JPMorgan On LatAm Airlines: Gol Linhas Shares Upgraded

Gol Linhas Aereas Inteligentes SA (ADR) (NYSE: GOL) surged as much as 14 percent after JPMorgan upgraded the airline to Neutral from Underweight as the company's recent liquidity-enhancing announcements and stronger BRL (Brazilian real) "should allow for a material reduction in risk perception."

"We upgrade to N in light of the still-weak macro/demand environment in Brazil and GOL's elevated leverage," analyst Fernando Abdalla wrote in a client note.

"In our view, the recent strategies adopted by GOL targeting the improvement of its balance sheet (R$1 billion anticipated sale of tickets to Smiles, aircraft renegotiation, and sale of aircraft) should allow for an improvement in the balance sheet," Abdalla noted.

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Justification

Accordingly, the analyst believes the risk perception regarding an eventual bankruptcy is now materially lower.

"Additionally, the recent BRL appreciation (fueled by the improvements on Brazil's political front) should lead to a better free cash flow profile," according to the report. Furthermore, the analyst increased EBIT margin for 2016 by 380bps to 2.0 percent.

According to the note, GOL faces significant forex volatility "as a material portion of its operating expenses are denominated in or linked to the U.S. dollar, while just a small part of its revenues is exposed to U.S. dollar. Therefore, a significant depreciation of the dollar could positively impact the company's financials."

"Every 5 percent change in fuel prices should lead to a roughly 150bps change in our forecasted EBIT margin, while a 5 percent change in FX rates would lead to a roughly 130bps change in GOL's operating margin," Abdalla highlighted.

On the industry front, the analyst said, "2016 is shaping up to be a unique year for the Brazil airline industry given that we should see an industry-wide capacity reduction [...] In the past few years, capacity reductions implemented by GOL and TAM were offset by increases from smaller players."

"In our view, such strategy could allow airlines to present better yield/load factor, leading to a healthier competitive outlook," the analyst added.

Shares of Gol Linhas climbed 11 percent at $9.15 by early afternoon Monday.

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