; reiterate Buy

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    14 May 2019
    Published by

    Azul, S.A., the issuer of Azul Investments LLP’s US$400mn 5.875% senior unsecured bonds due 2024 (B1/B+/NR), reported mixed Q1 19 results in light of recent headwinds, such as BRL depreciation, the end of the 20% payroll tax relief program and accounting changes to comply with IFRS 16 standards. However, the company’s guidance for the remainder of the year is positive, with Azul expecting further cost reductions, with the arrival of new, more cost-efficient aircraft and an improving business outlook domestically and internationally.

    Revenues in Q1 were US$675.06mn, compared with US$582.09mn a year ago. EBITDA in the quarter was US$192.3mn, compared with US$177.82mn in Q1 18. EBITDAR, albeit affected by the headwinds, was also higher in Q1 19 than in Q1 18, reaching US$197.12mn from US$181.70mn.

    Cash in Q1 19 was US$332.9mn, lower than the US$435.3mn reported the previous quarter. Further, short-term debt of US$371.6mn was higher than the US$86.5mn at end-18, and total debt amounted to US$3.178bn as leases that were previously recorded as “off balance sheet” items were added to the balance sheet after the introduction of the new accounting norms. Still, on a comparable basis, adjusting Q1 18 for IFRS, total debt in Q1 19 compared negatively with the US$2.577bn of Q1 18.

    As a result, debt/EBITDAR was weaker in Q1 19 than during the previous year, coming in at 4.5x versus 3.6x. However, the company expects its operational and financial results to improve through the remainder of 2019, given initial signs of strong domestic and international demand in April, as well as further cost savings. The latter are expected on the back of the arrival of new, more cost-effective aircraft and the continuing implementation of cost efficiencies.

    The bonds trade at cUS$96.347 (ALLQ) to yield c6.68% (g-spread 448bps, z-spread 446bps), compared with Gol Finance S.A.’s US$650mn, 7.0% senior unsecured bonds due 2025 (B-/B), which trade at cUS$96.397 (ALLQ) to yield c7.79% (g-spread 557bps; z-spread 551bps) and which are also a Buy.

    Although we believe that Gol’s premium provides investors with a better relative- and absolute-value alternative to Azul, both companies’ bonds remain attractive investments. Their relatively low dollar value and compelling yields will benefit from upside in the coming quarters as the Brazilian airline industry consolidates (particularly given the absence of Avianca’s Brazilian operations) and as both airlines make further efficiencies. We reiterate our Buy recommendation on Azul’s bonds.